Severe weather has slowed the economy resulting in a drop in our Business Cycle Conditions indicators, but we believe the effects are temporary.
There have been six snow events in the U.S. Northeast since December, five with accumulations of at least 12 inches. The Southeast has suffered its first Category 4 snow event — classified as “crippling” — in 18 years. The polar vortex brought so much frigid air to the Midwest this winter that ice has covered an estimated 88 percent of the Great Lakes’ surface, the most since 1994. Several western and southwestern states are suffering through record-breaking droughts. Cumulatively, these and other severe weather patterns have restrained economic activity across the U.S.
The U.S. is the world’s third-largest exporter behind China and the European Union. Chart 1 shows the ten largest U.S. export markets in 2013. Taken together, these nations purchase 61.8 percent of U.S. exports. Among the ten, North American neighbors Canada and Mexico top the list. For both Canada and Mexico, the auto industry accounts for a significant share of trade volume. In the third position on the list of largest export markets is China, followed by Japan, the U.K., and Germany (Chart 1).
Forecasts for global economic growth are rising, providing some upside potential for U.S. exports – but risks remain.
On January 21, the International Monetary Fund (IMF) issued its biannual update to its World Economic Outlook (WEO), a summary of global economic conditions and forecast for global growth. The January update shows that IMF economists expect global growth to accelerate in 2014 and 2015, driven by advanced economies.
The new year is starting with good momentum, but vigilance is always warranted. AIER’s researchers identify six key areas to watch in 2014.
January 2014 marks the sixth anniversary of the start of the worst U.S. economic downturn since the Great Depression. It also marks four-and-a-half years since the subsequent expansion began. Measured against the average duration of the prior three expansions – just under eight years – the current expansion is just middle-aged, suggesting the potential for several more years of expansion.
Strong readings from AIER’s indicators reinforce a positive outlook for the holiday shopping season.
The November assessment of AIER’s indicators of Business-Cycle Conditions suggests that moderate growth will continue into 2014. Additionally, we believe the drivers are in place for a healthy holiday shopping season with jobs, wages, and wealth all on the upswing.
Expansion continues, but stagnating personal incomes pose a threat to long-term growth.
The four-year-old economic expansion is likely to continue, according to the latest data reflected in AIER’s indicators of business-cycle conditions. While the pace of recovery may not be spectacular, all of the broad measures of aggregate economic activity—gross domestic product, sales, employment, and industrial production—continue to rise.
The recovery does not benefit all parts of the economy equally. Business is gaining an outsized share of the growth, while households and individuals are not benefiting much.
Despite the impact of reduced public spending, the recovery remains intact.
The economy continues to grow at a slow but relatively steady pace. However, the U.S. labor market is one area that may see some twists and turns in the coming months. The steady decline in federal government employment because of expected budget reductions has offset some of the private sector recovery.
Although the economic expansion has slowed, both consumers and producers remain optimistic. In the short run, this optimism means the expansion will continue. It is likely to strengthen later in the year as consumer demand buoys economic activity.
In an attempt to stimulate the economy, the Federal Reserve has been accelerating money growth for almost a year. Last fall, the Fed began buying mortgage-backed and Treasury securities from banks, adding $530 billion of assets to its balance sheet so far.
By pumping more cash into the banking system, the Fed aims to encourage banks to make more loans. This would spur borrowing, spending, and investment, thus accelerating economic activity.
After months of sluggish growth, the housing market appears to be on a steady path of recovery. Building permits for privately owned housing units are up 17.3 percent since last April, and completions of privately owned housing rose 11 percent in March alone—up more than a third from a year ago.
High-skilled jobs account for most employment growth in a steady recovery.
The economic recovery remains intact. Absent any major external shocks, the U.S. economy will continue to grow at a steady pace.
AIER experts find that 91 percent of our leading indicators (10 out of 11 for which a trend is apparent) are expanding—a sharp increase from 82 percent last month. The cyclical score of leading indicators, derived from a separate, mathematical analysis, increased from 76 last month to 84. For all AIER measures, values above 50 suggest that economic expansion is likely to continue. A higher score reflects a more positive sign for the overall economy.
Tax changes prompted a record income boost in late 2012 and a record drop in early 2013. But this did not change the fundamentals.
Disposable income dropped 4 percent in January—the largest decline since monthly records began in 1959. But this is not a sign that the economy is primed for a downturn. Rather, it is the flip side of a one-time income boost in December when businesses and individuals acted in anticipation of 2013 tax changes.
Our most recent indicators of business-cycle conditions paint a picture of a steady recovery that is likely to continue.
It may seem sluggish compared to the recent past, but economic growth is right on trend.
Although the economic recovery has been under way for more than three years, it often seems lacking in gusto. The growth rate for gross domestic product (GDP), the broadest measure of economic activity, has averaged just over 2 percent annually in the years since the recession’s end. This has not been enough to pull the jobs market out of its doldrums. Unemployment now stands at 7.9 percent, and labor force participation has fallen to levels not seen in more than 30 years. People are literally bailing out of the economy.
The data depict an economy that is poised for growth, despite higher taxes, new regulations, and continuing drama in Washington.
The tax deal adopted by Congress late January 1 ended some of the policy uncertainty said to be confounding economic decision makers. The measure prevents income tax rates from rising for a majority of Americans. It also raises payroll taxes by ending a temporary tax holiday put into effect two years ago in the wake of the economic meltdown. As a result, we now know that take-home pay will fall a few percent for nearly everyone, while households earning more than $450,000 will face higher effective tax rates.
As the holiday season draws near, confidence rises because of falling unemployment, an improving housing market, lower debt, and buoyant stock prices.
As goes the consumer, so goes the economy—at least in the U.S. Consumer spending has accounted for more than 70 percent of GDP since early in this recovery. As a result, any outlook must pay close attention to this massive force.
Right now, the consumer is out spending. This is particularly important in late October and early November as we go into the annual holiday buying season.
Stimulus programs can’t go on forever. Eventually, something has to give.
The private sector part of GDP includes consumer spending, business investment in plant, equipment, and inventory, and the net effects of trade with other countries. It only excludes federal, state, and local government spending.Growth in the U.S. has fallen short of other recoveries. With unemployment over 8 percent and reported GDP growth weak, some policy makers have argued for renewed monetary or fiscal stimulus. Surely, some say, the problem is a weak private sector economy, and the government must come to the rescue. Maybe not.
Despite persistently high unemployment, income growth and consumer spending keep pushing a slow, but steady, recovery.
The pattern of current employment, income, and consumer spending tells the story of this recovery in microcosm. Households and firms are struggling to rebuild normalcy in the face of a stream of obstacles and threatening news. The economy has had a lot to digest over the first half of 2012, but the recovery continues.
Crisis in Europe and fiscal uncertainty at home contribute to a slowdown in spending. But the recovery is likely to continue.
AIER’s indicators of business-cycle conditions signal that the recovery is still underway. The percentage of primary leading indicators appraised as expanding is 91. The cyclical score of leaders, which is based on a separate, purely mathematical analysis, has fallen to 77, but still remains comfortably above 50. The score for the coincident indicators and the lagging indicators are both 100.
But there is a softening of the economy that most people feel.
Unprecedented deleveraging by households is one of the factors that is dampening the overall pace of expansion and undermining policy measures aimed at stimulating the economy.
In the postwar period, we have not seen a situation like this before. The current business-cycle recovery is the only one during which people have reduced rather than increased their total outstanding debt. (See chart below).
Overtime and temporary employment increase as the tab for health care makes businesses balk at adding permanent jobs.
To accommodate the growing population and begin making up for the millions of jobs lost during the recession, the U.S. economy needs to add at least 200,000 jobs a month. This isn’t happening. In March, the economy added 120,000 jobs, a substantially smaller increase than the average 250,000 monthly jobs added during the previous three months.
Gross domestic product expanded by a mere 2.2 percent in the first quarter of 2012. Subdued growth is only part of the reason the recovery is not producing robust employment gains. High uncertainty and the mounting costs of non-wage employee benefits are likely contributing to businesses’ reluctance to expand hiring.
Businesses and consumers are driving the expansion. But lessons learned from the financial crisis are holding the pace of growth in check.
The economic recovery is well underway. But at a growth rate of less than 3 percent per year, its pace has been less than spectacular. In the early years of past recoveries, particularly those that followed the severe recessions of 1974-75 and 1981-82, the economy grew in excess of 5 percent annually.
The modest overall pace of expansion might seem surprising, given that AIER’s statistical indicators of business-cycle conditions continue to post widespread increases. The economy is being pulled along by demand from business investment and consumer spending on durable goods.