Overall, the U.S. Economy continues to survive a passage through a seemingly unending series of self-inflicted crisis; specifically, presidential elections, the fiscal cliff, sequestration, and now Europe (Cyprus to be exact). While the political backdrop continues, there are clear signs the U.S. economy is continuing to expand. Most key metrics are showing continued improvement in month-over-month levels from one year ago. Housing Starts continue to climb, Light Vehicle Retail Sales show strength, and New Orders for Durable Goods, until recently one of the few areas of concern, have shown improvement.
The economic recovery that started last year is expected to continue through 2013, possibly into early 2014. Here is a summary of some important economic indicators, showing historical information and areas of potential risk that could threaten the economic recovery in the U.S.A.
Retail Sales – Sunny with a chance of clouds. Thank goodness for the consumer. Consumer spending has, until recently, been increasing month-over-month (adjusted for inflation) since mid-2012. The December-to-January was the second best on record while February’s reading was down. Maybe the consumer was taking a breather from the prior months splurge so February’s dip may be noise. Importantly, sales of big-ticket items, such as automobiles, boats, and other vehicles, has increased.
Having said that, this trend is expected to moderate because the consumer’s appetite to spend may be dampened for several reasons:
(1) The 2% income and payroll tax hike that took place early in the year increased taxes on most, if not all, consumer’s and possibly contributed to a fall in the December-to-January Disposable Personal Income reading resulting in less money in the consumer’s pockets
(2) The average hourly wages for the total private workforce is up a scant 2.1% which barely keeps up with the 2% inflation rate and if the consumer is going to continue to spend, their income needs to increase at a rate greater than inflation
(3) The uncertainty surrounding the governmental budget battles (that are now expected to continue through 3Q 2013) which in turn may cause the consumer to become risk averse
(4) The Personal Savings rate dropped in January to its lowest level in five years which may indicate consumers are pulling from savings to support their spending habits and this can only be sustained for so long.
While the growth In Retail Sales has been good for the past several months (excluding February’s reading), expect it to level off through the end of the year.
Wholesale Trade – Let in the Sunshine!! Wholesale Trade has been trending up since at least October 2012. Both durable and nondurable goods are climbing and are now near record high levels.
Durable Goods is expected to continue to rise through 2013 and into 2014 due to economic expansion and a continued recovery in the housing market. In fact, Wholesale Trade of Lumber and & Other Construction Materials is rising at the fastest pace in over seven years!
Nondurable Goods is also expected to see growth through 2013, moderating as we enter 2014. Of note, it is expected oil prices will rise in 2013 on the back of global recovery and tensions in the Middle East. The good news is the U.S. is now a net exporter of petroleum and, as oil prices rise, domestic wholesalers will profit.
Manufacturing - Let in the Sunshine!! Like Wholesale Trade, Manufacturing continues to show strength and has been trending up since at least 2012’s third quarter. U.S. Industrial Production was up 3.7% in 2012 when compared to 2011. It is also showing continued, positive growth through this past February, up 3.5% from this time last year. This trend is expected to continue through 2013 before moderating in 2014.
Interest Rates – Potential for rain. Are we finally seeing rates begin to rise? The yield on the U.S. 10-Year Treasury climbed to 2% in January and currently stands at 1.94% in mid-March. We expect it to vacillate tightly around the 2% mark through 2013 as the Fed continues to employ their accommodating money policy.
Speaking of the Fed, it has committed to buying $45 billion a month in long-term treasuries and mortgage bonds until the unemployment rates falls below 6.5% (now at 7.7%) or core inflation rises above 2.5% (now at 2.0%). The employment rate is not expected to reach 6.5% until sometime in 2015 and the inflation rate shows little sign of moving from its current levels.
Capital Goods New Orders — Cloudy with a chance of Rain … or Sun! In the last half of 2012, Capital Goods New Orders, a key in indicator of business-to-business growth, was one of the few indicators that was flashing a warning sign. Through most of the second half, new orders declined anywhere from 3.0% to almost 8% from 2011 levels.
However, new orders in several manufacturing areas (e.g. Industrial, Metalworking, & Construction Machinery, Material Handling Equipment and the Purchasing Managers Index) show improvement and this is tentatively expected to continue through 2013. The only areas seeing flat to declining growth are Electrical Equipment, Computers and Electronics and Defense Capital Goods New Orders.
While the slight uptick in new orders is a positive and may signal a bottom, it does not represent a trend. Additional information to be reported in the next couple of months will provide more meaningful insight into whether or not to expect sustained recovery in this area.
Construction - Mostly sunny with a chance of clouds. Construction is on the mend showing slow but steady growth. National housing starts are steadily climbing upwards to the tune of 27.7% above year ago levels; Both single-family and multi-family units increased as well. The Midwest was especially strong. Finally, home improvement construction spending is also on the rise. As construction is a leading indicator, by six to eight months, expect U.S. Industrial expansion to continue to rise in 2013.
One caveat to the trend is that the National Association of Home Builders (NAHB) Housing Market Index (HMI), a gauge of homebuilder sentiment fell from 46 in February to a 44 in March. Economists surveyed by Bloomberg were calling for an increase to 47. For context, a reading below 50 suggests more homebuilders consider the housing market poor. The NAHB cites builder’s “enthusiasm is begin tempered by frustrating bottlenecks in the supply chain for developed lots along with rising costs for building materials and labor.” It is too early to tell whether this is a temporary blip or a signal of troubles to come.
International – Fog, Heavy at times. What were they thinking when they wrote the Cyprus bail-out deal? Once again, European issues continue to hamper their recovery and potentially threaten the United States recovery. While the Cyprus issue could cause the U.S. problems, it is highly improbable they actually will. It is more a media side-show that demonstrates there are still threats to the European recovery.
One of the bright spots is Ireland. Their austerity measures appear to be paying off. It is anticipated they will be able to pay their way out of their bail-out by the end of the year. Another is Poland. It is expected to grow its economy through 2014.
On the negative side, Industrial Production for the core European countries, Germany, the U.K., and France, may remain flat through 2013 at which time, it is expected, they may fall back into recession. Industrial Production, Construction and Vehicle Production metrics were all showing weakness. The recovery of the German economy will dictate the overall strength of the European recovery. If Germany can gradually recover through the end of 2013, then there is the chance for accelerated global growth.
If Germany falls into recession, this could lead to …
…a global forecast change from Fog to Chance of Thunderstorms, heavy at times.
A special thanks to ITR Economics for providing most of the economic information and analysis contained in this newsletter. Since 1948, ITR Economics has given business leaders the economic information, insight, analysis and proactive strategies they need to take advantage of opportunities, maximize profits, and avoid risks. To subscribe to an ITR Economics newsletter, go to their website at www.itreconomics.com.