MAKING CENTS — Finishing the Year Strong
The economy rebounded at a 4.2 percent pace in the second quarter of 2014 after contracting 2.1 percent in the first.
The 4.2 percent growth reflected growing personal consumption, private inventory investment, exports, both residential and nonresidential fixed investment, as well as local government spending. The gains were partially offset by an increase in imports, which negatively impacts GDP, and a 0.9 percent decline in federal government expenditures. Prospects for the second half of the year are better.
Momentum Gainers and Killers
Much of the momentum was due to employment gains (with the exception of the August payroll data), lower prices at the pump, pent-up demand and a slight improvement in consumers’ assessments of the future.
Aggressive financial incentives including loans as long as seven years have also helped; longer loans make monthly payments more affordable when wage growth is still constrained.
The housing market is picking up, albeit not as rapidly as we had hoped; business owners are finally upgrading instead of just repairing old equipment.
Separately, state and local government spending has turned a corner and is finally adding to instead of subtracting from growth.
The federal government has been the primary drag on growth, with the deficit actually narrowing fairly substantially this year.
Trade is also a weak spot; imports are expected to outpace exports because we are doing better than much of the rest of the world.
At the time of this writing, the Federal Reserve is expected to end its current asset purchase program on October 29 the 85th anniversary of the 1929 stock market crash, for those who are superstitious. It will then hold the balance sheet constant through the first rate hike, which won’t likely occur until well into the third quarter of 2015. A shift in the composition of voting members on the FOMC in 2015 is expected to delay and temper the rise in rates.
Growing Confidence
Improving business confidence could push investment growth back up. Consumer spending and confidence remain below what would be considered normal levels by the standards of past economic expansions.
As job growth returns and consumers feel more secure, more robust income and spending increases may well be triggered, pushing second-half growth over the expected 3 percent pace. While that happening in what remains of this year is an outside chance, it’s a good bet that such a virtuous cycle will kick in next spring.
As for the unemployment rate, it has declined to 6.1 percent, mainly because there was a drop in labor force participation, particularly by teenagers. Fewer than usual entered the labor force in August, looking for work, and more than usual left the labor force during August, presumably to go back to school (or to grab what was left of summer vacation before hitting the books again).
The result, in both cases, was a lower labor force participation rate, which helped lower the unemployment rate. The labor force participation rate rose for those over the age of 25 in August.
What’s happening in the Housing Market?
As mentioned earlier, the housing recovery continues to be modest. New home construction has been slow to maintain the momentum seen earlier in the recovery, with housing starts falling to a 956,000-unit annualized pace, which is still less than half of the pace of units started before the recession hit.
Due to the recent volatility, starts look fairly flat so far this year. Despite the slow growth, homebuilder sentiment continues to improve and has reached a new high for the current recovery.
Homebuyer traffic, current sales and expected sales all improved in the latest homebuilder survey, which bodes well for the new home sales numbers in the next couple of months.
However, a large upswing in housing construction will likely be put off until next year, as building permits have also remained fairly flat. However, the underlying economic fundamentals remain strong and point to a pickup in the housing recovery, including more residential construction.
International Influences
The world’s eyes were on the northern part of Great Britain recently as voters in Scotland voted on the question of whether Scotland should become an independent nation.
Although the “yes” vote had closed ground in recent weeks in polling, the end result was fairly decisive with 55 percent of the voters saying “no.” The British pound, which had depreciated as the polls narrowed, recouped some lost ground in the aftermath of the vote.
The 2014 Finish Line
Economists are revising estimates upward for consumer spending in the current quarter and the rest of 2014 after solid retail sales report and strong data on health care outlays.
Core retail sales (excluding autos, gasoline, building materials and food services) rose 0.6 percent and are up 4.6 percent the past year, the most since early 2012. Let’s hope some of that goes towards more flowers, shrubs, and trees this fall.
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