MAKING CENTS — Headwinds or Tailwinds
As we enter a new fiscal year in October, we need to figure out which way the economic wind is blowing.
The 2013 OFA Short Course in July in Columbus, Ohio, was a hit again this year and many have even commented that it was the best in several years.
The general attitude of folks I visited was positive and I heard many comments on the trade show floor about the quality of the leads generated. As I conjectured beforehand, I did not hear many comments regarding the economy this year (as compared to years past), reflecting our general tendency to focus on the things that are directly impacting us at the moment.
Steady As She Goes?
Speaking of the economy, at least for now GDP growth will remain about the same as it has been (steady but subpar to where we should be) until late in the year. A strong early start, driven by consumer spending, faded as furloughs for some civil servants and curtailments in contracts mandated by an $85-billion reduction in government spending contributed to a third consecutive spring swoon, and continue to take a bite from economic activity in the third quarter.
But there are solid reasons to expect momentum to rebuild by late fall, when businesses and consumers have adjusted to fiscal tightening and the impact of the two-percentage-point hike in payroll taxes that kicked in at the start of 2013. Continuing improvement in the housing market, with building, sales and prices all climbing, should also add some punch to the expansion and give businesses and consumers the confidence to keep putting their spending power into GDP.
First-quarter GDP growth, recently revised down to just 1.8 percent, put in a less-than-sparkling performance. Still, it was better than the 1.5 percent or so rate that will persist during the second and third quarters before picking up in the final three months, for full-year 2013 expansion of 2 percent.
It seems likely that the country will enter fiscal year 2014 (which begins on Oct. 1) still under a sequester that would require continued across-the-board spending reductions with the government operating under a temporary funding measure. Odds are that lawmakers will agree only to a temporary increase in the debt ceiling in early fall, when the Treasury is expected to again reach its borrowing limit. Some of the uncertainty stemming from political jockeying in Washington over spending and another debt ceiling hike will have eased, if only because the country will have lived with such temporary measures and the sequester for some months by then. That may be sufficient to provide businesses with enough confidence to plan new strategy-oriented investments.
The economy’s underpinnings appear solid, not withstanding the modestly reduced contribution from government spending. The housing and auto sectors will continue to be the main drivers of economic activity for the remainder of this year and next, giving the private sector a heightened role in an anticipated acceleration of growth during the second half that will carry over into 2014.
However, the effect from sequestration may actually be significantly greater in fiscal 2014 and may exact an even greater toll on real GDP growth beginning in the fourth quarter of this year.
Residential construction has contributed 0.3 percentage points to economic growth over the past year, with most of the gain coming from apartment construction. Starts of single-family homes have taken longer to get back on track, even though inventories remain near all-time lows and buyer traffic is improving. Permits have been running ahead of starts, however, and the unusually wet spring weather in parts of the South has restrained starts.
Projections suggest that we will see a 30 percent increase in single-family starts this year and expect overall housing starts to be around a million units in 2013. Starts should rise by an additional 20 percent next year, if present trends continue.
Reluctant Business Investment
Business fixed investment is also taking longer to find its footing. Businesses remain reluctant to commit to major capital projects given all the uncertainty surrounding public policy. Moreover, many firms do not need additional capacity at this time and will need to see further gains in sales and earnings before boosting capital spending. There are some exceptions, however, as indicated by some of the conversations I had with greenhouse manufacturers on the OFA trade show floor.
The Fed’s love affair with quantitative easing also seems to be waning. Even in the face of weaker economic growth, the Fed is poised to begin tapering its security purchases this fall and end them completely around the middle of 2014. While the Fed has readily acknowledged these encouraging signs, it has also noted some obvious shortcomings.
Recent job gains have been more heavily weighted toward lower-paying industries, many of which his- torically employ large numbers of part-time workers. Much of the decline in the unemployment rate is also due to folks dropping out of the labor market, not from a pick-up in hiring.
In light of these concerns, the Fed has been deemphasizing the 6.5 percent unemployment rate as a point when it would begin to raise the federal funds rate. Ben Bernanke, the chair of the Federal Reserve, also has given the Fed a little more wiggle room by noting that any change in monetary policy will be strictly data driven.
It’s Only a Matter of Time
Regardless of what fiscal and monetary policies are put into place this year, we know inherently that it is only a matter of time until the next correction in the market takes place and any overvalued assets will be readjusted at that time. There are some economic modelers that are forecasting such a correc- tion toward the middle of 2014. Current fundamentals do not bear that out in my opinion, but there is a lot of uncertainty that clouds the air between now and then.
It does beg the question though: What are you doing right now to prepare for the next recession?
One of the best-selling books of all time talks about managing resources during the good years in anticipation of scarcer resources being available during the lean ones.
Now is a good time to make sure you are not finan- cially overleveraged but, at the same time, ready to move on strategic opportunities in the marketplace.