As we approach the middle of the year, we can take a moment and see where the economy is and how the rest of the year could play out. The data shows that the economy hit a rough patch in the fourth quarter of 2013, with the severe weather further hampering economic vitality in the first quarter of 2014. Yet, there are signs that the economy has now begun to make a significant come back. However any improvement will not be as robust as it was previous to the financial crises.
Let’s begin by reviewing some of the numbers. The latest number released by the Commerce department on the U.S. Gross Domestic Product (GDP) shows the economy grew at a seasonally adjusted annual rate of 1.0% in the first quarter of 2013. Unfortunately, this is the second worst quarterly performance since the recession ended in mid 2009 and marked the economy’s first contraction in three years. GDP is defined as a broad measure of goods and services produced across the economy. Many economists, along with the Federal Reserve, have attributed much of the contraction to the severe weather that the country experienced during the winter.
In contrast to the GDP numbers for the first quarter, new economic data shows the economy has picked up in various sectors such as manufacturing and hiring. Furthermore, retail and food sales rose a seasonally adjusted 0.3% from the previous month of May. Similarly, auto sales jumped 1.4% in April with other goods rising just 0.1% from April.
Finally, the Conference Board’s consumer confidence index rose to 85.2 from 83.5 in May. This is the highest reading we have seen since January 2008 and it’s usually a strong indication of improved consumer spending in the near future. All these various numbers demonstrate that the economy has the promise of producing a higher GDP in the second half of the year.
Since financial markets are global, we need to also include a world economic perspective in our outlook. There are still signs that the economies of much of Europe and Asia continue to exhibit a shakey foundation. Economic activity in the 18 country Euro Zone expanded at a weak annual rate of 0.8% during the first quarter of 2014. Of course, this excludes Germany which grew economically at a robust 3.3% pace during this same time. Domestically this is being felt in the drop of exports to a seasonally adjusted rate of 7.5% pace in the first quarter.
On the Consumer Front
Fewer discretionary purchases were noted this last quarter with consumer spending on goods only rising 0.4%. Consumers did spend a lot on energy to heat their homes and paying for health care which accounted for 3%. If not for this increase spending on health care and utilities the economy would have contracted. In the business arena spending on equipment fell at a 5.5% pace during the quarter, the largest decline since 2009. As we will see below, this is now a contributing factor in the decline of worker productivity.
Unemployment
Unemployment, as we have stated in previous articles, is the key to economic vitality and growth will be centered around employment and wage increases. In May U.S. Payrolls hit an all time high after one of the best four month stretches of job creation since the late 1990’s according to the labor department. Last month alone, there were 217,000 jobs added. This leaves the current unemployment rate at 6.3% – the lowest level since September of 2008.
Despite signs of substantial strength in these numbers, the job market is a far cry from what it was before the financial crises in 2008. One major concern is the growth of low wage employment and the slow down in well-paying fields of employment. The U.S. has 1.6 million fewer manufacturing jobs than at the beginning of the recession. By contrast there are now 984,100 more jobs in accommodation and food service sectors.
Wage pressure might be on the rise
U.S. Labor Department figures showed private sector non-farm hourly wages grow just 1.9% in April from a year earlier. This increase is not enough to offset the creeping inflationary pressures nor meet the standard of living for many workers.
In fact, employee compensation as a share of national income has fallen to its lowest point since 1951 at 66%, while profits soared to an all new level of 16%. The result is that the average American lost approximately 75% of their buying power since the early 70’s. Yet, many economists are finding much evidence of a strong uptick in wages five years after the recession ended. To support this contention these economists point to a recent survey of executives at more than two dozen large companies, including manufacturing and financial services companies, that reported rising wages. While workers are getting more jobs there is little evidence that the growing demand is or will cause higher wages.
The weekly average paycheck of private sector workers showed a mild 2.2% increase in April from a year ago. Looking further we see that this was primarily because people worked longer hours, not because their wages increased. The Labor Department’s Employment Cost Index which measures combined pay and benefits, rose just 0.3% in the first quarter-the smallest gain since 2009. The index is up 1.8% year after year, indicating that generally employers haven’t had to pay up to attract and keep workers. This suggests plenty of labor market slack to be absorbed before wage inflation becomes a concern.
At the same time, reports are indicating worker productivity declined at a 1.5% annual rate in the first quarter. This is seen as a result of the malaise in the labor markets, coupled with the muted business investment mentioned above. Finally we should take a look at the steep decline in Labor force participation. Currently, only 62.8% of the population is participating in the work force. This equates to 806,000 people leaving the work force in April. It is also important to note that those working part-time, but who preferred to work full time, was 12.2%. In other words people are taking part-time jobs as a last result, but are looking for full time employment. All this affects the ability of people to increase their spending and contribute to economic growth.
Inflation begins to surface
Inflation has begun to show an uptick with food costs up 0.4% in April. This continues an upward trend that began since the beginning of the year. Furthermore, in April consumer prices were up 2% from a year earlier and energy prices climbed 1.8% in April from a year earlier. The fastest annual increase since last August and a sign that underlying price increases may be gaining traction.
The Federal Reserve latest forecast has the economy growing above 3% through the end of this year and into 2015. They also predict the unemployment rate falling to 5.5% by the end of 2015. Should these scenarios come to frution it is likely that interest rates will move higher and this could cause a slow down in the economy at that point.
Housing
The National Association of Home Builders released their index of builder’s confidence. This report gives the market outlook for new single family homes. The results showed the lowest level in a year. At the same time, sales of previously owned houses did rise 1.3% in April, their first monthly increase this year, which rose again to 4.9% in May. However, U.S. homeownership rate is the lowest level since 1995 at 64.8% down from 65.2% at the end of 2013. Currently 74 million Americans own homes compared to the peak in 2006 when 76.5 million Americans, or 68.9%, owned their homes.
This is due in part to two main variables. One is the previous housing bubble which caused many people to lose their homes to foreclosure. Secondly is the rising number of young people leaving their parents home and renting apartments with no desire of buying a home. The Case Shilder home price index, which covers 20 major U.S. cities, advanced 12.9%. But this was down from 13.9% for all of 2013. Thus home prices are increasing, allowing homeowners to build equity. At the same time these increases are putting more people out of the range they can afford for a home.
About 20 million families have enough money to buy a home but are choosing to rent instead, according to new data from the NAR. With many workers turning to self employment and freelance work, many potential buyers are being scared off by the down payment and strict requirements to prove years of steady income. All this has slowed the effects that housing usually contributes to GDP.
Wrap-Up
As we have seen, there are many positive aspects of the economic data that shows a potential for the second half of the year to demonstrate better economic prowess. Nonetheless, this is not a broad range growth cycle that is being felt in all areas of the economy. Even if the economy does hit the anticipated numbers, this will not mean that we’re back to where we were before the economic crises of 2008. For us to return to that level of prosperity, the economy will need to have a more stable foundation based on stronger employment numbers with supportive wages.
As for small business owners this information is more positive than negative. Overall it shows that it is still possible for a business to succeed without a major drag from the economy as a whole. However, success will not be a given. Now more than ever every businesses will need to be strategic in all aspects of their business in order to maximize their financial potential.
Exploring these kinds of issues is exactly the kind of thing Bay Area Mastermind works with. Each month, members of Bay Area Mastermind get together to explore how to take their businesses to the next level by incorporating the latest strategies and techniques in business. You are invited to Test Drive a Bay Area Mastermind today by clicking on the link in this post on on the box to the right of the page. See you there.