Perspectives



Economic Review & Outlook: Implications for the US

The US economy continued to show moderate growth in the first quarter of 2013, following the trend of modest growth seen through all of 2012. Some economic indicators are showing positive signals: housing prices are continuing to rise; unemployment has remained under eight percent for eight months; and the private sector continues to add jobs despite continued cut backs in non-military government employment. Of these, the most positive signs are in the housing market because the net worth of families and individuals is often tied to real estate prices, and increased net worth can in turn lead to increased consumer spending down the road. On balance, the trend continues with a similar story to what this column reported in the December 2012 issue of EFR—a modest recovery that sustains some economic growth but has been insufficient to yield a full recovery.

US Real GDP Growth and Economic Components

In 2012, real GDP grew at 2.1 percent, in line with most forecasts and expectations and better than the 1.8 percent growth seen in 2011. Total growth for 2012 could have been higher, but the annual rate was dampened by an underwhelming performance of 0.4 percent during the fourth quarter—a quarter that traditionally posts higher growth due to increased consumer spending for the holiday season.

As 2013 began, US real GDP grew at 2.4 percent seasonally adjusted annual rate (SAAR1) in the first quarter. This compares with an average growth rate of 2.1 percent since the recession officially ended in Q3 2009, and 2.1 percent for all of 2012. Thus, 2013 is starting off stronger than recent average growth levels. Even more important is the strong growth seen in consumer spending. An overview of the four components of GDP (consumer spending, fixed investment, government spending, and net exports) also provides a deeper understanding into the drivers of GDP growth.

Consumer Spending

Consumer spending is traditionally the strongest component of real GDP growth, and it contributed most of the growth in the first quarter of 2013. Without consumer spending, real GDP growth would have been nearly flat, even with some growth in business investment. Furthermore, consumer spending grew at an annual rate of 3.4 percent in the first quarter, creating a recent high point. This is the second largest growth rate observed in this category since Q4 2006, second only to 4.1 percent growth in Q4 2010.

Major contributors to consumer spending growth in the first quarter were housing and utilities (4.7 percent growth), financial services and insurance (7.5 percent growth), transportation services (3.4 percent growth), and motor vehicles and parts (9.1 percent growth). Combined, these four sectors constituted over 62 percent of the total growth in consumer spending.

Investment

Business investment grew 4.1 percent in the first quarter of 2013. This area has fluctuated, as business investment growth has come in at 9.8 percent, 4.5 percent, 0.9 percent, and 14.0 percent during the first through fourth quarters of 2012, respectively. Because business investment is smaller in magnitude to consumer spending, this 4.1 percent growth only contributed 1.16 percentage points to total GDP growth. Without business investment, real GDP growth would have only been 1.22 percent in the first quarter.

The majority of the business investment increase in the most recent quarter is attributable to an increase in residential investment, which grew by 12.1 percent. This was responsible for over 56 percent of the total growth in business investment in the first quarter. The only other contributor of note was equipment and software, which grew by 4.6 percent. Non-residential structures declined by 3.5 percent.

Industrial capacity is another key indicator of business activity. Historically, a healthy industrial capacity utilization rate for the US has been between 80 and 85 percent; however, while the country has been trending in that direction, in recent months industrial capacity utilization has leveled off and even dipped slightly to 77.8 percent as of April 2013. It is nearly flat year-over–year.

Two factors are likely to contribute to higher capacity utilization: consumer demand and export demand. This is particularly true for durable goods and manufactured products that require heavy capital in the form of factories and equipment. As these areas of demand rise, capacity utilization is expected to increase.

The most positive signs in recent months have been in the housing market. This sector, which was a harbinger of the rest of the recession, is showing recovery in terms of both levels of investment and home prices. Real private residential investment grew 12.6 percent in the first quarter of 2013 to nearly $398 billion—a level not seen in nearly four years. The last time private residential investment was this high was in Q4 2008 when it was nearly $396 billion. Furthermore, the recent trend is upwards, with growth exceeding 10 percent for the past three quarters.

Similarly, home prices have been rising. The Case Shiller Index (20-city average) has shown growth for the past four quarters, growing at a rate of 13.4 percent in the first quarter of 2013. The index stood at 151.7 for March 2013; 149.9 for Q1 2013. Like private residential investment, home prices have not been as high since Q4 2008 when the index was 153.5.

Government Spending

Decreases in government spending (all levels) continue to slow economic growth. In the first quarter, government spending decreased by a 4.9 percent SAAR, following a 7.0 percent decline in Q4 2012. The government sector has posted declines in 11 of 13 quarters since the start of 2010. In the most recent quarter, government spending contributed to a 0.97 percentage point decline to real GDP growth. Without this decline, and all other sectors remaining as they were, real GDP growth would have been 3.4 percent.

Net Exports

Exports increased at an annual rate of 0.7 percent in the first quarter, while importa fell by 1.8 percent. In  general, net exports increased by $3.3 million in the first quarter, increasing at an annual rate of 7.0 percent due to the large relative decrease in imports compared to the growth in exports. Overall, an increase in exports is likely to contribute to industries such as manufacturing and agriculture, boosting capacity utilization and possibly leading to increases in the business investment necessary to meet growing export demand.

Projections

Annual US GDP growth in 2012 was 2.2 percent compared to 1.8 percent in 2011 and 3.0 percent in 2010. Forecasts for GDP growth in 2012 have been adjusted downwards by most sources, and this forecast represents adjustments to newer expectations of medium and longterm trends. Using a weighted average of International Monetary Fund, Congressional Budget Office, Office of Management and Budget (OMB), and Moody’s, GDP growth is expected to slow to around 2.0 percent for 2013. Growth is expected to pick up beginning in 2014, peaking in 2015 at around 3.9 percent, then falling back to 3.15 percent in 2017, and settling into a long-term growth rate of around 2.5 percent starting around 2018. The consensus among economists is that higher growth than this will be needed relative to future population growth in order to effectively reduce unemployment.

Employment

The April 2013 unemployment rate of 7.5 percent marks a 52-month low for unemployment, just shy of the 7.4 percent rate seen in October 2008.

The economy gained 165,0002 jobs in April 2013, marking the 31st straight month of job gains. The economy began shedding jobs in February of 2008. Starting in October 2010, the streak of job growth has added 5.6 million jobs, averaging about 164,000 jobs a month. Considering that 8.7 million jobs were lost during the period of February 2008 to February 2010, there are still 3.1 million jobs the economy must add just to return to previous employment levels. At the present rate of 164,000 jobs per month, it would take 19 months to bring total employment levels back to what they were before February 2008. Since this does not account for new entrants into the workforce, it would require even more job growth to reduce unemployment and accommodate new workers.

Inflation

Inflation is influenced, in part, by the monetary policy of the Federal Reserve. The Federal Reserve continues to hold the federal funds rate, the interest rate at which depository institutions actively trade balances held at the Federal Reserve with each other, usually overnight, on an uncollateralized basis, at near zero levels. For the month of May 2013, the federal funds rate stood at 0.11 percent, near the middle of the official target range of zero to 0.25 percent. While this might signal higher inflation, the post-recession economy remains resistant to inflation triggered by low interest rates from the Federal Reserve.

Bond rates are another indication of inflation. The 10-year US Treasury bond continues to trade at very low rates; July 2013 saw a low of 1.53 percent. Despite these very low rates, which tend to expand the money supply, there has been no significant inflation. Year-over-year core inflation, which does not include food or energy, was 1.5 percent (March to March), which is easily below the historic three to four percent range and well within the comfort zone of the Federal Reserve. Headline inflation, which is defined as core inflation plus more volatile food and energy prices, saw similar levels at 1.9 percent over that same time period.

Fiscal Receipts

According to the latest data from the Rockefeller Institute, state tax collections in the third quarter of 2012 grew for the 11th straight consecutive quarter, up 2.7 percent year-over-year. While nearly three years of consecutive gains in tax collections is good news for states, the overall collections are still weak when placed in historical context. When adjusted for inflation, nationwide tax receipts for state and local governments show a 4.4 percent decline in the third quarter of 2012 compared to the same quarter in 2008.

Local taxes have started to grow year-over-year averaging 2.6 percent over the past four quarters. This marks a significant improvement from the 4.6 percent decline the previous year. The divergence between state and local tax receipts are largely explained through the heavy reliance of local governments on property taxes, and property values have only recently started to look up, whereas income and sales tax revenues have been steadily increasing for awhile. The decline in local tax revenues has placed many counties and municipalities infiscal crisis.

Nonetheless, some states are beginning to see fiscal surpluses this year. California, the largest state economy, is headed for a budget surplus of about $2.4 billion spurred, in part, by a voter-approved tax increase last November. North Dakota foresees a $1.6 billion surplus as its economy continues to have low unemployment and a strong oil sector. Ohio projects over a $1 billion surplus, with nearby Wisconsin projecting nearly $484 million in the black. Other states projecting surpluses are Iowa ($800 million), Tennessee ($580 million) and West Virginia ($88 million). These surpluses may go towards funding previously unfunded pensions, towards other unfunded liabilities, and possibly towards improved or expanded infrastructure.

Regional Employment

Nevada continues to have the worst unemployment rate in the nation at 9.7 percent as of March 2013. It is followed by Illinois (9.5 percent), Mississippi (9.4 percent), California (9.4 percent), and North Carolina (9.2 percent). A positive trend is that all states now have unemployment rates below 10 percent, a threshold broken in December 2012. Prior to that, there was always at least one state with an unemployment rate over 10 percent every month for four consecutive years (from December 2008).

Unfortunately, 18 states and the District of Columbia saw unemployment rates rise between the Q4 2012 and Q1 2013. The largest of these increases was Illinois with a 0.63 percentage point increase. All other increases in unemployment were less than half a percentage point, suggesting some stabilization of unemployment rates. Thirty states saw strong declines in the unemployment rate in the first quarter of 2013, and another two states remained flat. Rhode Island and Vermont, in particular, had the sharpest unemployment drop, each posting a decrease of 0.57 percentage points. Colorado saw a decrease in unemployment of 0.40 percentage points, and the high unemployment states of California and Nevada saw some of the most positive trends. California’s unemployment rate decreased by 0.33 percentage points, while Nevada’s decreased by 0.37 percentage points.

 

Notes:

  1. All growth rates reported as seasonally adjusted annual rate (SAAR) unless otherwise inicated.
  2. Jobs numbers refer to the Bureau of Labor Statistics (BLS) Current Employment Statistics household survey which excludes the self-imployed and farm workers. The number of unemployed and labor force figures are from BLS Current Population Survey, and includes farm workers and the self-employed.

 

Image Header Source: woodleywonderworks (Creative Commons)

 

 

 


Geographies: United States
Sectors: Other
Topics: Economics