Economic Review & Outlook: Implications for the U.S.

The economy “waited” in the third quarter of 2011. There was waiting for housing to improve, as we watched new starts and housing prices remain flat. Investors waited for Congress to act on the budget and then for the “Super-committee” to act on a deficit reduction plan. Those of us in the infrastructure world have continued to wait for a transportation spending bill, only continuing to be left in a holding pattern, causing some governments to wait to spend on infrastructure projects. Consumers waited for businesses to provide jobs, while businesses waited for consumers to spend; and in the third quarter, the consumer market looked forward to the fourth quarter and holiday consumer spending. 

As reported in the last edition of this column, economic signals were at best mixed.



Third Quarter Growth and Economic Components

In the third quarter, U.S. real GDP grew at a 2.0 percent seasonally adjusted annual rate (SAAR), accelerating from 1.3 percent in the second quarter. Fortunately, the growth shows that some of the slowdown in the first half of 2011 may indeed have been just a “blip,” a viewpoint that was expressed by the Federal Reserve.

As of now, consumers seem to have settled into slightly higher spending levels. In fact, the majority of third quarter growth can be attributed to consumer spending (Box 1), which stood at 1.63 percent compared to 0.49 percent in the second quarter. The fourth quarter may very well carry on this upward trend, and be reinforced by holiday spending.

Among the major growth categories within consumer spending were recreational goods and vehicles (10.8 percent SAAR), motor vehicles and parts (5.5 percent), and health care services (5.4 percent). However, much of the other consumer categories were not remarkable, or negative, suggesting that the trend may be unstable and not representative of future consumer behavior.

With much of the growth in consumer spending confined to a few categories, it is not surprising that business investment continued a relatively flat trend over the last two quarters; for the third quarter, business investment declined marginally by -0.1 percent. A minor positive was that industrial capacity utilization continues its slight upward trend, standing at 77.8 percent in October 2011 (Box 2), with a 3.9 percent increase for the third quarter.

As a reference, healthy capacity utilization historically has been around 80 to 85 percent, so trends towards that range are a positive sign for the industrial sector. However, despite increases in capacity utilization, job increases have not followed—an indication of increased technology, more productivity per worker, and making due with less labor.

Consumers often spend more when their wealth is greater, and this has often been tied to home prices for many Americans. Here, we still see signs of stagnation. New housing starts in the third quarter declined -4.8 percent quarter-to-quarter, although they are up 21.8 percent year over ear. When looking at prices and residential investment, one sees that overall they remain flat. Real private residential investment in the third quarter grew at 1.6 percent while housing prices declined at -0.37 percent during the same period. Box 3 shows how these indices both have tabled off over the past four quarters.

On the government side, since the political and fiscal climates remain unfavorable towards expenditure and investment projects, government spending was flat in the third quarter at a rate of -0.02 percent, continuing its slightly negative or nearzero trend as government spending declined -0.18 percent in the second quarter. Most of the decline can be attributed to a 21.6 percent drop in federal non-defense structures, and a 1.4 percent decrease in state and local government spending. 

Finally, in the net exports area, there were some mild changes. Overall, net exports grew by a 0.49 percent in the third quarter. U.S. goods exports increased at a 4.3 percent, likely due to a (generally) weak dollar and rising (especially Asian) demand for U.S. goods (Box 4). However, exports likely have been slightly hindered by a growing euro crisis and a weak euro relative to the dollar. During this same period imports increased 0.5 percent, underscoring the fact that consumers appear to be waiting to spend more. Overall, the U.S. trade balance continues to be negative and will likely remain that way for the foreseeable future.


The consensus among forecasting agencies is that, at final accounting, U.S. GDP will grow somewhere between 1.7 percent and 3.9 percent in 2011.  Overall, forecasters have tempered their outlooks down to reflect the fact that actual 2010 GDP results posted lower than initial estimates, as well as to incorporate the less-thanstellar economic performance during the first half of the year. The International Monetary Fund (IMF) and IHS Global Insight had the most drastic reductions, lowering their 2011 projection from 2.8 percent to 1.5 percent, and 2.7 percent to 1.7 percent, respectively. The Congressional Budget Office (CBO) lowered its forecast from 2.7 percent to 2.4 percent, while Moody’s remained optimistic, increasing its forecast from 3.0 percent to 3.9 percent.

Using an average of Global Insight, IMF, CBO, and Moody’s, GDP growth is expected to expand 2.8 percent for 2011, increasing to slightly above three percent for 2012 through 2014, then decreasing to a long term growth rate of around 2.5 percent from 2016 to 2020. The peak growth is forecast to occur between 2012 and 2014, with growth at around 3.2 percent. The consensus among economists is that higher growth than this will be needed relative to future population growth, in order to reduce unemployment.

For the overall economy to truly undo the damage that occurred during the recession, more robust growth than 3.2 percent is needed. To truly emerge from this recent recession, many economists indicate to do so would require growth to be anywhere from 3.5 to five percent.


There has been some recent positive news and that is that the November 2011 unemployment rate improved to 8.6 percent compared to 9.0 percent in October. Furthermore, this 8.6 percent is the lowest monthly unemployment level posted since March 2009 (Box 6). Some of reduction in unemployment may be attributed to discouraged employees exiting the job market, as the Bureau of Labor and Statistics reports that while the number of unemployed persons fell by 594,000 in November, the labor force also fell by 390,000.

The economy gained 120,000 jobs in November, marking a 14-month streak of continuous job creation that began in October 2010. However, some of this was tempered by cut backs in government employment. Overall, governments shed another 20,000 jobs in November, marking a year-to-date loss of 263,000 jobs in this sector (Box 7).

As an overall impact, it is important to note that since the start of the official recession in December 2007 up to the beginning of the recent streak of job growth in October 2010, the U.S. economy lost a net 8.7 million jobs. During the 14-month job streak, there have been a net 2.9 million jobs created. At this pace, it would take an additional 28 months (which occurs in March 2014) simply to undo the initial loss of 8.7 millionjobs and bring us back to pre-recession jobs levels. To reduce unemployment, there would have to be even more jobs created to account for the addition of new workers into the labor market.


The Federal Reserve continues to maintain a near-zero interest rate, which stood at 0.08 percent as of December 2011, with the target set at zero to 0.25 percent. In terms of government debt, the 10-year U.S. T-bill was trading at 2.01 percent in November 2011, the second lowest level recorded since 1953. Nonetheless, significant inflation does not appear to be materializing. Third quarter core inflation increased slightly to 2.7 percent, which is well within the comfort zone of the Federal Reserve, and well within a normal three to four percent, which is the historic range for annual inflation.

Fiscal Receipts

State and local tax collections grew for the six consecutive quarters in the second quarter of 2011, according to the most recent data available from the Rockefeller Institute. This is in contrast to five straight quarters of decline seen from fourth quarter 2008 to fourth quarter 2009, inclusive. Overall, tax receipts for state and local governments grew 10.8 percent year-over-year during the third quarter. Much of this is from personal income taxes which grew over 16 percent year-over-year. Only eight states saw year-over-year revenue declines: Alabama, Georgia, Indiana, Kansas, Maryland, New Jersey, New Mexico, and Nevada. However, when looking at actual levels of fiscal receipts, 38 states had lower collections than in the second quarter of 2008, translating into a 9.5 percent decline in tax revenues than three years ago in inflation-adjusted dollars. This means that, while state revenues are by and large no longer declining, they are far from returning to pre-recession levels. According to the Center on Budget and Policy Priorities, 42 states, as well as the District of Columbia, are working to, or have already had to close budget gaps totaling $103 billion for the 2012 fiscal year, forcing them to make tough choices about how to spend their limited dollars.

Local governments, however, continue to face deteriorating conditions, especially since they rely on property taxes much more heavily than state governments do. Such property taxes typically constitute about two-thirds of local tax revenues. Over the last four quarters, year-over-year local tax collections declined an average of 1.7 percent, diminishing the resources available for local government programs and infrastructure spending.

Regional Outlook

Unemployment is dispersed throughout the country as of October 2011. Nevada leads with the highest unemployment (13.4 percent), followed by California (11.7 percent), D.C. (11.0 percent), Michigan (10.6 percent), and Mississippi (10.6 percent). There were also seven other states with unemployment rates exceeding 10 percent: South Carolina, North Carolina, Rhode Island, Florida, Georgia, and Illinois. This means much of the Sun Belt, the former engine of growth in the U.S., remains in poor shape with no signs of a marked recovery in the near future.

States in the Great Plains and parts of the Midwest continue to have lower unemployment, with North Dakota (3.5 percent), Nebraska (4.2 percent), South Dakota (4.5 percent), New Hampshire (5.3 percent), and Vermont (5.6 percent) the top five in terms of low levels of unemployment. This trend appears to be related to population levels, with lower-density states posting lower unemployment. This is not illogical given that lower population levels often mean lower labor force competition. Overall, 11 states saw year-over-year increases in unemployment in the second quarter. Fortunately most states saw their unemployment rate recede. New Mexico saw a 1.9 percentage point decrease, followed by Nevada (-1.7 points), Indiana (-1.3 points), Oklahoma (-1.3 points), and Oregon (-1.1 points).

Overall, the national picture shows improvement in a dispersed pattern, with even some of the harder hit states like Nevada getting their unemployment rates down to lower levels. However, according to IHS Global Insight near-term U.S. outlook, growth is going to be led by the South Atlantic, Mountain, and West South-Central regions. In the Mountain and West-South Central regions this growth is being driven by energy sectors as higher oil prices and newer technologies have made new oil and gas ventures in these areas profitable.


Image Header Source: Source: Jono Crane (Creative Commons)

Geographies: United States
Sectors: Other
Topics: Economics