Perspectives



Economic Review and Outlook: Implications for the US

The US economy continued to grow in the second and third quarters of 2013, picking up some steam after a more moderate first quarter. Most major economic indicators are showing positive signals: housing prices are continuing to rise, unemployment has remained under eight percent for 14 months, and the private sector continues to add jobs despite the stagnation of government employment. Of these, the most positive signs of a turnaround are in the housing market, as its collapse signaled the start of the recession.

On balance, the trend continues with a similar story to what this column has reported over the last few issues: a modest recovery that sustains some economic growth, but has been inadequate to yield a full recovery, primarily in terms of full employment.

US Real GDP Growth and Economic Components

While 2013 got off to a slow start with only a 1.1-percent seasonally adjusted annual rate (SAAR1) in the first quarter, it has since picked up coming in at 2.5 and 3.6 percent in the second and third quarters, respectively. This is slightly higher than the average annual growth rate of 2.3 percent seen since the recession officially ended in Q3 2009, and in line with the 2.8-percent growth observed in 2012. Thus, 2013 continues the recent trend of moderate but steady growth. A closer look at the four components of GDP (consumer spending, fixed investment, government spending, and net exports) provides a deeper understanding into the drivers of GDP growth.

Consumer Spending

Consumer spending contributed much of the growth in the second and third quarters of 2013 accounting for 50 and 37 percent of the growth, respectively. Without consumer spending, real GDP growth would have been around 0.5 percent in both of these quarters. That being said, since the end of the recession in Q3 2009, quarterly growth in consumer spending has averaged 2.1 percent, but has only come in at 1.8 and 1.5 percent over the past two quarters.

Major contributors to consumer spending growth in the third quarter were furnishings and household equipment (12.0-percent growth), recreational goods and vehicles (11.5-percent growth), and motor vehicles and parts (6.5-percent growth). Together these three categories accounted for 56 percent of the growth in consumer spending.

Investment

Business investment grew 9.2 and 9.5 percent in the second and third quarters of 2013, respectively. This area has seen a great deal of fluctuation since the recession; over the past four years it has ranged from -7.5 percent to 36.2 percent. Because business investment is smaller in magnitude to consumer spending, even growth rates approaching double digits only contributed 1.38 and 1.45 percentage points to total GDP growth in the second and third quarters of 2013, respectively. Without business investment, real GDP growth would have only been 1.12 and 1.35 percent in these quarters, respectively.

The majority of the business investment increase in the most recent quarter is attributable to an increase in residential investment, which grew by 14.2 and 14.6 percent in 2013’s second and third quarters, respectively. Residential investment includes construction of new single-family and multi-family structures, residential remodeling, production of manufactured homes, and brokers’ fees. This was responsible for roughly 30 percent of the total growth in business investment in both quarters. The only other contributor of note was non-residential structures, which grew by 17.6 and 12.3 percent in quarters two and three, respectively. Nonresidential structures consist of new construction and improvements to existing structures in commercial and health care buildings, manufacturing buildings, power and communication structures, and other structures.

Industrial capacity is another key indicator of business activity. Historically a healthy industrial capacity utilization rate for the US is between 80 and 85 percent; however, while the country has been trending in that direction, over the past year industrial capacity utilization has leveled off, standing at 78.1 percent as of October 2013. It is, however, up 1.1 percentage points year-over–year.

Two main factors 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.

There continue to be positive signs 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 at an annual rate of 14.2 percent in the second quarter of 2013 to nearly $478.1 billion. In the third quarter, it grew at an annual rate of 14.6 percent, coming in at $504.0 billion. The last time real private residential investment was this high was in Q2 2008 when it was nearly $516.3 billion. Furthermore, the growth rate has been in the double digits for the past five quarters.

Similarly, home prices have been rising. The Case-Schiller Index (20-city average) has shown growth for the past six quarters, with an annual growth rate of 26.4 percent in the second quarter of 2013 and 20.8 percent for the third quarter so far (September data has not yet been published as of November 2013). The index stood at 164.53 for August 2013; as with real private residential investment, this index has not been this high since Q3 2008 when it was 164.22.

Government Spending

Stagnation and decreases in government spending (all levels) continue to slow economic growth. In the first quarter, government spending decreased by a 0.4 percent SAAR. This was followed by an almost flat third quarter of 0.2 percent growth. The government sector has posted declines in 11 of 15 quarters since the start of 2010. In the most recent quarter, government spending contributed only 0.04 percentage points to real GDP growth. It is expected that the fourth quarter of 2013 will see a further dip in spending as a result of the 16-day federal government shut down in October.

Net Exports

Exports increased at annual rates of 8.0 percent and 4.5 percent in the second and third quarters, respectively. Imports also rose over this time but more slowly, by 6.9 and 1.9 percent. In general, net exports fell by $2.1 billion in the second quarter and then increased by $11.2 billion in the third quarter. Net export growth is largely due to an increase in exports over the last two quarters, not a decrease in imports. 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 business investment necessary to meet growing export demand.

Projections

Annual US GDP growth in 2012 was 2.8 percent compared to 1.8 percent in 2011 and 2.5 percent in 2010. Forecasts for GDP growth in 2013 have been adjusted downwards by most sources, and this forecast represents adjustments to newer expectations of medium- and long-term trends.

Using a weighted average of the International Monetary Fund, Congressional Budget Office, Office of Management and Budget, and Moody’s, GDP growth is expected to slow to around 1.8 percent for 2013. Growth is expected to pick up beginning in 2014, peak in 2015 at around 3.8 percent, then fall back to 3.2 percent in 2017, and finally settle into a long-term growth rate of approximately 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 October 2013 unemployment rate was 7.3 percent. The September rate of 7.2 percent marked a 57-month low for unemployment; the last time the unemployment rate was lower was November 2008 with 6.9 percent.

The economy gained 204,0002 jobs in October 2013, marking the 37th straight month of job gains. The economy began shedding jobs in February of 2008. Starting in October 2010, the current streak of job growth has added 6.6 million jobs, averaging about 179,000 jobs per month. Considering that 8.1 million jobs were lost during the period between February 2008 and October 2010, there are still 1.5 million jobs the economy must add just to return to previous employment levels. At the present rate of 179,000 jobs per month, reaching this number of jobs would take nine more months. Since this does not account for new entrants into the workforce, additional job growth would be required to reduce unemployment and accommodate new workers.

Inflation

Inflation is influenced, in part, through 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 October 2013, it stood at 0.09 percent, on the low end 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.

Bond rates are another indication of inflation. The 10-year US Treasury bond rates have seen an increase from their lows of approximately 1.45 percent in the summer of 2012, to the current average of 2.7 percent (for the month of November to date). This is a result of the anticipated wind down of the Federal Reserve monthly bond-buying program in 2014. 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 (September to September), 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 the more volatile categories of food and energy prices, saw slightly higher growth at 2.2 percent over that same time period.

Fiscal Receipts

According to the latest data from the Rockefeller Institute, state tax collections in the first quarter of 2013 grew for the 13th consecutive quarter, up 8.6 percent year-over-year. This was stronger than the growth seen in the previous six quarters and was mostly due to strong growth in personal income tax collections, which increased by 18.4 percent year-over-year. However, this large increase is due at least in part to the acceleration of income recognition in the calendar year 2012 for tax purposes, as Americans worried about the uncertainty surrounding fiscal policy changes in 2013. Although the tax collections in Q4 2012 and Q1 2013 were artificially boosted, this was the first time since the start of the Great Recession that inflation-adjusted state tax collections were higher than previous peak levels.

Local tax revenues have now grown for the fourth consecutive quarter, after facing six quarters of decline. In real year-over-year terms, local taxes grew by an average of 3.1 percent over the last four quarters, a significant improvement from the declines seen over the past two years. The lag in the recovery of local tax receipts can largely be explained through the heavy reliance of local governments on property taxes (property values have only recently started to recover), whereas income and sales tax revenues have been steadily increasing for some time.

Regional Employment

Nevada continues to have the worst unemployment rate in the nation at 9.3 percent as of October 2013. It is followed by Rhode Island (9.2 percent), Michigan (9.0 percent), the District of Columbia (8.9 percent), and Idaho (8.9 percent). A positive trend is that only three states have unemployment rates of nine percent of greater, a threshold broken in May 2012. Prior to that, there had been at least four states with an unemployment rate of nine percent or greater since December 2008.

Unfortunately, 30 states and the District of Columbia saw unemployment rates rise between the Q2 2013 and Q3 2013. The largest of these increases were in Idaho, Alaska, and Massachusetts at 0.5 percentage points. All other increases in unemployment were less than half a percentage point, suggesting some stabilization of unemployment rates.

Eighteen states saw declines in the unemployment rate in the third quarter of 2013, and another two states remained flat. Mississippi and Alabama, in particular, had the sharpest unemployment drop, posting decreases of 0.57 and 0.47 percentage points, respectively. Nevada saw its rate decrease by 0.10 percentage points.

 

Notes:

  1. All growth rates reported as seasonally adjusted annual rate (SAAR) unless otherwise indicated.

  2. Jobs numbers refer to the Bureau of Labor Statistics (BLS) Current Employment Statistics household survey which excludes the self-employed 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