Perspectives



Economic Review and Outlook: Implications for the US

The US economy continued to grow in fourth quarter of 2013, though at a more moderate pace than seen in the third quarter. However, the first quarter of 2014 saw virtually no growth in the economy. While the GDP stagnated and the residential/housing sector fell back marginally the unemployment rate fell to a five and a half year low and job creation continued to be positive.



Overall, the story remains much the same as what this column has reported since the beginning of th recovery—a mix of positive and negative trends that sustains some economic growth, but has been insufficient to yield a full recovery.

US Real GDP Growth and Economic Components

Throughout 2013 the US economy grew 1.9 percent, which was lower than the 2.8 percent growth seen in 2012 and in line with 2011’s growth of 1.8 percent. The first quarter of 2014 saw virtually no growth in GDP, with a 0.1 percent seasonally adjusted annual rate (SAAR1). This is the lowest growth rate seen since the fourth quarter of 2012, which also came in at 0.1 percent. A closer look at the four components of GDP consumer spending, fixed investment, government spending, and net exports) provides a deeper understanding of the drivers of GDP, as shown in Box 1.

Consumer Spending

Consumer spending kept the economy from contracting in the first quarter of 2014; without it, real GDP growth would have been close to -2 percent. Quarter-over-quarter, the increase seen in consumer spending in the first quarter of 2014 was 3.0 percent, one of the strongest showings since the end of the recession.

Growth in consumer spending came largely from the services sector: housing and utilities (5.9 percent), health care (9.6 percent), and financial services and insurance (5.0 percent). Together these three categories accounted for practically all the growth in consumer spending.

Investment

Business investment contracted by 6.1 percent in the first quarter of 2014. This sector has seen a great deal of post-recession fluctuation. Since 2010 it has experienced growth rates that range from -7.5 percent to 31.9 percent, posting a rate of 17.2 percent growth as recently as the third quarter of 2013. Because business investment is smaller in magnitude to consumer spending, even with such a large contraction as 6.1 percent, it only decreased GDP growth by one percent in the first quarter of 2014.

Source: Elvert Barnes (Creative Commons)

Half of the decrease in business investment (0.57 percent) can be attributed to a decrease in inventories, which fell at a SAAR of 87 percent. Much of the remaining decrease came from two sectors: information processing equipment (-15.7 percent) and transportation equipment (-11.8 percent). Together those two sectors pulled down GDP growth by 0.4 percent in the first quarter of 2014. 



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. While the country had been trending in that direction, industrial capacity utilization appeared to have stalled at around 77 percent before it began inching upwards again in 2013. The first quarter of 2014 brought more growth and, as of March, industrial capacity utilization stood at 79.2 percent, a level not seen since June of 2008 (Box 2).

Real private residential investment fell for the first time in 12 quarters. After five straight quarters of double digit growth (SAAR), the fourth quarter of 2013 saw this sector contract at an annual rate close to eight percent and it fell a further 5.8 percent in the first quarter of 2014. Given the key role this area played in the recession this decrease is somewhat worrying. However, when compared year-over-year, the first quarter of 2014 was up 9.3 percent.

Similarly, home prices have stalled after seeing two quarters of strong growth in the middle of 2013. While the Case-Shiller Index (a 20-city average) continued to grow in the fourth quarter of 2013, it did so at an annual rate of four percent compared to the 26.5 and 22.9 percent rates posted in the second and third quarters of 2013, respectively (Box 3). Furthermore, while March 2014 data has not yet been published as of writing this Perspective, the January and February figures are not encouraging and point to a potential fall in prices.

Government Spending

Stagnation and decreases in government spending at all levels continue to slow economic growth. In the first quarter of 2014, government spending decreased by a 0.1 percent SAAR. The government sector has posted declines in 13 of 17 quarters since the start of 2010.

Net Exports

Exports fell at an annual rate of 7.8 percent in the first quarter of 2014 (Box 4). Imports also fell over this time but less sharply, by 1.4 percent. Net exports fell by $31.6 billion (2009 chained dollars) in the first quarter of 2014. The contraction in net exports was largely due to a decrease in exports of $40.5 billion (2009 chained dollars), while imports only fell by $8.8 billion (2009 chained dollars).

Projections

Annual US GDP growth in 2013 was 1.9 percent compared to 2.8 percent in 2012. Forecasts for GDP growth in 2014 are mostly higher than 2013; however, these forecasts may not have yet taken into account the poor showing in the first quarter.

Using an 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 3.0 percent for 2014. Growth is expected to peak in 2015 at around 3.7 percent, and then fall back to 3.1 percent by 2017, settling into a long-term growth rate of around 2.6 percent starting around 2019 (Box 5). 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 2014 unemployment rate was 6.3 percent, marking a 67-month low (Box 6). The last time the unemployment rate was lower was September of 2008 when it came in at 6.1 percent. The economy gained 288,0002 jobs in April 2014, marking the 43rd straight month of job gains (Box 7 on the following page).

The economy began shedding jobs in February of 2008. Starting in October 2010, the current streak of job growth has added 7.9 million jobs, averaging about 185,000 jobs per month. Considering that 8.1 million jobs were lost during the period of February 2008 to October 2010, there remain 200,000 jobs the economy must add just to return to previous employment levels.

At the present rate of 188,000 jobs per month, it will take a little over a month to bring total employment levels back to what they were. While this is good news it does not account for new entrants into the workforce.

Additional job growth would be required to reduce unemployment and accommodate the new workers that have entered the market since the downturn.

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 March 2014, it stood at 0.08 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 bonds have picked up somewhat from a low of just under one percent seen in July 2012, but remain historically low, averaging 2.2 percent in the first quarter of 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 1.6 percent (March to March), 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 lower growth at 1.5 percent over that same time period (Box 8).

Fiscal Receipts

According to the latest data from the Rockefeller Institute, state tax collections have grown each quarter for the past four years. In fact, the fourth quarter of 2013 is the fifth consecutive quarter since the recession that inflation-adjusted quarterly state tax collections were higher when compared to peak levels. However, growth softened significantly in the second half of 2013. Early data suggests a further softening in the first quarter of 2014 and possible declines in state income tax collections.

Overall state tax revenues increased by 3.5 percent in the fourth quarter of 2013 compared to the same quarter the previous year, once inflation is accounted for this is a real growth rate of 2.0 percent. This is much lower than the real growth of 7.4 and 8.1 percent seen in the first two quarters of the year. This decrease has largely been driven by slow to stagnant growth rates in personal income tax receipts. Some of this is likely due to the acceleration of income from calendar year 2013 to calendar year 2012 by individuals looking to avoid higher federal tax rates. 

Local major tax revenues have grown for the fourth consecutive quarter. Year-over-year, local taxes grew by an average of 1.4 percent over the last four quarters; this is a significant improvement from the 0.2 percent decline of the preceding year. The lag in the recovery of local tax receipts can largely be explained through the heavy reliance of local governments on property taxes, and property values have only recently started to recover, whereas income and sales tax revenues have been steadily increasing for awhile. 



Regional Employment

Nevada no longer has the worst unemployment rate in the nation; Rhode Island does at 8.7 percent as of March 2014. It is followed by Nevada (8.2 percent), Illinois (8.4 percent), California (8.1 percent), and Kentucky (7.9 percent). A positive trend is that no states have unemployment rates above nine percent for the first time since September of 2008.

Additionally, only four states saw unemployment rates rise between the fourth quarter of 2013 and the first quarter of 2014: Missouri (0.23 percentage points), Alabama (0.20 percentage points), Iowa (0.13 percentage points), and New Mexico (0.07 percentage points). All other states saw unemployment hold steady or fall. Tennessee and Louisiana, in particular, had the sharpest drops in unemployment, each posting decreases of 0.97 percentage points. Rhode Island, the state with the highest level of unemployment, saw its rate decrease by 0.40 percentage points.

Note: 

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

Image Header Source: Ken Teegardin (Creative Commons)