Rough Recovery Still Has Potential

The U.S. economy will experience mild expansion through mid-2014, followed by softness to mild decline in the second half of the year.

Alan Beaulieu
Alan Beaulieu

Every day headlines present an inordinate amount of conflicting and worrisome information. We often receive concerns about articles predicting impending doom, a stock market crash of immense proportions, the collapse of the U.S. dollar, and a future where U.S. GDP growth is limited.

Others see unlimited potential in 2014 and a year that will prove to be much stronger than 2013. ITR Economics says that the U.S. economy will experience mild expansion through mid-2014, followed by softness to mild decline in the second half of the year. Here are some trusted reasons why.

Consumer spending, which generates two-thirds of U.S. GDP, is positive. There is no threat of mushrooming consumer debt collapsing the economy as it did in 2008-09. The U.S. household debt-to-income ratio reached a record high in 2007. Today, the debt ratio stands at its lowest level in nearly 30 years. The American Bankers Association reports credit card delinquencies are at the lowest level in more than 23 years. It helps that inflation is benign and that the stock market has replenished 2008-09 401(k) losses. A creditworthy consumer with normal savings, low debt levels and increasing home values means that the consumer spending adjustment next year is manageable.

In the financial sector, tier one capital (high quality) now makes up 11.3 percent of bank capital vs. 5.6 percent in 2008. Banks are holding a record $1.9 trillion in excess reserves vs. about $2 billion before the crisis. Banks are stable.

The current pace of the rising trend in housing starts and sales is unsustainable, and growth rates are cooling as investors and consumers adjust to higher mortgage rates. Additional regulations in healthcare and the banking industry will end up costing everyone more. Consumer spending will feel the weight of higher healthcare costs and flat employment gains. Overall, global economies are on the mend, and U.S. banks and households have deleveraged in the last five years and should be able to adapt to the changing climate without a major crisis.

So what feels wrong about this recovery? Perhaps it is just how long it took to get to this present level of economic activity. Both retail sales and the stock market surpassed pre-recession highs in 2013, but it took us more than five years to get to the breakeven point. Open up the newspaper and read about the government shutdown, sequestration, debt ceiling limit and our looming $17 trillion debt, and it is understandable why this “recovery” might feel temporary or borrowed.

Indeed, the recovery has not been smooth in the business community. Over the past few years, business-to-business activity has been volatile with the confluence of weak foreign markets and uncertainty over taxation and regulation at home leading to large swings in capital goods ordering, both up and down.

The most recent swing in business-to-business activity started in the summer of 2012 when a normal seasonal slump in new orders nondefense capital goods excluding aircraft turned into the worst third-quarter drop in more than 10 years. In 2013, the numbers look much better, but partially because they are being compared to last year’s low numbers. Two of the hardest hit segments—electromedical, measuring and control instruments, and engines, turbines, generators and other power generation equipment—jumped by 3.3 and 37.0 percent respectively in the third quarter compared to last year. But the real question remains whether this is a sustained recovery or just a favorable comparison to a tough economic period one year ago.

Our analysis of leading indicators and extant factors portend economic growth in many sectors through mid-2014. Expect a mild downturn in the latter half of the year as job growth and consumer spending slow. Some of our more forward looking indicators, such as corporate bond prices, consumer confidence and housing starts are on the backside of the business cycle right now, which suggests some cyclical weakness ahead for capital goods ordering next year.

The rapidly expanding oil and gas sector of the U.S. economy alone should provide opportunities for many businesses. The phenomenon of manufacturing returning to North American shores should build over time as our low natural gas prices attract energy-intensive industries. Improving market conditions abroad should also help U.S.-based exporters get an additional lift.

>> Alan Beaulieu, alan@itreconomics.com, is President of the Institute for Trend Research (ITR). The ITR blog can be found at www.itreconomics.com/blog.

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