Holidays have come and gone, some presents to be treasured, others exchanged or returned. Here’s a look at the gifts that the U.S. economy left us in 2013 and what they all mean for 2014.
Economy improving. The final estimate for GDP in the third quarter, according to the Bureau of Economic Analysis (BEA), was an impressive 4.1 percent on a quarter-to-quarter basis (SAAR). Growth in the first and second quarters of 2013 were 1.1 and 2.5 percent, respectively. The Federal Reserve Board (FRB) has “admitted” that the economy is stabilizing and has begun to ease the bond-buying program. The GDP data showed a stronger-than-expected surge in inventories and consumption (consumers spending on household goods). The fourth quarter of 2013 looks set to finish on a positive note as well. Fixed investment in non-residential and residential construction also increased. The general acceleration is certainly welcome news and is supported by other external data through November. Be prepared for increasing activity as we enter 2014.
Positive leading indicators. U.S. industrial production, our benchmark for assessing the current state of the U.S. economy, rose in November for the 62nd consecutive month (annual trend). The trend dynamics for each of the three sectors of production (mining, manufacturing and utilities) showed upside momentum. All indications from the internal rate-of-change trends are that production activity in the U.S. is strengthening. This is also supported by the key leading indicators that we follow. The ITR Leading Indicator, U.S. Leading Indicator, the Purchasing Managers Index and the Chicago Fed National Activity Index suggest a stable rate of growth (no recession) in the U.S. economy in 2014, although growth in the first half is expected to be stronger than the second half. We suggest that you check for potential bottlenecks in your operation that could slow production. This is also a good time to consider expanding the sales staff and increasing your marketing efforts.
Shopping spree. Annual retail sales (excluding autos) rose a healthy 3.2 percent in the previous 12 months to November. Considering the headwinds consumers faced in 2013—sluggish wage growth, the reinstated 2.0 percent social security payroll deduction and tax increases from the Affordable Health Care Act—U.S. consumers did a stellar job in keeping this important segment of the economy on a healthy growth track, with sales setting a new record in deflated dollars. Annual U.S. light automobile sales posted their strongest numbers since May 2008, rising 8.4 percent from the previous year. Existing home sales were also the best in five years, up 10.1 percent over the previous year through November. 2014 will see a deceleration in the rate of growth in these sectors, but the post-recession contribution of the American consumer continues to be one of the strongest factors in the recovery.
Business-to-business. October’s non-defense capital goods new orders (without aircraft), our benchmark for business-to-business purchases, is increasing 3.3 percent from the year earlier to its highest level in five years. The internal signals are pointing toward further growth into 2014. Banks are easing capital requirements, which should spur additional growth. Defense capital goods new orders have declined steadily since December 2012, but the pace of decline is easing. Annual new orders are essentially level (-0.2 percent) with last year, but the quarterly year-over-year comparison is up 5.6 percent, a sign of mild rise ahead.
Business activity as measured by the Institute for Supply Management’s Purchasing Managers Index finished 2013 with the two top finishes of the year, 57.3 (November) and 57.0 (December). The benchmark number of 50 indicates expansion in the manufacturing sector. The recent bipartisan Ryan/Murray budget agreement resulted in a two-year agreement. This was the first bipartisan agreement in a divided congress since 1986. Though there is nothing much to celebrate, it is hoped that this will provide a little more certainty and confidence for business decisions, beyond lurching from one quarter to the next.
Market gains. Two of the best gifts for consumers and investors in 2013 were the rise in home prices and soaring equities. According to S&P/Case-Shiller, home prices in 20 major cities rose 13.6 percent over the past year to October, the fastest year-over-year pace since 2006. Excluding distressed home sales, CoreLogic reported prices increased 10.8 percent over the past 12 months to September.
Riding the FRB’s wave of quantitative easing, the stock markets ended 2013 with their best annual performance since the mid 1990s. The S&P 500 and Dow Industrials rose 29.6 and 26.5 percent, respectively, and set multiple new highs through the year. The NASDAQ was up 38.3 percent, the strongest year since 2009.
The question entering 2014 is when the next stock market correction will occur. History would suggest we are due. ITR thinks the correction will be normal (16-34 percent decline) and short-lived, nowhere near the devastating losses suffered in 2001 or 2009. The answer as to what to do is a personal one that depends on one’s age, risk tolerance and current circumstances. As a company, ITR has taken precautions to help employees (who so choose) limit their 401(k) exposure in view of a possible correction. At the very least, be prepared and make some decisions in advance of the usual wave of panic and misinformation.
Automation World readers should be encouraged by the general health in the U.S. economy and the outlook of stable growth in 2014. Consumers and businesses appear to be more settled and less anxious than one year ago and likely feeling wealthier. There will be pockets of instability (market correction) and mild weakness as we finish the year, but no overtly negative cycle is in view. 2014 will finish better than 2013.
>> Alan Beaulieu, [email protected], is President of the Institute for Trend Research (ITR). The ITR blog can be found at www.itreconomics.com/blog.