Slow Compensation Growth Boosts Competitiveness Of U.S. Manufacturing

December 17, 2014

Anemic growth in worker compensation since the start of the decade has substantially strengthened the cost advantages of U.S. manufacturing against other mature economies, according to data on 34 countries released today by the International Labor Comparisons (ILC) progrm of The Conference Board.  In 2013 (the last year for which data is available), hourly compensation costs for American manufacturers averaged $36.34, up just $1.59 from 2010.  This represents slower growth than even the crisis years of 2007-2010, over which hourly costs grew $2.71.

"Despite a rapidly shrinking unemployment rate, U.S. manufacturing saw exceptionally low worker costs growth in recent years, especially compared to European countries with often weaker recoveries but more rigid labor markets," said Elizabeth Crofoot, Senior Economist with the ILC program.  "Our dollar-denominated data reveal a broad spectrum among advanced economies: At one end, countries where labor costs are relatively low and still declining - notably Japan and Greece.  At the other end, countries - led by Switzerland, Sweden, Australia, Norway, and Germany - where already high pay and benefits continue to rise at relatively rapid rates."

"Looking ahead, the dollar's recent return to appreciation may somewhat shrink the cost advantage built by U.S. manufacturing in 2010-2013 over other mature economies," said Bart van Ark, Chief Economist at The Conference Board.  "And while emerging markets in Asia, Latin America and Eastern Europe will maintain large cost advantages over the U.S. for the foreseeable future, depreciation of their currencies could significantly narrow the gap and put more pressure on productivity gains to avoid further erosion of those countries' competitiveness."

In dollar terms, only Greece, Japan, and Ireland among countries compared saw slower manufacturing compensation growth than the U.S. between 2010 and 2013.  Hourly labor costs in Japan ($29.13) and the U.K. ($31.00) were below American levels in 2013; compensation was higher in most other large mature economies.  Taking a longer view, local costs in manufacturing as a percentage of U.S. costs rose between 1997 and 2013 in all economies compared except Japan, Brazil, and Taiwan.

Source: The Conference Board

Disappointing Global Growth Likely For Fourth Straight Year In 2015

November 12, 2014

World economic growth, which stands at 3.2 percent for 2014, will accelerate modestly to 3.4 percent in 2015, The Conference Board reported today.

The Conference Board Global Economic Outlook provides output growth projections for 2015, 2015-2019, and 2020-2025, including 11 major regions and over 50 mature and emerging economies.  Overall, annual global growth is projected to average 3.3 percent from 2015-2019, but could decline to an average of 2.7 percent in the period 2020-2025 on the basis of the current trend.  According to the Outlook, long-term growth around 3 percent is sufficient to sustain a moderate increase in global living standards, but is too low to meet all the future challenges posed by rising middle classes in emerging markets and aging populations in mature economies.

"Growth in 2014 met our cautious projections, which were at the low end of analysts' views," said Bart van Ark, Chief Economist of The Conference Board.  "Optimists are poised to be similarly disappointed in 2015 - and more so as the long-term growth trend dips below 3 percent.  While many in both advanced and emerging economies continue to await a 'full recovery' to pre-crisis growth rates, we believe businesses and policymakers would stand better to focus on managing three key macroeconomic certainties that will define the slowdown in the decade ahead: First, a looming labor shortage; second, a drop in productivity growth; and finally, a lack of investment in productive assets."

Recovery "Bonus" Shrinking for Mature Economies

Across the advanced economies, the Outlook predicts 2.3 percent growth in 2015, compared to 1.9 percent in 2014.  Growth in the Euro Area should improve to 1.6 percent from 0.9 percent in 2014; Europe as a whole is projected to grow 2.0 percent.  This modest spike in recovery is expected to last a few years and is apt to bring European growth somewhat higher - and closer to U.S. levels - than anticipated by the current consensus forecasts.  Beyond a brief period of upside potential, however, the long-term picture remains stagnant: The Outlook sees Euro Area growth averaging 1.9 percent across 2015-2019, before dipping back to 1.2 percent in 2020-2025.

Meanwhile, U.S. growth is expected to rise from 2.2 percent in 2014 to 2.6 percent in 2015.  This improvement reflects an economy steadily returning to full capacity - and will be difficult to sustain into the future as the risks of slower productivity growth sink in.  In the medium-term, the Outlook does expect the U.S. to sustain 2.4 percent annual growth during 2015-2019, but the long-term trend sees growth slowing to just 1.9 percent in 2020-2025.  In the same two periods, Japan is expected to grow at 1.4 percent and 1.1 percent, respectively.

"For much of this decade, forecasters have assumed that mature economies still face a large output gap between their actual production and their potential performance if operating at full capacity," said van Ark.  "This offered a recovery 'bonus' that would allow advanced economies to make up what was lost in the recession at growth rates higher than the longer-term trend.  While the U.S., Europe, and others will still see some of these effects in 2015 and the following few years, we believe the output gaps have shrunk considerably and any post-recession 'bonus growth' will be relatively small and fleeting."

Easy Growth Coming to and End in Emerging Economies - and the World

From the late 1990s until recently, emerging markets have powered the global economy, based on an unprecedented growth differential between emerging and advanced economies.  This historical anomaly is fading as many emerging economies are entering a phase in which rapid catch-up growth has come to an end, with the need for serious, long-term and politically problematic economic reforms coming to the fore.  In 2014, positive growth surprises in India and Mexico couldn't offset major disappointments in Brazil and Russia, while China's extended "soft fall" proceeded apace.

Overall, growth in developing and emerging economies is projected to inch down to 4.7 percent in 2015, compared to 4.8 percent in 2014 and 6.2 percent in 2010-2013.  The slowdown will be largely driven by the Chinese economy, for which growth is anticipated to decline further in 2015 to 6.5 percent, down from 7.3 percent in 2014.  Other large emerging markets will remain stagnant or see slight improvements in 2015, with growth projected at 5.5 percent in India; 4.3 percent in the rest of developing Asia; 1.8 percent in Latin America; and 3.4 percent in the Middle East and North Africa.  Sub-Saharan Africa will see solid growth improvement, from 4.2 to 5.0 percent, while growth will rebound to a still-anemic 1.4 percent in Russia, Central Asia, and Southeast Europe.

Looking further ahead, the medium trend in Chinese growth is projected to fall to an average of 5.5 percent in 2015-2019 and 3.9 percent in 2020-2025.  The corresponding numbers in India are 5.5 percent and 5.0 percent, meaning the Indian economy is likely to be growing significantly faster than China's by the beginning of the next decade, making it a potential bright spot and strengthening contender in the global market.  Growth throughout 2015-25 should average 3.1 percent in Brazil and 2.8 percent in Mexico.  By the middle of the 2020s, emerging markets will still substantially outpace advanced economies - growing at an average 3.7 percent versus 1.8 percent - but by perhaps the smallest margin in a generation.

"While the growth contributions from emerging economies are by no means gone, and their growth will continue to be faster than that of mature economies, the significant downshift in their growth trajectories should make us aware that success from the recent past provides no guarantees for the future," explained van Ark.  "For the year ahead in particular, the confluence of multiple geopolitical fissures in Eastern Europe, the Middle East, Western Asia, and (to a less urgent extent) the South China Sea make it even less likely that an emerging-market boom will ride to the rescue of global growth, as it has in the recent past."

While the global picture appears downcast, it does offer opportunities for firms and governments with a realistic understanding of the challenges.  Ultimately, this decade of slower growth could offer a foundation for overcoming the risk of extended stagnation.

"At 3 percent global growth on average," said van Ark, "the next ten years may come to look like the 1980s - a time of modest growth during which structural reforms in many economies facilitated the transition from the old post-World War II 'golden years' to an era driven by the rise of services and new innovations."

Source: The Conference Board 

Strong Topline GDP Growth Overstates The Strength In The Economy

October 30, 2014

The U.S. Bureau of Economic Analysis today reported 3.5 percent annualized growth in real Gross Domestic Product for the third quarter of 2014, which is above expectations because of strong contributions from net exports and government spending on national defense.

The growth in household consumption was disappointing, and business investment grew only moderately.  Despite extremely low interest rates, residential investment continues to grow unusually slowly, partly a result of very weak household formation.

Moving forward, we expect the U.S. economy to grow at about a 2.5 percent rate on average in the coming quarters.  If moderate growth and therefore the current pace of job creation are sustained, we could even see some pickup next year in wage growth, and a first Fed hike by mid-2015.

Source: The Conference Board

CEO Confidence Declines Again

October 8, 2014

The Conference and PwC Measure of CEO Confidence declined again in the third quarter of 2014.  The Measure now reads 59, down from 62 last quarter (a reading of more than 50 points reflects more positive than negative responses).

Says Lynn Franco, Director of Economic Indicators at The Conference Board: "While CEOs say economic conditions have improved from the start of the year, their expectations for growth in the short-term have softened.  Overall, CEOs remain optimistic about growth prospects in the U.S. and India, but sentiment for Europe has declined considerably.  Expectations for China and Japan have moderated, and CEOs remained negative about Brazil's near-term prospects.  Less than a quarter of chief executives report increasing their companies' capital spending plans since January, while less than 20 percent have scaled back spending."

CEOs' assessment of current economic conditions, however, was more positive.  Now, approximately 52 percent claim conditions are better compared to six months ago, up from 46 percent in the second quarter of 2014.  Conversely, business leaders' appraisal of conditions in their own industries declined, with just 41 percent saying conditions in their own industries have improved, compared with 48 percent last quarter.

CEOs' expectations regarding the short-term outlook were less optimistic.  Slightly more than 44 percent of business leaders anticipate economic conditions will improve over the next six months, down from 53 percent last quarter.  However, nearly 51 percent expect conditions to remain the same.  Expectations for their own industries are also more subdued, with 34 percent anticipating an improvement, down from 46 percent in the second quarter.  About 51 percent expect no change in conditions.

Global Outlook

CEOs are more positive in their assessment of current economic conditions in the United States and India, but remain negative regarding conditions in Brazil, China, Europe and Japan.  More notable, business leaders' assessment of conditions in Europe and Japan went from positive (a reading of 50 and over) to negative, while India increased into positive territory.

Looking ahead, short-term expectations for Europe, China and Japan declined but remain slightly positive, while expectations for Brazil edged up but remain negative.  Overall, CEOs are most positive about the outlook for both the United States and India.

More CEOs Increasing Capital Spending Plans

Nearly 21 percent of chief executives report increasing their companies' capital spending plans since January of this year, while 17 percent have scaled back spending, based on a supplementary question.  In 2012, when we last asked this question, only 9 percent of respondents had incrased their capital spending plans and 32 percent had made cuts.  An increase in sales volume was one of the most common reasons given for increasing capital investment plans.  A decline in sales volume also played a key role in scaling back spending plans.

Source: The Conference Board

Retail Industry Added 27,000 Jobs In July

August 1, 2014

The National Retail Federation calculated retail industry (excluding autos and gasoline) employment increased by 27,000 jobs in July.  NRF calculated that retail gained 232,000 jobs year-over-year.  The healthy and steady increase in retail employment was due to improved economic and seasonal factors in the second quarter and should provide for stronger growth in the second half of the year.

"Pickup in retail employment in July and the upward revisions to June and May are very encouraging," NRF Chief Economist Jack Kleinhenz said.  "The increase was due in part to seasonal hiring as well as improved business and consumer conditions.  No one can guarantee smooth sailing ahead even though overall retail payrolls are encouraging.  Choppy growth will continue."

"Recent data increasingly show that the economy is on better footing, reflecting improved consumer and business confidence.  Although the unemployment rate edged up, more seekers entered the labor force.  The nation's retailers are adding jobs at a healthy pace."

The U.S. Bureau of Labor Statistics Employment Situation Summary showed that total nonfarm payroll emplyment rose by 209,000 in July, slightly below industry expectations.  The unemployment rate ticked up to 6.2 percent and the civilian labor participation rate increased to 62.9 percent.

Source: National Retail Federation 

Strong Job Growth Sustained During The Summer

August 1, 2014

The economy generated a gain of 209,000 jobs in July, very close to the average of more than 200,000 per month over the past year.  This means that the trend in employment growth, which supported stellar second quarter GDP growth and strong consumer and business confidence, is holding up for now.  The unemployment rate has remained almost unchanged at 6.2 percent, still well above the natural rate of unemployment, which is about 5.5 percent.  This implies that the pace of job creation can continue for a few more months beyond the summer.  However, participation isn't increasing rapidly, with baby boomers retiring en masse.  Moreover, labor productivity, which has been low for a long time, may become a more important source of growth.  These forces could also begin to create more upward pressure on wages later this year.

Source: The Conference Board

Q2 GDP: Rebound Exceeds Expectations

July 30, 2014

The U.S. Census Bureau of Economic Analysis today reported 4.0 percent annualized growth in real Gross Domestic Product for the second quarter of 2014.

Some of the past quarter's growth performance reflects a catch-up from the dismal first quarter performance.  But this stellar growth figure also suggests that the economy has gained some momentum and could hold on to this new found dynamism through the second half of 2014.  We find further confirmation in The Conference Board Leading Economic Index for the U.S. as well as the continued strengthening of the Consumer Confidence Index, released yesterday.  Job growth has driven income growth.  And consumers have clearly been spending on some long-delayed purchasing plans.  As a result, business investment is beginning to pick up.  These gains in consumption and investment could be accompanied by better numbers on export trade in the second half of the year, provided the global economy doesn't slow much further.  In short, the economic doldrums of late 2013 and early 2014 are likely to be in the rear view mirror.

Source: The Conference Board

NRF Revises Annual Economic Forecast, Expects Stronger Second Half Of Year

July 23, 2014

The National Retail Federation today lowered its retail sales forecast for 2014 because of slow growth recorded during the first half of the year, but said sales are expected to grow significantly faster over the next five months.  NRF forecasted in January that retail sales would grow 4.1 percent in 2014 over 2013, but today's revision lowers the forecast to 3.6 percent.

NRF calculated that sales grew 2.9 percent during the first half of the year and are expected to grow at least 3.9 percent during the second half.  The numbers include general retail sales and non-store sales, and exclude automobiles, gasoline stations, and restaurants.

No retailer was immune to the doldrums witnessed during the first quarter, and as a result, the year's growth trajectory was impacted," said NRF President and CEO Matthew Shay.  "That said, there is plenty of evidence that the second half of the year will be better for the industry as consumers begin to feel more optimistic about their spending decisions.

"And though we maintain realistic expectations of retail sales growth in 2014, we are optimistic that the chances for a stronger economy still exist," continued Shay.

"The severe weather and other factors we experienced earlier this year have taken their toll on retail, but most of those problems are behind us," said NRF Chief Economist Jack Kleinhenz.  "A second look at our forecast shifted our expectations slightly, but it's important to note that the outlook is positive.  Sales are growing and we expect them to continue at a moderate pace."

In this month's Monthly Economic Review, Kleinhenz noted,"...one of the worst winters in recent memory kept shoppers home during the first quarter, and weak numbers for real estate, inventories and exports continued to hamper the economy through the second quarter.  However, employment has grown at its strongest pace since 2005, business and consumer confidence have edged higher, manufacturing activity has expanded and inflation pressures remain tame, improving expectations for the second and third quarters."

Source: National Retail Federation

Economic Highlights For The Week Ahead

June 11, 2014

Last week:  The U.S. economy generated almost 200,000 new jobs in May, continuing a trend that is now more than a year old.  Indeed, consistently generating that many new jobs is slowly beginning to encourage some discouraged workers to start looking again.  As these developments continue, there will be less slack in the labor market and more instances of tightness in certain fields.  And that, in turn, would put upward pressure on wage growth.  How much and how soon will be big questions later in the second half of this year and into 2015.  Meanwhile, consumers, now a little more confident, will pick up the pace in spending.  And the economy, with a much better second quarter (after a weather-induced decline in the first quarter), will do even better this summer, as the third quarter begins.

Retail Sales, May (Bureau of the Census)

Vehicle sales (at a 16.5 million pace in May) reflect some continued catch up, as consumers continue to replace old vehicles for newer and more fuel efficient models.  Nonauto retail spending has been quite uneven - with a significant gain in March but a very slow April.  It would not be a surprise if May's data is more similar to March than April.  Retailers, still stuck with piled up inventory, are hoping that continued good news on the labor front enables consumers to put into action some long delayed plans, which in turn will bring the inventory-to-sales ratio back down to something closer to normal.  In fact, they have yet to resort to discounting in order to stimulate more in-store or web traffic.  If sales disappoint again, that could well be the next step in late spring.

Producer Price Indexes, May (Bureau of Labor Statistics)

Energy prices remain relatively stable.  Food prices are stable now, but could start to move a little higher.  "Core prices (which exclude food and energy) remain very low, rising by no more than 0.2 percent per month.  The concern has been more about prices slowing.  But if the economy is starting to gain some momentum, it could result in a little price acceleration, not in May but perhaps later this summer.

Source: The Conference Board

Economic Highlights For The Week Ahead

June 2, 2014

Last week:  For the second week in a row, the bond market made the biggest headlines.  The Federal Reserve is tapering down its quantitative easing (buying fewer bonds) and the economy is catching up from a bad winter.  With sentiment up, strong job growth and some renewed strength in the ordering rate, one might think artificially low borrowing rates would be moving back toward normalcy (something reflecting a 2 percent inflation rate, and maybe a 2 percent risk factor).  Instead of moving up to about a 3 percent yield on a 10-year Treasury bond (on its way higher, assuming sustained economic growth), yields fell from above 2.7 percent to 2.45 percent this week.

Moreover, it's not like stock prices are falling or volatility in stocks is sending money into the bond market.  Rather, the bond market is making a bet that the economy is more likely to lose steam and gain momentum.  The economic data point to gathering strength.  And that's the view of professional economists (as much as 4 percent GDP growth this quarter, annualized), and that's on track with a slow build in consumer sentiment as well.

Who is right?  Maybe the better question is what is the proper way to view all this.  German bond yields are almost a full point lower than U.S. bonds right now.  And Japanese bonds are even lower.  So one could argue that money is flowing away from other markets to chase the higher yield, sending prices of U.S. bonds up, which sends yields lower.  If one takes that view, it would follow that money flowing away from bonds elsewhere is also decreasing money there, keeping the euro much above its purchasing parity level.  This is not an argument justifying lowering yields but it does suggest lower yields are more reflective of what is not happening elsewhere around the globe than what is happening domestically.

Employment Situation, May (Bureau of Labor Statistics)

The economy opened up more than 250,000 new jobs in April.  The figure for May might come back to about 200,000, or about the trend growth of the past 12 months.  Still, this would be a reflection of an ecoonomy gaining strength.  And the paychecks from these new jobs, along with slowly rising sentiment, could fuel replacement buying.  That includes consumers replacing old worn furniture and appliances along with continued vehicle replacement.  And with final demand finally picking up, there very well could be more business investment - giving these workers the necessary tools to get the work done.  Money for investment is not the issue.  Indeed, neither is sentiment as surveys of attitudes of business executives through the first quarter reflect an uptick in optimism. 

An uptick in consumer spending and business investment is a recipe for continued job growth of more than 200,000 per month for at least the next few months.  In other words, the economic cycle could well start spinning a little faster, just as The Conference Board Leading Economic Index has been signaling.  Look for more construction jobs, service sector jobs, perhaps even some manufacturing jobs.

Regionally, hiring has been the weakest in the service-dominated big population centers in the Northeast and Midwest.  If the labor market is turning more robust, it is likely that service-sector employment in these markets is starting to pick up.

Source: The Conference Board

Economic Highlights For The Week Ahead

May 27, 2014

Last week: The Conference Board Leading Economic Index continues to point toward more solid footing for the U.S. economy.  Investors remain skeptical.  After the drop in bond yields last week, yields moved very little this week.  Are consumers equally skeptical?  This week's consumer confidence report will show whether consumers remain in a "wait and see" mode.  Of course, consumers pay more attention to changes in the labor market than the bond or stock market.  Next week, the latest news on job growth may live up to consumer expectations and help convince them that it is time to finally implement some long delayed replacement purchasing.

The Conference Board Consumer Confidence Index, May

The data point to an improving economic environment.  Are consumers buying it?  Confidence, especially consumer expectations, was higher in April than at the start of this year.  Did it move higher in May?

Personal Income and Outlays, April (Bureau of Economic Analysis)

Income growth has generally been in a range of about 0.2 to 0.3 percent.  Spending was even slower through March but might have improved in April, as the severe winter weather lets up.  The bigger issue is whether job growth and some rise in wages will be enough to move above that 0.2 to 0.3 percent range.

Question of the Week: Is the housing recovery running out of steam?

The housing recovery certainly ran into more than a simple speed bump.  Consider that sales of existing homes peaked in July of 2013.  But that's not all.  Sales peaked in different parts of the country nearly simultaneously.  That's not a typical pattern.  Moreover, the drop in sales ran counter to all computer models.  Clearly something happened to change the trend, and in an unusual manner.  Perhaps the rise in mortgage rates, as well as the run up in home prices resulted in a pull back.  Another factor may have been the slowing in sales of distressed homes - foreclosed homes put on the market.  A third factor had to do with the number of sales to those buying a home to rent out or renovate and resell (so-called flip sales).

Mortgage rates have actually retreated a little from the peak last year.  The supply of distressed homes has continued to dwindle, though the pace has slowed.  On the other hand, with job gains averaging almost 200,000 per month over the past 12 months, and expected to continue, if not accelerate a little, demand for homes could well start moving up.

One more factor affects sales of homes: getting mortgage approval.  This likely did not impact sales last year as lending conditions remained restrictive.  Many lenders were still dealing with nonperforming loans.  This problem has diminished to the point that some lenders have eased credit conditions.  In sum, fewer diminished sales, fewer flip sales, more sales to the newly employed, mortgage rates not moving up (at least for now), and eased lending conditions should all combine to allow home sales to start moving higher.  In turn, more demand would send more crews out to build more new homes.  So, no, the housing recovery is not running out of steam.  It did hit a speed bump.  But that speed bump is now in the rear view mirror.

Source: The Conference Board 

Economic Highlights For The Week Ahead

May 19, 2014

Last week:  In a data heavy week, it's hard to imagine that the big news of the week came from the financial markets.  And, it was driven not by domestic considerations but what is happening overseas.  The backdrop is the continuing tapering by the Federal Reserve.  Where it once bought $85 billion in bonds per month, it has tapered down to $45 billion and will be even lower over the next few months.  Faced with slow growth in the Euro-zone (or no growth in France, Italy, and the Neatherlands), and very low inflation (which could go still lower), the European Central Bank is thought to be considering its own quantitavie easing program.  If the ECB is going to buy bonds, increasing the demand without an increase in supply could well bid up the price (thereby lowering the yield).  In anticipation, markets this week lowered yields on sovereign debt, even in France, Italy and the Netherlands.  Will the ECB act?  Will it more than offset Fed tapering?  More importantly, will Euro growth perk up and inflation gradually move up to the ECB's target of 2 percent?  The only thing that is clear right now is that financial markets will be paying very close attention to this story this summer.

The Conference Board Leading Economic Index for the U.S.

The Coincident Economic Index, which tells us where the economy is right now, continued to rise moderately through March.  The Leading Economic Index for the United States has been consistently much stronger, suggesting there could be more punch going forward.  With the end of inclement winter weather, and some fundamental strengthening in the economy, the growth path going forward looks encouraging.  Was that still the signal in the data in April?

Fact of the Week

As the Federal Reserve continues to taper on bond buying, we are also moving closer to the day when interest rates are no longer artificially low.  The Federal Government debt totals about $17 trillion.  Every inch up on borrowing rates therefore implies higher borrowing costs, possibly resulting in changes elsewhere in the nation's budget to afford paying the debt service.

Meanwhile, American households are in debt to the tune of about $11 trillion, the lion's share of which is mortgage debt.  But to the extent that this amount is tied to fixed rate mortgages, hikes in interest rates will have less impact on households now, though possibly more impact on those trying to take out a mortgage going forward.  Either way, with that much debt to carry, small changes in interest rates can have big consequences - even bigger consequences if the economy were to quickly slide back to a 2 percent growth path.  Luckily, the forecast is for something closer to 2.5 percent.  And that difference in growth could make the difference in how much negative impact there is coming from higher interest rates, down the road.

Source: The Conference Board

Economic Highlights For The Week Ahead

May 12, 2014

Last week:  Some improvement in trade, domestically and globally, was the big news this week.  The forward indicators have been pointing to some improvement in global industrial conditions, which may be developing, as evidenced by the trade data.  The other big story is financial, in terms of the Federal Reserve continuing to unwind quantitative easing.  This is leading to renewed speculation about the timing of a return to a more normal yield curve in interest rates.  And the irony is that the domestic economy is beginning to pick up enough steam to contemplate raising interest rates, which would mean higher mortgage rates, which would possibly slow the improvement in home building and buying.  How much, and over what time frame, is a story that will unfold perhaps over the next year and a half.

Retail Sales, April (Bureau of the Census)

Vehicle sales (at a 16 million pace in March) reflect some catch up from widespread inclement weather at the start of the year.  Non-auto retail spending will reflect the same trend.  Going forward, the retail pace will be dictated by the pace of hiring and any pickup in wages.  Retailers, still stuck with piled-up inventory, are hoping continued good news on the labor front allows consumers to put into action some long delayed buying plans, which in turn will bring the inventory-to-sales ratio back down to something closer to normal.

Producer Price Indexes, April (Bureau of Labor Statistics)

Energy prices remain relatively stable.  Food prices are stable now but could start to move a little higher.  "Core" prices (which exclude food and energy) remain very low, rising by no more than 0.2 percent per month.  The big worry is that they might start rising even more slowly, as non-energy commodity prices stop rising at all.  In a soft economic environment, there is little reason to think these raw commodity prices will start rising faster this summer.

Consumer Price Indexes, April (Bureau of Labor Statistics)

Globally, inflation is slow.  Domestically, it is simply holding steady, but at a very slow pace.  "Core" prices (which exclude food and energy) have been rising by no more than 0.2 percent per month for more than a year.  Even with the economy starting to grow faster, faster price increases are probably not going to develop this spring or summer.  Energy prices are running below year-ago comparisons.  Food prices, however, are responding to low crop output, the result of a severe and prolonged California drought.  Medical-care inflation has slowed while the cost of housing remains steady.  Without much change in either of those two components, retail inflation will not change significantly.

Housing Starts and Building Permits, April (Bureau of the Census)

Home building has been running close to a million starts (annualized).  Demand has held up, even with mortgage rates moving a little higher.  And with foreclosure activity winding down, more demand has to be met by increased construction.  The home-owner end of this market could be impacted if mortgage rates rise faster.  Apartment building, however, is the stronger segment of this market, and even with higher mortgage rates, this won't change.  In fact, with 200,000 new jobs a month and higher mortgage rates, demand for apartments could intensify.

Fact of the Week

The national unemployment rate is now down to 6.3 percent.  But among those 24 years of age or younger, it is over 9 percent.  Moreover, a new report, In Ths Together: The Hidden Cost of Young Adult Unemployment, notes that governments (federal and states) lose almost $9 million in taxes not collected from pay not earned.  Add in the number not working and not in school (and since they are not looking for a job, they are not counted in the labor force) and the cost skyrockets to $25 billion.

What is the cost to individuals?  Starting their careers with bouts of unemployment, delaying their earnings experience and not developing their skill set could result in a collective loss of $20 billion in money not earned over thier working lives.

Nor is this strictly an American problem.  Youth unemployment is higher in several other countries, much higher in a few countries like Spain.  In fact, across the globe there is an army of unemployed and unengaged youth.  There are approximately 75 NEETS (Not in Employment, Education, or Training) across the globe.  What's more, the slower the global economy grows, the faster the number of NEETS will grow.  And by extension, the call on public resources and the limit on those resources increases, precisely because they are not engaged in economic activity.

Source: The Conference Board

Healthy Housing Industry Spurs Job Growth

May 7, 2014

The health of housing is key for the overall state of the U.S. economy and housing stands poised to serve as an engine of job growth with the right policies in place, the National Association of Home Builders (NAHB) told Congress today.

Testifying before the Senate Banking Committee's Subcommittee on Economic Policy during a hearing examining the drivers of job creation, NAHB economist Robert Dietz said that home building and remodeling have generated 274,000 jobs over the past 2 1/2 years.

"This expansion has direct economic benefits," said Dietz.  "Housing provides the momentum behind an economic recovery because home building and associated businesses employ such a wide range of workers."

Employment from new home construction and remodeling has a wide ripple effect.  About half the jobs created by building new homes are in construction.  They include framers, electricians, plumbers and carpenters.  Other jobs are spread over other sectors of the economy, including manufacturing, retail, wholesale and business services.

NAHB analysis of the broad impact of new construction shows that building 1,000 average single-family homes generates:

• 2,970 full-time jobs
• $162 million in wages
• $118 million in business income
• $111 million in taxes and revenue for state, local and federal governments

Similarly, construction of 1,000 rental apartments, including units developed under the Low Income Housing Tax Credit, generates 1,130 jobs while $100 million in remodeling expenditures creates 890 jobs.

Currently, housing comprises about 15.5 percent of GDP but Dietz said the industry still has room to grow.

"Typically, housing represents 17 to 18 percent of the GDP," he said.  "With a growing population and an aging housing stock, NAHB forecasts that single-family construction will increase 22 percent in 2014 to 760,000 units and multifamily production will rise 6 percent to 326,000 units."

Noting that 2014 should be the first year since 2007 in which total housing starts exceed 1 million homes, Dietz said this expansion will produce jobs.  "In April alone, home builders and remodelers added 13,100 jobs," he said.

NAHB estimates that total housing construction over the next few years should return to just under 1.7 million combined single-family and multifamily starts on an annual basis.

Homeownership also represents the most important investment and source of savings for most middle class households.  The latest economic date show that the primary residence represents 62 percent of the median home owner's total assets and 42 percent of their wealth.  Moreover, almost two-thirds of all U.S. households own a home, while just 50 percent possess a retirement account and only 16 percent own stocks and bonds.

Though homeownership remains a cherished American ideal, access to safe and decent affordable rental housing is needed for those households for whom rentng is the best choice.  The Low Income Housing Tax Credit, the nation's only affordable housing production program, serves a critical role in this regard.  Since its inception, the tax credit has produced and financed more than 2 million affordable rental apartments.

Industry Faces Several Challenges

While home construction is poised to continue to expand and add jobs, builders continue to face persistent headwinds.  These include access to buildig lots, rising building material prices, access to builder loans and worker shortages in some markets.

Additional challenges are the lack of policy certainty in areas connected to housing.  To help the industry play its traditional role as a job creator, Dietz called on Congress to ensure that undue regulatory burdens do not hinder economic and job growth.  "Regulations imposed by the government at all levels account for 25 percent of the final price of a new single-family home built for sale," he said.

On the tax front, Dietz urged lawmakers to protect the mortgage interest deduction and Low Income Housing Tax Credit, which are critical to ensuring the growth of the middle class and access to affordable housing, and to enact a tax extenders bill that would retroactively extend expired tax rules such as the minimum 9 percent credit rate for the Low Income Housing Tax Credit and residential energy efficient tax credits for new construction and for retrofitting existing homes.

"Passing comprehensive housing finance reform that includes a federal backstop to ensure the availability of the 30-year mortgage, increase private capital in the marketplace and protect the American taxpayer would be a net positive for job creation," he added.

Source: National Association of Home Builders 

Economic Highlights For The Week Ahead

May 5, 2014

Last week: Perhaps the biggest news in this data-heavy week is the rebound in wage growth.  Factories and stores, idled by winter weather, were back in business in March.  The jobs report shows they continued to catch up in April.  But as The Conference Board's Leading Economic Index has been signaling for months, this is more than just a weather story.  The economy is getting stronger.  And the proof will come over the coming weeks as consumers gain more confidence and spend more (especially on long-delayed replacement items).  And perhaps there will be more business investment in the equipment needed to get the job done.

Employment Trends Index, March (The Conference Board)

This index does for the labor market what the Leading Economic Index does for the general economy.  The labor market is rebounding now.  Does this forward indicator show more underlying strength this summer, once the catch up is completed?

Fact Of The Week

As of late April 2014, according to the Drought Monitor, all of California is now in moderate to exceptional drought - for the first time in a decade and a half.  This is a big deal.  How big?  It could result in as many as 20,000 lost jobs and 800,000 acres of idle farmland.  Indeed, the worst drought conditions happen to be in the normally crop rich Central Valley.

The estimated costs could approach $7.5 billion.  But that's not all.  A limited supply of food is sure to send its cost higher.  In this era of deflationary pressure, that might be the biggest deal of all.  We could have the Federal Reserve setting out on an expansive monetary policy to counter deflationary pressure while food prices skyrocket, resulting not just in a hit on the average household budget but causing consumers (taxpayers) to do more than complain.  Finally, it is not just California.  Western and/or southwestern states are dealing with a multi-year drought that is not letting up this spring and probably won't let up during this crop-growing summer season.  Only Montana and Wyoming,  and of course northeastern Washington have escaped these conditions.

Source: The Conference Board

What's Ahead For Employment?

April 23, 2014

Many economic discussions - especially those following the Great Recession - have focused on the short-term or immediate economy, particularly in regard to the labor market.

However, longer term issues regarding investments, hiring and other business decisions cannot be lost in our thinking about the economy and its direction.  While most of us don't necessarily think or plan 10 years out, it remains vitally important to economists, retailers, policymakers and the consuming public to think about the future while creating budgets, plans or sales projections.

Fortunately, the U.S. Bureau of Labor Statistics provides information about the future with its Employment Outlook report that it issues every two years with a 10-year projection of employment and output.

Since the last BLS report, the economy has notably improved and is now poised for more sustained growth.  As the economy expands, long term patterns of growth and industry activity can be more readily observed and the BLS' estimates and projections become valuable to retailers and others who need to make decisions about the future economy, employment and consumer spending.

So where will eht jobs be 10 years from now?

In the coming decade, BLS projects that the "retail trade" sector is expected to increase by more than 1 million jobs to a total of about 16 million jobs by 2022.  In fact, retail is projected to be one of the top three domestic industries for future employment opportunities - behind only construction and health care.

 

The projected growth in the retail industry - pegged at 0.7 percent annually - reflects the healthier pace of consumer spending at 2.6 percent (higher than the 1.8 percent of the last decade) and a strengthening economic recovery.  BLS assumes that the economy will grow by 2.6 percent per year, unemployment will drop to 5.4 percent and productivity gains will increase 2 percent a year (idealistic for sure but feasible).

Demographic Changes Abound

While the retail industry's jobs increase isn't as dramatic as those in construction and health care (retail already has a large employment base), the three growth sectors are all inter-related.

As housing and residential construction increases to accommodate a growing population, construction will continue to gather steam.  Increases in new units built and the replacement of old housing should pay dividends to retailers who will help buyers fill those homes - think appliances, furniture and garden supplies.

America's rapidly aging demographic - baby boomers - are also spurring job growth in medical service fields.  An aging population and expanded medical insurance coverage (Obamacare) are factors the BLS incorporated into its projections.  Again, retailers - especially those selling health and personal care products - will play a critical role in that demand.

What is readily apparent from a review of the BLS report is the important role demographic changes are making in the economy.  While demographics have always played an important role in economic decisions, they are now becoming a centerpiece for discussion.

One of the most dominate changes is that the labor force participation rate among older workers is expected to continue its decline.  As the baby boomers (those born between 1946 and 1964) head into their retirement, fewer will be part of the American labor force, lowering the participation rate and slowing labor growth and economic activity.

This demographic change - while anticipated - is especially important for retailers.  As an individual ages, purchases change.  Retailers should take some time to prepare for these changes and remain ever-vigilant and responsive.

Source:National Retail Federation

Economic Highlights For The Week Ahead

April 25, 2014

Last week: The Conference Board Leading Economic Index pointed to some faster growth in the U.S. economy this spring and summer.  Two important ingredients, beyond recovery from a bad winter, are improving sentiment and a pickup in demand, signaled by improving orders.  This past week, data on orders for durable goods suggested the ordering rate is gaining traction.  This coming week will provide a fresh read on the state of consumer sentiment.  One big question: Do consumers perceive the same economic gravity shown in the ordering and indicator data?

The Conference Board Consumer Confidence Index

The economic data point to an improving economic environment.  Are consumers buying it?  Confidence did gain a little in February and again in March.  Did this continue in April?

Gross Domestic Product - 1Q 2014 (Bureau of Economic Analysis)

This first read on the economy in the first quarter will show the impact of sharp and widespread inclement weather - reducing job growth and limiting consumer shopping.  If the rise in GDP comes in close to 1.5 percent (annualized), that number will be well below the underlying rate of growth in the economy, and set the stage for a second quarter report that will overstate it, as shopping and home building catch up.

Personal Income and Outlays, March (Bureau of Economic Analysis)

Income growth has generally been in a range of about 0.2 to 0.3 percent.  Spending was slower in February, due to sustained bad weather.  There is a chance that spending in March rose faster, as shoppers were able to get to the stores.  April, in turn, will show even more of that.  The bigger issue is whether job growth and a rise in wages will be enough to move income growth above the 0.2 to 0.3 range.

Employment Situation, April (Bureau of Labor Statistics)

The economy opened up a little more than 180,000 new jobs in March.  The figure for April could be just over 200,000, reflecting an economy that is gaining strength and catching up from this past winter.  That much job growth is likely to feed household sentiment and boost shopping.  The big question is whether all this will be enough to generate more capital investment in equipment.  In other words, business clearly is investing in more workers, but do they have enough equipment for the staff to get the job done?  Money for investment is not the issue.  Indeed, neither is sentiment as surveys of attitudes of business executives through the first quarter reflect an uptick in optimism.

An uptick in consumer spending and business investment is a recipe for continued job growth of more than 200,000 per month for at least the next few months.  In other words, the economic cycle could start spinning a little faster, just as The Conference Board Leading Economic Index has been signaling.  Look for more construction jobs, service sector jobs, perhaps even some manufacturing jobs.

Regionally, hiring has been the weakest in the service-dominated big population centers in the Northeast and Midwest.  If the labor market is turning more robust, it is likely that service-sector employment in those states is about to pick up.

Housing And The Economy To Continue On An Upward Path, Economists Say

April 24, 2014

A growing economy, pent-up demand, competitive mortgage rates and affordable home prices will keep housing on an upward trajectory through 2015.  However, several obstacles including tight consumer credit, shortages of lots and labor and rising materials prices are hindering a more robust recovery, according to economists who participated in yesterday's National Association of Home Builders (NAHB) 2014 Spring Construction Forecast Webinar.

"Housing needs an improved economy," said NAHB Chief Economist David Crowe, adding that the economy is expected to respond as payroll employment continues to grow and the unemployment rate slowly recedes from 6.7 percent in the first quarter of this year to 6.2 percent by the fourth quarter of 2015.

Consumer confidence is back to pre-recession levels and the purchase of motor vehicles and home furnishings are on the rise, indicating that consumers are increasingly willing to buy big ticket items such as houses.

Reflecting an increase in credit demand and economic growth, mortgage interest rates are projected to rise to 5 percent by the end of 2014 and 6 percent by the end of next year.  Noting that these rates are still low by historical standards, Crowe said this would "not be a significant deterrent to expansion in the housing market."

With new home sales averaging just 8.8 percent of total home sales, barely half the historical average of 16.1 percent, Crowe observed that "this is another reason to believe that the new home market will have to make up existing ground."

However, he cautioned that builders continue to face a number of headwinds.

"Supply constraints related to lots and labor and rising lumber, gypsum and OSB (oriented strand board) prices are hurting the ability of builders to meet demand," he said.  "Moreover, creditworthy borrowers, particularly younger families and first-time home buyers, are having difficulties in getting home loans."

Remodeling, Sales and Starts on the Rise

The NAHB Remodeling Index, which averages ratings of current remodeling activity with indicators of future activity, stands at 53 in the first quarter of 2014 and has been above 50 for six of the past seven quarters.  A reading above 50 indicates that more remodelers report market activity is higher (compared to the prior quarter) than report it is lower.

NAHB is forecasting that residential remodeling will post a 3.8 percent increase in 2014 over last year and rise an additional 2.4 percent in 2015.

New home sales are expected to climb 29 percent from 431,000 in 2013 to 557,000 this year.

Single-family housing production is projected to increase 22 percent from 621,000 last year to 760,000 in 2014 and surge an additional 55 percent to 1.18 million units in 2015.

On the multifamily side, production is expected to rise 8 percent from 308,000 in 2013 to 331,000 this year, reaching what is considered a normal level of production.

Banks Awash in Cash

Agreeing that the economy is on an upward trajectory, Maury Harris, managing director and chief U.S. economist at UBS, said that financial lending institutions are sitting on a mountain of cash.

"Banks have over $2 trillion of excess reserves.  That's with a 't'," he said.  "Banks would like to put that money to work and increase lending, which will help the economy."

In the aftermath of the Great Recession, Harris said that normal household formations have fallen short by about 2.5 million as graduating college students were forced to move back in with their parents and young adults were doubling up in apartments.

"As unemployment comes down and credit availability eases, Millennials (the 25-34 age group) will feel better about their economic circumstances," said Harris.  "I think we will see the shared household rate come down, less doubling up and a pickup in household formations."

Harris is forecasting 1.15 million housing starts this year (700,000 single-family and 450,000 multifamily) and 1.35 million next year (900,000 single-family and 450,000 multifamily).

A Gradual Climb to Normal

Looking at the state statistics behind the national numbers, Robert Denk, NAHB's assistant vice president for forecasting and analysis, cited a range of differences among the states in the amount of distress suffered during the recession and the progress that is being made in recovering.

Housing production nationwide bottomed out at an average of 27 percent in early 2009 and reached 45 percent in the first quarter of 2014.

In the worst hit states, housing fell to 10 to 15 percent of normal production while production only fell by half in other states with a better underlying economy.

"The hardest hit states were the bubble states - Arizona, Florida, California and Nevada - along with the industrial Midwest, which struggles with challenges in the auto industry and a declining manufacturing sector," said Denk.

"Where individual states stand now has a lot to do with how far they fell when the Great Recession hit", Denk added.

Fueled by a booming energy sector that is producing solid job and economic growth, Texas, Louisiana, Oklahoma, Wyoming, North Dakota and Montana are at the forefront of the housing recovery, with North Dakota now the first state to surpass its normal level of housing production.

"On a national basis, single-family housing starts are projected to get back to 70 percent of normal production by the end of this year and 93 percent of normal by the end of 2015," Denk said.

In another way of looking at the long road back to normal, by the end of 2015 the top 40 percent of states will be back to normal production levels, compared to the bottom 20 percent, which will still be below 80 percent.

Source: National Association of Home Builders

Economic Highlights For The Week Ahead

April 21, 2014

Last Week: With winter weather in the rearview mirror, the big question now is how much bounce will demand get - with shoppers finally able to get out and about.  Weather may be the big reason why the economy underperformed in the first quarter.  Good weather may be the reason why the economy overperforms this spring. 

The Conference Board Leading Economic Index For The U.S., March

The Coincident Economic Index, which tells us where the economy is right now, continued to rise moderately through February.  The Leading Economic Index for the United States has been consistently much stronger, suggesting there could be more punch going forward.  With the end of inclement winter weather imminent, evidence of better conditions might begin to show in the housing, labor, and retail markets.

Orders For Durable Goods, March (Bureau of the Census)

This is the key economic report of the week.  Relatively weak ordering has been persistent, as both consumer and business demand show something of a wait and see attitude.

Source: The Conference Board

Economic Highlights For The Week Ahead

April 14, 2014

Last week: During a quiet week with relatively little news, the drop in stock prices garnered headlines, even as corporate profit reporting gets underway.  There seems to be a little more retail activity in early spring, as the wet, cold winter fades into memory.  And forecasts continue to reflect optimism that the economy is picking up momentum.  Still, it is hard to shake the memory of prolonged weak growth.  And new reports about softness in the housing market (another dip in mortgage applications) do not help.  So, some cautious optimism seems to pervade, except on stock exchanges.

Retail Sales, March (Bureau of the Census)

Vehicle sales (at a 16.4 million pace in March) reflect some catch up from widespread inclement weather at the start of the year.  Nonauto retail spending will appear stronger than it really is for the same reason.  Going forward, the retail pace will be dictated by the pace of hiring and any pickup in wages.  Retailers, still stuck with piled up inventory, are hoping continued good news on the labor front allows consumers to put into action some long delayed plans.

Consumer Price Indexes, March (Bureau of Labor Statistics)

Globally, inflation is slowing.  Domestically, it is simply holding steady, albeit at a very slow pace.  "Core" prices (which exclude food and energy) have been rising by no more than 0.2 percent per month for more than a year.  There is little reason to expect anything different.  Energy prices are running below year-ago comparisons (not including natural gas and electricity, driven higher by the bad weather).  Food prices are relatively quiet, although meat prices could be driven lower as more steak hits the markets due to herd culling out west, another weather impact.  Prices will rise as demand exceeds supply.  "Core" prices, however, are unlikely to start rising much even if the economy turns a corner.  Medical-care inflation has slowed while the cost of housing remains steady.  Without much change in either of those two components, retail inflation will not change significantly.

Housing Starts and Building Permits, March (Bureau of the Census)

Home building has been running close to a million starts (annualized).  Demand has held up, even with mortgage rates moving a little higher.  And with foreclosure activity winding down, more demand must be met by increased construction.  Weather has delayed some home building, but it hasn't stopped the industry from staffing up, in anticipation of putting up more units (single family or apartment).  The most likely path forward is continued slow improvement.  Alternatively, a faster pace is far more likely than a slowdown.

Industrial Production, March (Federal Reserve Board)

The ordering rate remains soft and the inventory overhang weighs on production schedules.  So even if retail buying is poised for a pickup, it remains too soon to expect industrial production to start posting anything close to robust gains.  That may develop later this spring.  For now, flat industrial production is more likely.

Source: The Conference Board