Where Things Stand
By Scott J. Brown
February 20, 2012
Recent economic data have been mixed, but generally on the positive side of expectations. However, an unusually mild winter appears to have had a significant impact. Accounting for weather, the story appears to be largely the same: a moderate economic recovery, restrained by a number of headwinds, but with some potential for much better growth down the line.
Weather: The mild winter appears to have boosted motor vehicle sales, construction activity, and employment. However, it’s difficult to calculate the weather impact with much precision. Looking ahead, the weather story could evolve in a couple of ways. One, weather-related strength could serve as pump priming. Reported “good” economic news could add to business confidence, leading to more hiring, more bank lending, and so on, which, in turn, would add to consumer spending and business investment, leading to even more confidence and hiring, and so. Two, mild weather may simply be pulling forward (or “borrowing”) seasonal gains from March and April. This is often the pattern. Three, most likely, we’ll see more of the latter. So, curb your enthusiasm.
The Longer View: The economy continues to operate far below its potential, which means that an extended period of above-trend growth is needed to mop up current slack. Real GDP growth has long trended about 3% per year. This trend is not the same a potential output. In fact, potential output should be below this trend partly due to the aging of the population. However, those arguing that the housing sector has either permanently reduced potential output or overstated potential output prior to the housing correction are off base. We have a lot of ground to make up, especially in the job market.
The Consumer Outlook: The household sector drives the bus. Consumer spending accounts for 70% of overall growth. Business investment is there, ultimately, to satisfy the consumer. Recent figures have been spotty. Personal spending figures ended 2011 on a weak note and retail sales figures for January were disappointing. Adjusted for inflation, disposable personal income, the main fuel for consumer spending growth, slipped 0.1% in the 12 months ending in December. January numbers should look better, helped by job market improvement (which was aided by the weather) and a 3.6% cost-of-living adjustment in Social Security. However, gasoline prices have crept up since mid-December, limiting the purchasing power of most middle class families. Gasoline prices are always a wildcard in the economic outlook. Last year, as the economic gears seemed to begin to catch, $4 gasoline slammed the consumer in the spring and early summer. Gasoline prices bear watching closely over the next several weeks.
Europe (the never-ending story): Greece is the biggest concern in the short term. See Daniel Davies’ excellent post on the political and economic perils for European policymakers (but not after lunch). Of course, there are many other troublesome issues for Europe beyond Greece. However, the European Central Bank’s liquidity program has significantly reduced the odds of a broader banking crisis in Europe in the near term.
Energy: A recent piece by Raymond James’ energy team calls for a long-term reduction in the price of natural gas relative to the price of crude oil. This has important implications for energy consumption in the U.S. In particular, low natural gas prices would be a boon for manufacturing (especially energy-intensive industries). There’s no arguing the direction, but I’m much less enthusiastic about their conclusions about the dollar and the trade deficit. Still, as part of a general economic recovery, low natural gas prices ought to play a key role.
The story remains essentially the same: moderate economic growth in the near term, with some headwinds and downside risks, but an optimistic long-term outlook. USA, USA, USA.
(c) Raymond James