Securing a Lasting Economic Recovery
June 12, 2013
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According to the National Bureau of Economic Research, business expansions have averaged 59 months in the past 11 business cycles. June 2013 marks the fourth birthday of the current U.S. economic recovery, and this one seems very likely to be above average on this score.
But despite its advancing age, the current recoverys performance in terms of real gross domestic product (GDP) growth is the weakest on record in the post-war period. Real GDP of the U.S. economy is currently 3.2% higher than its peak in the prior business cycle. However, it is roughly 5.7% short of the Congressional Budget Offices estimate of potential GDP a significant output gap.
The Feds quantitative easing program continues to provide artificial support. The economy is most likely to be declared independent enough to need less of this kind of aid by the end of 2013, assuming that labor market and inflation numbers evolve as we expect.
Incoming economic data underscore that the economy has been resilient enough to withstand the headwinds of a weak global economy and budget sequestration. We expect the economy to gather momentum after a modest increase in real GDP in the second quarter and establish escape velocity from its sub-potential pace. This publication also includes our first take on economic performance in 2014, which should see self-sustained growth that exceeds the pace of activity seen so far in the economic recovery.
U.S. Economic Outlook
Key elements of our forecast:
- Nominal household net worth reached a new high in the first quarter ($70.3 trillion versus the previous peak of $68 trillion). The upward trajectory of household wealth, combined with the increase in income, supports expectations for a moderate growth in consumer spending in the rest of 2013. As the headwinds of tax increases and budget cuts fade, 2014 consumption should be even more robust.
- Of the components of consumer spending, auto sales remain a bright spot. Low interest rates, aggressive discounting at dealers and the age of the fleet support expectations for continued growth in auto sales, following an increase to 15.2 million units in May from 14.9 million units in the prior month.
- Sales of new and existing homes have moved up, while prices of homes also have risen. The nearly 60-basis-point back-up in mortgage rates to 3.9% in recent weeks should dampen demand for homes somewhat. But historically low mortgage rates and a plethora of cash buyers should continue to spur home purchases in the months ahead, and construction should continue to make a hefty contribution to real GDP growth.
- The April decline in shipments of non-defense capital goods, the proxy for capital spending in the GDP report, cast a long shadow. However, one month does not make a trend, and it is entirely possible that May and June data will offset this weakness.
- The 175,000 increase in payroll employment and 7.6% jobless rate in May are solid readings on the labor market, but they are not strong enough to trigger an immediate reduction of asset purchases by the Federal Reserve. Nonetheless, we expect hiring momentum to continue, paving the way for the tapering to begin by year-end.
- Standard and Poors recently upgraded the outlook for the U.S. economy to stable from negative and retained the AA-plus rating. Although markets shrugged off the downgrade of U.S. sovereign debt in August 2011, the latest improvement in the outlook is a bullish development.
- The 10-year Treasury note yield is at 2.2% as of this writing, raising the level of concern about interest rate risk and the adverse impact on home purchases and mortgage refinancing. We have been expecting rates to rise gradually, but we think the recent back-up is a bit overdone. All eyes are on the Feds June 18-19 Federal Open Market Committee meeting for clarification.
- The positive tone of recent economic data suggests that the Feds asset purchase program is on its last legs. However, the deceleration of the personal consumption expenditure price index to a 0.7% year-to-year increase in April and the decline in inflation expectations in the five-year space to 1.85% from 2.31% in early March bear close watching. We think that deflation is not a major risk and that the price level will rise modestly during the balance of the forecast period.