Economic Prediction? Might as Well Forecast the Weather

by Anirban Basu 23. April 2014

Anirban Basu

Recent Weak Data Largely Attributable to Atmospheric Conditions

The global economy expanded by a below-average 3 percent last year. The U.S. economy expanded by less than 2 percent, though the latter half of the year was much better than the first. The U.S. economy expanded at a 4.1 percent annualized pace during the third quarter (more than a third of that was due to inventory accumulation) and then followed up that performance with 2.6 percent growth during the fourth. That means that during the final six months of 2013, the U.S. economy expanded at a better than 3 percent rate. Among the leading contributors to growth during the fourth quarter were personal consumption and net exports.

Most forecasters believe that 2014 will be better for both the global and national economies. After expanding 3 percent last year, the International Monetary Fund forecasts that the global economy will expand 3.6 percent this year (the previous forecast had been 3.7 percent, but was downgraded largely due to the expected impact of sanctions on the Russian economy -- Russia is now expected to expand 1.3 percent in 2014, down from the prior forecast of 1.9 percent). Growth is expected to accelerate in both Europe and the U.S. The forecast for America is 2.8 percent, though we believe that could very well turn out to be a tad optimistic.

Part of this sanguinity can be attributed to momentum. Consumers in much of the world appear poised to accelerate spending in 2014, in large measure because of massive gains in certain equity markets, including in (until recently) the U.S. and Japan. The S&P 500 market gauge gained 29.6 percent last year, the largest annual gain since 1997. The Dow Jones was up 26.5 percent and the NASDAQ was up by more than 38 percent.

Consumers and key segments of the broader economy continue to benefit from favorable interest rates and easing credit conditions. Commercial real estate has been one of the beneficiaries of easing credit standards. The Federal Reserve’s January 2014 Senior Loan Office Opinion Survey on Bank Lending Practices indicates that on net U.S. institutions have eased standards for most forms of commercial real estate loans. These same bankers report experiencing stronger demand for such loans. The Comptroller of the Currency’s 2013 Survey of Credit Underwriting Practices reports that bank examiners determined that 24 percent of banks offering non-construction commercial real estate loans had eased their lending standards compared to a year prior while only 8 percent had tightened standards.

One of the most interesting aspects of economic life has been the refusal of interest rates to head higher. Conventional wisdom has expected meaningful increases in interest rates for months, but at the time of this writing, the 10-year Treasury note offered a yield of just 2.66 percent. The five-year note yields about 1.65 percent. The implication is that 1) investors remain cautious and there continues to be a flight to quality; 2) the Federal Reserve’s efforts to keep borrowing costs low continue to work; 3) investors remain unconcerned by the nation’s accumulated $17.5 trillion debt; and 4) global investors continue to disproportionately ship investment dollars to America.

Stable inflation and interest rates is also likely attributable to still weak labor markets. Despite ongoing job growth, unemployment remains stubbornly close to 7 percent (6.7%; March). But labor market dynamics have changed for the better. In previous periods, unemployment had largely declined because people were leaving the labor force. Since January, nearly 1.3 million people have returned to the nation’s labor market. The labor force participation rate, which achieved a historic low in December of 2013, has risen to 63.2 percent (March).

Perhaps the most worrisome aspect of U.S. economic performance is the recent softening in retail sales momentum. While some of this may be due to larger outlays on housing, the softening of year-over-year retail sales increases indicates that consumers are still not positioned to drive the economy into 3 percent growth territory. While some analysts have attributed the slowdown in year-over-year performance to the weather, it is clear that softening began before the weather turned wintry. Moreover, momentum in certain categories such as Internet sales, which should not be as susceptible to weather, has also waned.

Economic Winter in Maryland

Maryland's job growth remains incredibly inconsistent on a month-by-month basis. In a prior report, we indicated that Maryland’s job growth performance was respectable. That is no longer the case. The state’s economy added just short of 7,600 jobs between February 2013 and February 2014. That translates into a growth rate of 0.3 percent, one of the slowest in the nation. The state lost 600 jobs in February after losing 6,100 jobs in January. Undoubtedly, weather played a part, but even if January and February had been flat, Maryland’s level of performance would have been far below the nation’s.

Sequestration and a housing market that continues to be frustrated by disproportionate numbers of foreclosures are at least partially responsible. One in every 557 housing units in Maryland reported a foreclosure filing in February, up roughly 30 percent from a year ago, second only to Florida and almost double the national average according to RealtyTrac data. Among metropolitan areas, Baltimore-Towson had the third highest foreclosure rate of all metropolitan areas besides Tampa and Miami.

Three months ago, Maryland ranked 28th in terms of year-over-year job growth. That ranking has fallen by 16 spots to 44th. Moreover, the quality of jobs being added is not high. The fastest year-over-year job growth was recorded in the lowest wage segment, leisure and hospitality (8,600 net new jobs; 3.4%). By contrast, manufacturing and information have been shedding jobs.

Anirban Basu is Chairman & CEO of Sage Policy Group, Inc., an economic and policy consulting firm in Baltimore, Maryland. Basu is one of the Mid-Atlantic region's most recognizable economists, in part because of his consulting work on behalf of numerous clients, including prominent developers, bankers, brokerage houses, energy suppliers and law firms. On behalf of government agencies and non-profit organizations, Basu has written several high-profile economic development strategies, including co-authoring Baltimore City's economic growth strategy. His opinions do not necessarily reflect the opinions and beliefs of 1st Mariner Bank.

Let There be Light...at the End of the Tunnel

by Anirban Basu 24. January 2014

Anirban Basu

The U.S. economy had been stuck at 2 percent growth for several years and throughout much of 2013. Imagine a sports car with incredible get up and go, but one that had to constantly negotiate a series of speed bumps that permit it to only travel between 30 and 40 miles per hour. To complete the analogy, that translates into sub-par economic growth and an unemployment rate still hovering around 7 percent after more than 4 years of economic recovery.

However, the outlook for 2014 is as positive as it has been for any year since the onset of the financial crisis. There are a number of relevant factors at play. The world economy is now strengthening, with accelerating growth apparent in China, parts of Europe, the U.S., and in a host of emerging nations. Accordingly, the International Monetary Fund projects that the global economy will expand 3.6 percent in 2014 after expanding closer to 3 percent in 2013.

There are other tailwinds that more specifically impact the U.S. economy. The nation now enjoys greater certainty regarding its federal budgetary and Federal Reserve monetary policies. Seemingly against all odds, the federal government recently passed a budget that guides spending into 2015. On December 18th of last year, the Federal Reserve announced that it would begin to taper its bond purchase program beginning in January. Rather than purchasing $85 billion each month in assets, the Federal Reserve will taper its purchases to $75 billion per month. Specifically, the FOMC will reduce its purchases of Treasuries and mortgage-backed securities to $40 billion and $35 billion per month.

Equity investors cheered the policy announcement for at least three reasons. First, the Federal Reserve introduced language suggesting that short-term rates will remain low for many quarters to come. The announcement also reduces the level of policy uncertainty, and markets don’t like uncertainty. Finally, the decision to taper implies that the Federal Reserve’s forecast for U.S. economic activity has improved since its September 2013 meeting.

There’s more at work than policy shifts. Gas prices have fallen, helping to increase consumer disposable spending power. Corporate performance remains solid. A majority of large U.S. corporations beat their earnings estimates during last year’s third quarter. However, a materially smaller share beat their revenue estimates, implying that companies continue to aggressively manage costs to boost bottom line performance. With economic growth now accelerating both nationally and globally, corporate America may have an opportunity to rapidly expand both their respective bottom and top lines.

The stock market has simply boomed as a result of the confluence of many factors, with the S&P 500 surging nearly 30 percent in 2013. While 2014 is unlikely to generate anything close to that return, the stock market’s performance has added both capital and confidence to the U.S. economy, which in turn creates a better environment for the broader market.

In general, regions of the nation enjoying the fastest recovery are those that are associated with rapidly rising populations (e.g., Texas, Florida), surges in energy production (North Dakota, Texas, Louisiana), increased industrial output (Indiana, South Carolina) and rapidly recovering housing markets (Florida, Georgia, Arizona). These regions are likely to continue to expand more rapidly in 2014.

Will Maryland Catch the Tailwinds?

Maryland was a willing participant in the nationwide recovery and continued to post solid economic performance numbers throughout 2013. For instance, between November 2012 and November 2013, the state added 33,500 jobs or 1.3 percent according to the Bureau of Labor Statistics. The State ranked 28th in the nation with respect to year-over-year percentage job growth over that period, down from 22nd in May of 2013. Despite the dip in relative job growth, the Free State ranked ahead of Virginia. Statewide aggregate employment has now surpassed its December 2007 level, the month during which the Great Recession began.

Despite a promising outlook for the global and national economies, there is cause for concern in Maryland. Like a facemask-wearing stalker in a 1980s horror movie, the State’s structural deficit refuses to permanently disappear. What was once estimated to be a $300 million surplus for FY2014 is now an $87 million deficit. The budgetary gap rises to $400 million for FY2015. It is critical that Annapolis resolve these shortfalls without further impacting the state’s business climate and reputation.

Moreover, Maryland does not fully participate in many of the economic segments that are likely to drive the U.S. economy forward in 2014, including industrial and energy production. As a wealthy state, Maryland does benefit from disproportionate impetus from stock market-induced wealth effects, however. It also helps that sequestration has been relaxed a bit. The distribution, medical research and financial service intensive Baltimore metropolitan area has arguably been the healthiest economic region within Maryland of late in terms of pace of recovery.

Anirban Basu is Chairman & CEO of Sage Policy Group, Inc., an economic and policy consulting firm in Baltimore, Maryland. Basu is one of the Mid-Atlantic region's most recognizable economists, in part because of his consulting work on behalf of numerous clients, including prominent developers, bankers, brokerage houses, energy suppliers and law firms. On behalf of government agencies and non-profit organizations, Basu has written several high-profile economic development strategies, including co-authoring Baltimore City's economic growth strategy. His opinions do not necessarily reflect the opinions and beliefs of 1st Mariner Bank.

Unrealized Potential: A Glance at Our Economy

by Anirban Basu 21. October 2013

Anirban Basu

Despite a growth rate that has averaged more than 3 percent over the past 25 years and an unmatched capacity to create and support a host of powerful companies ranging from Google and Coca-Cola to Boeing and Caterpillar, the U.S. economy has been stuck at 2 percent growth for several years. Imagine a sports car with incredible get up and go that has had to continuously negotiate a series of speed bumps. Economically, these take the form of higher tax rates, sequestration, rising interest rates, a recently resolved federal shut down, and the uncertainties associated with healthcare reform. The upshot – 2013 will go down as yet another disappointing year for the U.S. economy.

While the government reached a deal to reopen the government, the 16-day shutdown and a standoff regarding the federal debt limit, cost the nation’s economy $24 billion according to an S&P estimate. Furthermore, according to the Conference Board, the economy is set to expand at just 1.7 percent on an annualized basis during the fourth quarter. In other words, the economy may not be entering 2014 with much momentum.

U.S. equity markets, however, have generally continued to surge higher. As of October 10, 2013, the Dow was up nearly five percent since the onset of the third quarter and up nearly 16 percent year-to-date. The Nasdaq Composite was up nearly 21 percent year-to-date as of October 10th, which happened to be 10 days into the federal government shutdown.

The rebound in equity markets is attributable to numerous factors. One is a still expanding, though somewhat disappointing U.S. economy. Corporate profitability and ongoing injections of liquidity into the economy by the U.S. Federal Reserve have also contributed to appreciating share prices.

Of course, Federal Reserve policy influences more than stock prices. Consumers have leveraged low interest rates, including through the purchase of new cars and light trucks. Sales of new vehicles in the U.S. are on pace to exceed 15 million in 2013.

The Federal Reserve will continue to focus on accelerating economic growth as long as inflation remains tame. For now, inflation is not a major issues. Consumer prices rose just 0.1 percent in August after climbing a similarly benign 0.2 percent in July. Despite large jumps in February and June (0.7 and 0.5 percent, respectively), trend inflation remains well within the Federal Reserve’s comfort zone.

Labor market performance remains mixed. While it is true that unemployment fell to 7.3 percent in August, the lowest rate recorded since December 2008, the decline was primarily attributable to the 312,000 people who left the labor force. Only 63.2 percent of Americans presently participate in the labor force, the lowest proportion since August 1978.

Maryland's economy added 43,300 jobs or 1.7 percent to aggregate nonfarm payrolls. Because Maryland is a wealthy state, it is likely that consumers here benefit more on average from the stock market’s rally. This may help explain some of the state’s demonstrated capacity to withstand federally-induced headwinds. According to the most recently available data, statewide nonfarm employment stands at 2,616,200 jobs, a record high.

Looking Ahead

As of this writing, America’s government has been reopened for less than 24 hours. Although the nation was not foolish enough to tempt fate through default, the government could again close on January 15th, less than three months from now. This means that Washington, D.C. will continue to be a source of fixation and uncertainty among the nation’s business decision-makers. That uncertainly will likely prevent the economy from accelerating to 3 percent growth next year. Another 2 percent year is quite possible.

Anirban Basu, Economist, Sage Policy Group, Inc. & First Mariner Bank Board Member

Anirban Basu is Chairman & CEO of Sage Policy Group, Inc., an economic and policy consulting firm in Baltimore, Maryland. Basu is one of the Mid-Atlantic region's most recognizable economists, in part because of his consulting work on behalf of numerous clients, including prominent developers, bankers, brokerage houses, energy suppliers and law firms. On behalf of government agencies and non-profit organizations, Basu has written several high-profile economic development strategies, including co-authoring Baltimore City's economic growth strategy. His opinions do not necessarily reflect the opinions and beliefs of 1st Mariner Bank.



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