Economy Still Recovering from Frigid Winter

by Anirban Basu 8. August 2014

Anirban Basu

The winter of 2013/14 was brutal. Construction starts were delayed. Merchandise sat idly at ports. Consumers stayed indoors and local government budgets were hammered by snow removal costs. For roughly three months, forward economic momentum was stymied. According to the Bureau of Economic Analysis, the U.S. economy contracted at a 2.9 percent pace during the year’s initial quarter.

For a time, economists debated whether or not first quarter weakness was attributable to the weather or to economic fundamentals. We can now say with some degree of confidence that atmospheric conditions are largely to blame. Consumer spending began to trend higher as early as March. According to the Bureau of Labor Statistic’s initial estimate, the nation added 288,000 jobs in June and has now added more than 200,000 jobs for five consecutive months, the first time that’s occurred since the late-1990s. While the quality of jobs being added to the economy is generally quite poor, more Americans enjoy employment opportunities and the unemployment rate (6.1 percent) is now at its lowest level since September 2008.

That said, the first quarter was so bad from an output perspective that it has altered the forecast for 2014. As of March, the Federal Reserve’s forecast for growth was in the 2.8 to 3.0 percent rate. It has now been revised to a range of 2.1 to 2.3 percent.

A key implication pertains to interest rates. With growth continuing to remain at or below America’s long-term potential, the Federal Reserve is likely to remain accommodative. Even though its QE3 program is being wound down, investors probably don’t have to worry about increases in short-term rates until very late in 2014 or next year, though this view is certainly not universal.

A bright spot is the apparent health of capital markets. The first half of 2014 saw a record number of IPOs. While U.S. companies accounted for six of the top ten performing initial stock offerings, Europe—now recovering from its debt crisis—recorded the most IPOs of any region in absolute terms. The total value of initial public offerings was up 54 percent during the first half of 2014 compared to the same period one year prior. Life sciences companies raised more money through initial public offerings during the first half of 2014 than they did during all of last year.

America’s energy production renaissance arguably represents an even brighter spot. A recent report by the U.S. Energy Information Administration indicates that U.S. energy production met 84 percent of the nation’s demand in 2013. The fraction of U.S. energy consumption satisfied domestically has been rising since 2005, when it stood at 65 percent. Job growth remains strong in many of the nation’s energy-intensive markets, including Texas, Oklahoma, Louisiana and North Dakota. Last year’s rise in natural gas prices has even helped to support a resurgence of demand for coal.

That does not suggest, however, that it will be smooth sailing for equity investors. The run-up in stock prices has stretched P/E ratios in many industry segments. To justify those and higher valuations, corporate profits need to bounce back in the second half of 2014. Profits from current production fell from $198.3 billion during the first quarter of 2014 after rising $47.1 billion during the prior quarter. Equity prices continued to expand nonetheless. Correspondingly, the Dow Jones Industrial Average’s P/E ratio rose from 15.0 at the end of 2013 to 16.5 as of July 1st. As the market creeps higher, weak earnings reports stand to become more impactful and market performance could become less stable. If the Federal Reserve begins raising short-term interest rates sooner than expected, the need for more impressive earnings growth becomes even more urgent.

Economic Winter in Maryland

Maryland's job growth continues to underwhelm. The Free State added 22,100 jobs between May 2013 and May 2014. That translates to 0.9 percent growth, ranking 37th among all states over that period. Month by month job growth has remained incredibly inconsistent; the State lost 1,300 jobs in May after adding 10,600 jobs in April. While weather was a convenient scapegoat for the subpar job growth in the first quarter, recent data reflect a lingering malaise.

To the extent that there has been job growth in Maryland, it has been primarily in the Baltimore metropolitan area. Suburban Maryland has been hammered by sequestration and most rural Maryland economies continue to underperform by both national and statewide standards. Development momentum, meanwhile, has been building in the Baltimore area, including in hotspots like Baltimore’s waterfront, Owings Mills, Towson and Columbia.

The housing market, while slightly improved, continues to be at least partially responsible for Maryland’s lackluster performance. One in every 621 housing units in Maryland reported a foreclosure filing in May. That translates to 0.16 percent of total units being foreclosed, exactly double the national average according to RealtyTrac data. Home sales in Maryland were up 17 percent on a month-to-month basis in April, but are down 12 percent compared to one year ago.

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.

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.



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