Economic Update 2011: Alan Beaulieu
Economist Alan Beaulieu sees the economy making slow gains through the rest of 2011 and into 2012.
There was certainly no lack of economic “drama” over the summer between the debt ceiling, Standard & Poor’s lowering the U.S. government credit rating, decline and volatility in the stock market, and an unemployment rate that remains stubbornly above 9.0 percent. These issues have
caused many political and business leaders to fear a near-term recession. We will look at reality in the paragraphs below, but before reading on you should know that we have not changed our outlook as presented in the August STAFDA report. We had already factored each of these events into our thinking about the economy going forward; therefore, they were not surprises that would cause us to change our projections.
The U.S. economy will stumble along at a slow rate of rise through the rest of 2011 and into early 2012. 2012 as a whole will likely see a mild improvement in the rate of growth. The business cycle will likely peak in 2013 and the economy will slide into recession beginning in the second half of 2013, and for most of 2014. That has not changed since the last time we met in Arizona. The most important element about the forecast is that it remains within the entrepreneur’s power to beat this outlook with better growth and ongoing profits.
Concerns over Europe have also been front and center in numerous media outlets and in many recession-oriented conversations. Our outlook on Europe is fairly straightforward. The Greeks have to be bailed out. Though the Germans, French and others will complain bitterly about it, in the end they have little choice. A Greek default would seriously undermine the health of too many European banks; and, perhaps more importantly, it could cause a domino effect involving state and private financial institutions in Ireland, Portugal and Italy.
Assuming an agreement regarding Greece is reached in the near term, European banks may begin to build fortress balances for “next time,” which will likely come as Greece, and perhaps other nations, fail to adhere to needed austerity measures over the next two to three years. The accumulation of excess reserves hedged banks against a future default, but it will provide less liquidity for businesses and individuals over the next few years. This lack of liquidity can be expected to exert upward pressure on interest rates. Increased interest rates and a diminished ability to borrow can be expected to create some headwinds to economic growth in Europe and in the U.S.
Specific facts to consider:
The U.S. Leading Indicator (produced by the Conference Board and put into a rate-of-change format by ITR) is a very useful and accurate leading indicator. The July monthly index pushed the monthly rate-of-change higher (see the green line on the graph). Another look at the graph shows that the monthly rate-of-change moved lower from March 2010 to April 2011. The duration and dynamic of the decline speak to a slower rate of rise in the US in 2011, and not to an imminent recession. Ongoing ascent in the U.S. Leading Indicator monthly rate-of-change bodes well for the U.S. economy in 2012, particularly in the latter half of the year.
Another piece of good news is found in the U.S. Industrial Production monthly data trend. The index ascended 0.9 percent from June to July. The July increase is better than the 10-year average and slightly better than last year’s July jump, and last year was a recovery year.
Retail sales are important in the STAFDA world. Tool and hardware sales by consumers track with retail sales, as seen by the 12/12 rates-of-change on the accompanying chart. Retail sales activity is indeed slowing down, as seen by the decline in the rate-of-change, but the moderate rate of decline is indicative of a general economic slowdown, not a recession. The 2011 seasonal rise to date falls within the parameters of normal and is indicative of mild expansion.
A more specific indicator for STAFDA members can be found in the sale of existing homes. The July statistics were disappointing to be sure, given the 3.5 percent June-to-July drop. However, two key measures of business cycle activity, the 12/12 rate-of-change and the annual moving total, ticked higher in July despite the disappointing month. We are well aware that it is too early to declare a business-cycle low off a single-month rise in these two key measures; however, the fact that they moved upward at all should provide some encouragement to readers in that it buttresses our forecast of forthcoming stability in the housing market in 2012.
Make Your Move
Keep in mind that the backside of this business cycle (2011-early 2012) looks to be a soft landing. Readers should plan on higher volumes of activity over the next 18 months. Do you have the processing, accounting and shipping capabilities to be busier in 2012 than you are today? The current environment is very friendly toward making capital expenditures if those expenditures eliminate a bottleneck, push you into a new market
place, or have a short payback period.
Alan Beaulieu is president of the Institute for Trend Research, the senior economic advisor for NAW (The National Association of Wholesaler-Distributors) and STAFDA’s designated economist. Visit www.ecotrends.org.