3 Reasons the Economic Recovery Isn’t Over Yet
We are nearing the six-year mark of economic recovery, which started in June 2009. The average economic expansion since World War II, according to the National Bureau of Economic Research, is just under five years. But the current one, admittedly tepid, should continue for three good reasons: rising employment, recovering housing, and stronger manufacturing.
The government in February reduced the gross domestic product numbers for the fourth quarter of 2014 from 2.6% to 2.2%. This has caused some to reevaluate growth, or lack thereof, in 2015, especially given the cold bitter winter in much of the nation. The winter weather held back the GDP number for this year’s first quarter, which nonetheless is an improvement on the negative performance in 2014’s first period (down 2.1%).
Official figures for the first quarter of 2015 are due out later this month. Some observers, such as the Federal Reserve Bank of Atlanta, aren’t optimistic.
Looking ahead, however, many bright spots arise for the long term.
First, it appears that the employment number is going to be strong and continue above 200,000 new jobs a month, although the number could vary widely from month to month. Job postings have recently been at record highs, but an issue is the lack of the required job skills for these jobs.
With the retirement of baby boomers, we can expect that the labor participation rate (those working plus those looking for work), which has been on the downswing since the recession, will eventually increase.
While this seems to be a positive, a lot of intellectual knowledge will be lost, along with the required skills needed to replace the retiring boomers. This will likely force businesses to train their own workers, and not leave the task to schools. A tighter labor market could also lead to some wage inflation, as those with the skills will be in very high demand.
Just imagine what the jobs number might have been if the weather in February had been better. While economists were looking for 240,000 new jobs, the actual number came in at 295,000 and unemployment fell to 5.5%, where it remained through March. Wages, after growing significantly in January, increased a minimal amount in February. Given the growth in jobs, it is hard to imagine a recession any time soon.
Next, housing is continuing its rebound, with acceleration for both existing and newly built homes, as expectations are for a growth in sales of 7% and 19% respectively. There is a bit of a pull and a push as a result of rising interest rates and a lowering of some borrowing standards.
Nonetheless, many first-time homebuyers have repaired their balance sheets by accumulating enough money to make a down payment on a home, albeit a relatively modest one. In many places around the country, the inventory of existing homes for sale is very limited as a result of the high demand.
Lastly, manufacturing will have a significant impact on the GDP number for the year. Although manufacturing had a good 2014, it slowed down this year due to the colder winter weather and oil-price declines, which led to cutbacks in the energy industry.
Long-term trends, though, are more encouraging. The chronic loss of American factory jobs to lower-cost nations – six million of them went away from 1998 and early 2010 – has reversed itself. Since then, the U.S. manufacturing employment gained 7%, to 12.2 million jobs. That is still short of 1998’s 17.5 million positions, but the increase still is a big economic plus. Every $1 in sales of manufactured goods produces $1.37 in output in other segments of the U.S. economy – the largest multiplier effect of any sector.
With all of that said it will be up to companies to increase both their top and bottom lines to produce the earnings required to drive the equity markets forward at reasonable valuation levels. Despite a soft first quarter, it’s nothing significant enough to derail the long-term outlook for economic growth.
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