TrendTracker Update - February, 2017
By Art Raymond
Call for Creative Leadership
Less than 30 days through President Trump’s first 100, it’s clearly too early to tell what effect his policies will have on the economy, domestic and global. His stance on economic matters during the campaign covered the full political spectrum from conservative to liberal.
Given that uncertainty, how confident are Americans in the U.S. economy? One gauge, Gallup’s U.S. Economic Confidence Indicator*, came in at +11 for January, the highest level in the nine-year history of the index. This measure averages two survey findings: how Americans rate current conditions plus whether they believe times are trending better or worse. The scores can range from -100 to +100. Through its history this index has been in negative territory.
Interestingly the index hit +19 after Trump’s inauguration. Since the beginning of February, it has slipped slightly as the to-and-fro of Washington politics muddy the water. Uncertainty is bad for individual confidence and hence the economy as a whole.
Let’s take a look at the final numbers for 2016, which describe the situation at the end of the Obama presidency.
Gross Domestic Product
4Q2016 GDP came in at an annualized growth of 1.9 percent versus expectations of 2.2 with an inventory build that added a full percentage point. Final demand rose only 0.9 percent.
Positives included a solid 2.5 percent rise in personal expenditures and a 10.2 percent jump in residential investment. Business investment continued with a third gain in a row coming in at up 2.4 percent.
Full year 2016 growth was only 1.6 percent. This performance continued in line with the 2.1 percent average annual growth since the recession ended in July 2009. The current recovery is one of the longest since World War 2 albeit the weakest.
The new administration campaigned on a promise of 4 percent growth. Just how that goal will be attained is, of course, unknown. The streak of below 3 percent growth stretches back to 2005. Improving that trend will prove a stubborn goal that requires a mix of innovative long-term policy and political compromise. Continuing the status quo will not get the job done.
As noted above expenditures by the consumer are providing key support to our economy.
The chart below shows a solid positive trend for 2016 as a solid job market puts cash in workers’ pockets.
*Going forward your Updates will depend on the findings of the Gallup Organization’s timely and statistically valid reports along with the usual battery of government information.
Retail sales posted 0.6 percent growth in December. Much of that month’s gain came from vehicle sales, which rose 2.4 percent. That performance offset the declines in department store sales (down 0.6 percent), electronic/appliance store sales (down 0.5 percent), and restaurant sales (down 0.8 percent). Holiday spending thus failed to provide its normal seasonal support.
The headline unemployment rate (called U-3 in government reports) ended 2016 at 4.7 percent, down from 5.0 percent in December 2015. This January U-3 rose to 4.8 percent as payrolls increased by 227,000 employees.
The higher rate was attributable to a rise in the number of persons seeking jobs, a sign of the optimism reported in the Gallup U.S. Economic Confidence Indicator (see above). As a result the number of persons in the market rose by 0.2 percentage points to 62.9 percent.
A more accurate jobless rate is called U-6 that counts those working part time but wanting full-time employment as well as those not working nor looking for work but having sought a job sometime in the past 12 months. In 2016 that number fell to 9.2 percent, down from 9.9 percent. This January U-6 rose to 9.4 percent.
Importantly, average wages grew to $26.00, up 2.5 percent over the last year. The average work week remained flat in January at 34.4 hours.
The environment for jobs remains buoyant. For January Gallup’s Job Creation Index, which tracks workers’ sense of the job market, came in at +34, the highest score in the index’s nine-year history. This metric is based on a random survey that asks whether a worker’s employer is expanding, not changing, or reducing its roll. The percentage of those laying-off is subtracted from the percentage of those hiring to obtain the index number. The January index was the result of 43 percent expanding less 9 percent laying-off.
The January ISM Manufacturing Index rose from December’s 54.5 to 56.0, its highest level since November 2014. Positive components of the Index were new orders and employment. In the negative were input prices reflecting higher wage costs.
The impact of the oil collapse bottomed in mid-2016 and is having a reduced effect on the Index as shown in the chart above.
Rejuvenating domestic manufacturing is a top goal on the Trump administration’s action list. In TrendTracker’s opinion this objective faces some high hurdles. Many of the products like wood furniture that have been offshored over the past 20 years remain labor intensive and somewhat difficult to automate in their current form. Many of the plants that lost business to imports were shutdown. Building new capacity requires time for design, permitting, construction. Skilled workers required to man more mechanized processes must be trained. In summary re-shoring will not quickly be achieved even if the economics prove positive. Making such projects feasible will require substantial product design/engineering efforts and in many cases a shift in consumer tastes. A pro-business environment in Washington will be a prerequisite, and we as a nation are a long way from that status.
The slow-growth U.S. economy is clearly reflected in the housing data. In 2016 builders broke ground for only 1.166 million homes versus 1.112 million in 2015. That performance, while a gain of 4.9 percent year on year, is well below the historical annual need of 1.5 to 1.6 million homes. At its 2006 peak Housing Starts included about 1.8 million single family homes. Last year the number was only 781,000. So much for a housing-led recovery…
Problems facing homebuilders include the shortage of skilled labor, the scarcity of financing, and the dearth of buildable lots. More critical are demographic factors. Household formation, a key demand driver, has fallen as the young adults have chosen to bunk down with friends or family. Many of these prospective homebuyers are burdened with student debt and poor job prospects. According to Harvard Joint Center for Housing Studies, 1.7 million more households would exist today if households were being formed at the rate in 2005. As a result of these market parameters, many of the new homes built today are aimed at upscale customers rather than first-time homebuyers.
In addition to single-family housing starts, multi-family construction is critical to the forest products and value-added wood products industries. Last year about 385,000 apartments and the like were started. That number is about 35 percent above the 20-year average of apartment construction. As with new homes, many of these units feature upscale elements such as granite countertops and wood flooring. Demand for these high-end units exploded as well-paid Millennials forsook homeownership. In many cities supply is exceeding demand. Real estate research firm CoStar estimates that renters of these units must have incomes of at least $75,000.
As landlords reduce rents to entice tenants to sign up, less incentive to buy a home is created. Price appreciation of single-family homes could slow and thus shift the economics of homeownership.
New Home Sales decreased by 10.4 percent in December to 536,000, the lowest rate since last February. For 2016 in total, 563,000 new homes were sold, a 12.2 percent jump over 2015.
While Existing Home Sales fell 2.8 percent in December to 5.49 million, total 2016 sales were the best in a decade. The 5.45 million units sold was 3.8 percent above last year’s performance.
Activity is being adversely impacted by the shortage of homes on the market. According to the National Association of Realtors, that inventory fell by 11 percent to 1.65 million, the lowest since that metric was developed in 1999 and the equivalent of only 3.6 months of supply.
A critical factor for both new and existing home sales is the financing cost of construction loans and mortgages. The two charts above clearly show that the higher interest rates of the last three months are a negative for both categories of home sales. First-time buyers, a cohort that represents 32 percent of sales, are increasingly at risk of failing to qualify for mortgages.
The data clearly shows an economy still stuck in low gear.
Bottom Line: The anomaly of a 4.8 percent U-3 unemployment rate combined with a less-than 2 percent GDP growth continues to perplex economists. Fed officials believe that the economy is near full employment, and that rising wage pressure will push inflation above its 2.0 percent target. Yet wages are rising moderately, the average work week is well below 40 hours, and 5.8 million people are working part time because they cannot find full-time jobs. Given those facts the Fed is jumping the gun to suggest a need for three quarter-percentage point rate increases in 2017.
To re-start economic growth our real needs are creative thinking and leadership from the powers that be in Washington and the 50 state capitols. We must demand a consensus of action that eliminates uncertainty and rejuvenates confidence in our future. In the words of famed economist John Maynard Keynes, “our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction.”