The Compass Report: U.S. Economy Gains Are ‘Grudgingly Slow,’ But Better

Editor’s note: This story is a component of The Compass Report. The quarterly Compass Report is managed by The City Wire, and sponsored by Arvest Bank. Supporting sponsors of The Compass Report are Cox Communications and the Fort Smith Regional Chamber of Commerce.

“Grudgingly slow” gains in the U.S. labor market, gains in business investment and increases in consumer spending during the fourth quarter of 2014 point to modest national economic growth in 2015, according to analysis that is part of The Compass Report, an  independent analysis of economic conditions in Arkansas’ three largest metro areas..

Jeff Collins, an economist for The City Wire and former director of the Center for Business and Economic Research at the University of Arkansas, said the more stable economic outlook is allowing the Federal Reserve to end its monetary stimulus policies and begin setting the stage for short-term interest rate increases.

“Output growth has been solid over the last 3 quarters. This coupled with relatively strong employment growth has reduced the economic concerns of U.S. households and businesses,” Collins noted in his analysis of fourth quarter 2014 economic conditions. “Indeed, many economists expect output to grow between 2.5 to 3.0 percent for the foreseeable future barring unexpected shocks such as the extreme winter weather which significantly reduced output in the first quarter of the year.”

BRIGHT SPOTS
The continued low prices for energy is nothing short of a “tax holiday for the consumer,” Collins said. Real personal consumption expenditures grew by 4.4% in the fourth quarter compared to an increase of 3.2% in the third quarter. He expects the demand will continue, with slowing growth in China and economic weakness in the European Union likely to result in low energy prices for the foreseeable future.

He also noted that retail sales continue to grow at an annualized rate of 2.5%.

“Despite the dysfunction in Washington and ongoing unrest in the Middle East, Americans are beginning to do what they do best, spend. This is evident in the consumption and retail data. As labor markets tighten income growth and eventually inflationary pressure are likely to occur. In the meantime, most Americans will enjoy lower gas prices, better employment prospects, and rebounding real estate values,” Collins noted in his analysis for The Compass Report.

Improved economic conditions have also allowed many households to reduce debt.

“Given the severity of the recession and pre-recession levels of household debt, most Americans have for the last several years been reducing spending and de-leveraging their balance sheets. Household debt payments as a percentage of disposable income reached a peak in third quarter 2007 (13.2%), but have been declining steadily since. In the third quarter, the most recent quarter for which data are available, the rate was approximately 9.9%,” Collins wrote.

Another positive is business investment. Collins said the outlook is for business spending to continue to grow through 2015 and to be especially strong in structures and equipment.

While not necessarily a bright spot, the U.S. labor market is improving with non-farm employment posting gains in 17 consecutive quarters. The economy created roughly 973,000 non-farm jobs in the fourth quarter after creating 717,000 in the third quarter of the year. Of the 372 MSAs in the country, only 14 posted rates above 10% in December and 158 had rates below 5%. No Arkansas metro area had a jobless rate above 7.2%.

However, growth in the labor force – number of people qualified to work – was essentially flat year-on-year. Collins said slow or no growth in the labor force “has been a persistent aspect of the recovery.”

KEY POINTS
Following are other highlights of Collins’ analysis of the national economy during the fourth quarter of 2014.

• Incomes and employment are expected to grow modestly through 2015. Housing, however, is expected to continue to accelerate given positive market conditions.

• According to the Bureau of Labor Statistics, the Consumer Price Index declined at a seasonally annualized rate of 0.4% in December. Falling oil prices were offset by modest increases in food, shelter, and medical services prices.

• Federal government expenditures, which had been steadily declining rebounded substantially in the third quarter only to decline precipitously in the fourth quarter.

• Employment growth has been and will continue to be relatively strong in the services, particularly in hospitality, retail trade, professional and business services, and education and health care services.

• The construction sector has recovered substantially. The sector added an estimated 294,000 jobs between December 2013 and December 2014.

• Employment in manufacturing has been growing slowly led by durable goods manufacturing.

ECONOMIC RISKS
The economy is on a more stable pattern, but serious risks lurk at the edges. Following are brief notes from Collins’ assessment of the risks.

• The U.S. economy remains heavily dependent on the consumer. While consumer confidence has improved significantly, consumers are still wary of taking on debt to finance increased consumption.

• Globally, demand has softened impacting global output growth and demand for U.S. exports. Growth in China continues to decline, reducing global output growth.

• The potential for Greek default and leaving the Euro Zone could negatively impact European economies and induce additional defections.

• While the unemployment rate has consistently improved, it does not adequately tell the entire story. Reduced labor force participation, high unemployment rates for young and minority workers remain persistent problems.

• The Federal Reserve is in the process of turning off the monetary spigot in response to stabilized growth. However many economists are concerned about the impact on inflation of prolonged easy money.

• Low oil prices are like a tax break, but how long will they last?