Growth...Must Have Growth...
For the last three quarters, America has been dealing with a relatively stagnant economy that has averaged only 1% growth — or, to use a Halloween metaphor, a zombie economy. Would the third quarter Gross Domestic Product (GDP) numbers continue to show low growth and perpetuate the Economy of the Walking Dead?
Fortunately for us all, the Bureau of Economic Analysis (BEA) reflected signs of economic life in the third quarter. The BEA reported a robust 2.9% growth in its first estimate of GDP, beating the already bright Bloomberg consensus estimates of 2.6%.
Overall, the report provided more treats than tricks. Consumers are still doing their part to propel the economy, accounting for almost 1% of the GDP growth through spending on services and almost 0.7% more through spending on durable goods. Business investment increased by 1.2% as compared to a 1% increase in the second quarter. Private inventories increased by 0.61%, implying that businesses may be planning for increased demand. Exports increased by 10%, the largest increase since the fourth quarter of 2013. Prices remain relatively low with inflation as defined by the PCE index at 1.4% and core inflation (excluding food and energy) at 1.7%.
One data point does not make a trend — but the BEA report is a nice positive sign that we are shaking off the economic doldrums and heading in the right direction after seven quarters of growth averaging below 2%.
The economic downturn in 2014 was propelled by three interrelated factors: plummeting oil prices, a strong US dollar depressing exports, and an overall slowing of the global economy. The global economy is still questionable, as the International Monetary Fund (IMF) recently revised the 2016 global growth projection to slow to 3.1% before rebounding slightly to 3.4% next year, but the other factors are finally looking up. Oil prices have partially recovered recently, closing at $48.70 a barrel after an early-year trough near $35, and the dollar is still high but relatively stable.
Exports appear to be rebounding in spite of the effect of the strong dollar. The third quarter increase was buoyed by a large increase in soybean exports triggered by weather-related poor crops in Argentina and Brazil that increased demand for the American supply.
While the soybean surge may be a one-off, the stability of the dollar is allowing a broader recovery for exports. If the IMF is right with respect global growth, the recovery in exports should be just as slow as the GDP recovery — so don't expect 10% growth to be the new norm — but the stage is set for an export rebound.
As for oil prices, there is still a glut to deal with but prices are expected to continue to increase slightly. The US Energy Information Administration forecasts that Brent crude oil prices will average $51 per barrel in 2017.
All in all, it appears that the economy may finally be rising out of the doldrums — which brings up the topic of the Federal Reserve.
Fed Watching Resumes
Is a higher GDP number the trigger that finally drives the Fed to act and raise interest rates? The numbers are strong, but probably not strong enough to warrant immediate action on their own. Inflation remains low and there are still questions about how much slack remains in the job market — and the upcoming election lurks as a background factor.
While a rate is hike is still a possibility before the election, it seems unlikely given the Fed's reluctance to appear to be affecting the election — especially after the FBI's Friday announcement re-igniting the Hillary Clinton e-mail controversy. FBI director James Comey announced that the FBI was re-examining the Clinton investigation based on discovery of potentially relevant e-mails from a separate investigation. That event managed the rare feat of uniting Democrats and Republicans in outrage and requests for more information.
A Fed rate hike in November would be on stronger and less ambiguous ground than the FBI director's announcement, but a majority of economists expect deference to a December hike instead.
Homeownership Rises, Finally
Meanwhile, in a separate bit of recent good news, the Census Bureau reported that homeownership in the third quarter jumped to 63.5%, hopefully reversing a general decade-long slide in homeownership numbers. The second quarter's 62.9% mark represented the lowest number in over 50 years.
With mortgages rates still near historic lows, why haven't more people taken advantage of them? There are a multitude of potential reasons, and it's possible that most people who can afford to take advantage of the low rates to buy or refinance have already done so. However, the larger issue may be simple supply and demand.
A 6-month supply of available homes is indicative of a healthy housing market, but except for a 6.1-month reading in July of 2014 we have not seen that number since October 2011. The September reading was 4.8 months, reasonably close to the average over the last four years. The shortage is especially acute in the crucial category of entry-level homes.
The fact that homeownership rose in spite of a supply problem, rising prices, and a looming rate increase is a good sign, but will it continue over the next few months? The supply problem does not appear likely to resolve itself in the short term. Once we get a few months beyond the election-cycle turbulence, we should begin to see more clarity.
Who's up for some good economic news after months of politically driven negativity? Count us in.
The BEA report is not outstanding, but it certainly represents a welcome step in the right direction. If the trends can be sustained for a few more quarters, we should see the economy start to come back into more of a natural balance. The Fed will finally pull the trigger on interest rate hikes, and the market distortions caused by the reaction to the Great Recession should begin to ease.
How does this news affect you? The fact that inflation remains low means that your purchasing power is improved as we head into the shopping holiday. Since core inflation is higher than overall inflation, that means that lower food and energy prices are dragging inflation down even further, implying more good news for your pocketbook.
The combined BEA and Census Bureau reports also give you some potential direction if you plan to enter the housing market in the near future. It seems likely that interest rates will start rising slowly, by 2017 if not in December, and the supply issue is not forecast to change much — so if you find the right home for you, it is best to act on it quickly.
At least we can take stagnant growth off of the list of Halloween fears. With one of the strangest elections in years, where a recent tongue-in-cheek poll found millennials preferred a meteor strike to the prospect of either President Clinton or President Trump, don't we already have enough to worry about?