Summary: 2014 was to be the year the US economy reached “escape velocity” from the slow 2.2% GDP growth since the crash. So far, as repeatedly predicted here, that has not happened. What might the second half of 2014 hold for us? The long-awaited acceleration, or more trend growth, or (what few economists expect) further slowing? Nobody expects a recession. Here’s some data that might help you prepare.
In December 2013 there were widespread forecasts of a boom in 2014. On February 21, half way through Q1, I wrote:
The consensus forecast per Blue Chip Economic Indicators as of February 20 for US GDP: 2.7% in 2014 and 3% in 2015. But years of over-optimistic forecasts have made economists cautious, so their “whisper numbers” are higher than their official numbers. My guess is that 2014 will be another year of slow (2.2%?) growth. But, as always, surprises await us — good and bad.
I was a pessimist about 2014 in December through February. Now it appears I was too optimistic, since the first surprise of the year was Q1 GDP of -2.9%. Then most economists expected a big bounce in Q2. Now forecasts for Q2 look disappointing, but hope remains for the rest of the year:
- Q2: 3.1% (the Atlanta Fed’s NowCast is 2.7%)
- 2H: 3.0%
- 2014: 1.6% (from Q4 to Q4)
The basis for economists’ hopes
The four horses expected to pull the economy are export growth, housing, business capex, and consumer spending (especially autos). Three of these are likely to be disappointing. The fourth looks strong, but might prove the weakest later in the year. Let’s take a quick look at each.
(a) Exports
With slow Q2 growth in both Japan and Europe, export growth might prove weak. The drop in Japan’s economy following the April sales tax increase has been far larger than expected.
(b) Housing
Hopes for housing were great, looking for growth in new home construction, existing home sales, and rising prices. Purchase mortgage applications are down 17% YoY NSA. Both permits and starts were weak in June, an ugly leading indicator. Worse, there are indicators that the market is weakening. See top-analyst Mark Hanson’s June 8 report (free registration required), far from the consensus opinion. For a specific example see his June 10 report about May activity in Phoenix; confirmed by this July 7 report by the Center for Real Estate Theory and Practice at AZ State U.
(c) Capital Expenditures
Capex growth is the great hope, but has not appeared so far. Look at the trends (MoM, SA):
- manufacturers’ new orders: March +1.5%, April +0.8%, May -0.5%,
- industrial production: March +0.9%, April +0.0%, May +0.5%, June +0.2%.
The evidence suggests that CEO’s prefer to enrich themselves through stock buybacks, rather than focusing on building the firm through capex and workers (e.g., training, motivation). See the numbers by FactSet. It’s the Triangle Trade of stock options to stock to buybacks, to which CEOs devote not just corporate America’s cash flow but also its borrowing. See David Stockman explain how the buyback process works for IBM. See Gordon Long’s analysis of the math: “The buyback tax ruse“.
(d) Consumer spending
The trends show no sign of the expected boom. They’re slowing. MoM, SA:
- Consumer spending has not accelerated: March was 0.8%, April +0.0%, May +0.2%.
- Retail sales are slowing: March was +1.5%, April +0.6%, May +0.5%, June +0.2%.
- Vehicle sales have been the driver of consumer spending, and might be peaking. March was +4.2%, April +1.0%, May +1.0%, June -0.2%.
Now for the bad news. Auto sales have been driven by subprime lending (see the evidence here), a typical sign of a boom nearing its end as companies exhaust their usual customers. Even the New York Times has noticed; they point to one factor that might bring a hard end to this cycle:
In many cases, the examination by The Times found, borrowers ended up shouldering loans that far exceeded the resale value of the car. A reason for that disparity is that some borrowers still owe money on cars that they are trading in when they purchase a new one. That debt is then rolled over into the new loan.
Bloomberg reported that the average loan-to-value ratio on subprime auto loans was 114.5%. Fast Company explains another reason why this cycle might end badly:
According to the National Automobile Dealers Association, the average American spends around $30,000 on a new car or light truck. In contrast, Interest.com’s 2013 Car Affordability Study says that the average American can only afford to spend $20,806 on a car.
What comes next?
Predicting the future of the large and unimaginably complex US economy — embedded in the giant world economy — is difficult in normal times. During these extraordinary times, with monetary policy on a scale never before tried, accurate predictions might prove impossible.
But a failure of the economic engines to ignite now (after years of dashed hopes) might have unusual consequences. As Michael Hartnett (Chief Strategist, Bank of America Merrill Lynch) wrote on 12 September 2013 (red emphasis added):
Significant monetary stimulus, the end of fiscal austerity, a booming housing market, a cheap dollar, record corporate cash balances — if the US economy does not significantly accelerate in the coming quarters, it never will. We assume it will…”
Years of massive fiscal and monetary stimulus have given a healthy flush to the US economy. But the stimulus is fading as the budget deficit shrinks and the Fed slowly but steadily normalizes monetary policy (with QE winding down by October and the first interest rate in mid-2015). Now we need normal growth, but we might not get it. But few or no economists expect a recession in the near future (but nobody expected GDP to fall in Q1).
And the longer-term prospect might be challenging, as described in these posts:
- What can we expect from the US economy in 2014?, 21 February 2014
- Status report on the US economy: stand by for the boom!, 24 April 2014
- The dilemma of the US economy: can’t take off & too close to the brink, 9 July 2014
- Has America’s economy entered the “coffin corner”?, 10 July 2014
- The next industrial revolution starts. Beware the Pied Pipers who lull us into passivity., 8 July 2014