Could the US economy accelerate higher in 2014
I have been saying for some time now that I believe peak growth in this US business cycle was Q3 2013. Nevertheless, I want to explore the possibility that growth will accelerate from here, something that could keep stock prices and other risk asset prices elevated. A few quick thoughts below
First, today’s jobless claims number at 304,000 supports the concept that the US jobs market has begun to pick up. What we should be looking for here are material downward shifts in the seasonally adjusted and unadjusted average initial claims. I tend to focus on the unadjusted data now to avoid seasonality problems. And what we see now is an unadjusted 4-week average of 295,000 claims. This is lower than last year’s average of 318,000/ The difference is only 23,000 but it is large enough to say that the numbers are improving. And they are better than I anticipated.
While the numbers have become better, the year-over-year comparisons are going to be harder to match by May. So we should look to see where this comparison is then. If it is still in the +20,000 range, the jobless claims data series would be sending a signal that is supportive of continued growth in the US.
Second, the industrial production numbers are also indicative of an improved economy. Industrial production increased 0.7% in March and that puts capacity utilization at 79.7%, which is a scant 0.9% below the average since 1972. The numbers are 3.8% above year ago levels. All of this says that industrial production continues to rise and that there is no break on the horizon.
Housing is a little more mixed, with housing starts at still depressed levels of an annualized 946,000. 1.2-1.5 million would be a normal number. So this tells you there is a lot more upside left in the housing sector. In terms of existing homes, where the bulk of demand is, the numbers show indications of excess – but not just for homes for sale. For example, asking prices are at a five-year high by one measure and up 10% year-on-year by another. That’s not crazy high but it shows housing is back. Still, educated people are leaving the cities because of high housing costs. That’s a trend that says house prices have become elevated.
On the other hand, an analysis for The New York Times by Zillow found 90 cities with median rent more than 30% of median gross income. And this is because the $1 trillion in student debt is crushing the homeowner dreams of a whole generational cohort. There is some indication that this has driven up house prices for sale in certain previously depressed markets in the west. Cash institutional buyers have been very active in this buy-to-let market. And apparently, they are now exiting the market because it has become overbought.
Let’s watch where housing goes. Right now though it should be adding to GDP growth. There is no indication it is about to fall.
Fourth, if you look at capital expenditure, there are reasons to believe it will accelerate in 2014. And given that the job market is becoming increasingly tight, perhaps there is enough confidence that consumer spending will stay elevated that companies are willing to make capital expenditures in anticipation of future demand growth. For me this is the big if for 2014. If we get a pickup here, then we should believe it would also indicate business confidence and we could see it translate into more jobs or higher wages as well.
Now, I am not a true believer in the thesis that growth is poised to accelerate beyond the levels we saw in Q3 2013. But I think there is a case to be made for growth picking up from the weather-slowed levels of January and February. And there is a case to be made for a pickup in capex that could translate into higher growth.
Overall, the picture in the US looks good right now. There is nothing that indicates an imminent recession. It is the opposite; if we see any surprises at the moment I think they are likely to be to the upside.