Where are we in the economic cycle?
After a number of years of stall speed growth, the US economy seems to be breaking out, even as the Fed has turned toward a tightening bias. As this cycle continues, we should not underestimate the ability of the US economy to continue moving forward. But we still need to ask where we are in the economic cycle to gauge how to react. After 5 years of recovery and expansion, I tend to think we are nearer the end of the cycle than the beginning. Some thoughts below
We have a lot of data points coming out showing a decent recovery. Today, we saw new home sales at the highest level since May 2008, Case-Shiller was up over 10% year-over-year and The Conference Board’s consumer confidence figure recorded its highest level since January 2008. All of these figures come on the back of decent and improving jobs and jobless claims numbers in recent weeks. There is no doubt that the US economy is improving, but by how much and is the growth accelerating?
Last month I wrote the following: “I am still pointing to Q3 2013’s 4.1% as a high water mark for growth in the US. And remember that this was followed by a 2.6% number for Q4. That’s well over 3% for one half year, due in large part to inventories.
“Even if you get 3.5% for Q2, the average with Q1 at –0.7% is well below 2% growth, the number I am calling trend growth in the US. In fact, if the US economy grows 3% for the rest of the year, that gets you to about 2% real GDP growth for 2014, much lower than the 2013 second-half trend.”
I think this logic still holds a month later. I am hearing reports that Q1 GDP may even be revised down to –2.0% because of healthcare spending adjustments. So full year 2014 growth is not going to be much above 2% if it is above 2% at all. But the numbers do indicate 3-4% growth for Q2 and potentially for Q3 as well.
Moreover, in the US, we have seen nowhere near the level of new home sales that we saw during all cyclical upturns since the 1970s except in the 1990s. New home sales are still at recessionary levels despite the 6-year highs. Add in the potential for a pickup in non-residential capital expenditure and you have the makings of a robust continued expansion.
This recovery has surprised again and again in its ability to overcome an enormous fiscal drag, the highest since the Eisenhower years, and weak wage growth in the face of consumer deleveraging. So while I consistently note the serious secular headwinds from household sector balance sheets, I also am optimistic about the cyclical robustness in the US growth trajectory.
What upsets this apple cart is a pullback in spending due to weak wage growth or due to job losses as inventories rise. Neither of these catalysts is on the horizon. Nevertheless, given the lack of wage growth, it’s hard to believe we are going to get 3-4% growth for more than a couple of quarters. I still see 2-ish% growth as the trend for 2014 and probably 2015.
I believe we have already seen the peak of growth in 2013. I also believe that the Fed’s tightening bias, the cyclical low in jobless claims, the 6-year high in consumer confidence, the record low VIX and a host of other cyclical data points are contrary indicators, meaning they cannot all go much higher on a sustained basis.
Looking at the jobless claims series alone, with the average at just over 310,000 per week, we have been bouncing around this range for a good 6-9 months. We hit the present level at the end of September. Claims spiked afterwards, before trending down again to the 310,000 level.
When we first hit this level last year I wrote: “While jobless claims can fall further still, I believe they are unlikely to fall much further from here. As this time series does track the change in GDP growth inversely quite well, it suggests that US GDP growth will decline from here…
“Given this, we should expect the change in claims to mean-revert and GDP growth to slow. This is the mirror image of the data signals we saw in January 2009, when jobless claims were going to stratospheric levels. None of this says recession, I should note. What I am talking about is a peak in growth.”
Jobless claims are not going to go much lower. If they go higher from here, GDP growth will slow. And they will go higher at some point in the near future – perhaps not on a sustained basis, but long enough to keep us in the 2% growth range given the lack of wage growth.
I still say, we saw the peak in growth in 2013 and that the cycle is closer to being over than beginning. But we are not anywhere near recession at this point. The US economy looks better today than it did when the year began.