Your economist here, Alan MacEachin, examining the U.S. economy through a magnifying glass and serving a dish of economic information you can use and impress your friends with.
How would I describe the U.S. economy through the first eight months of 2013?
The economy right now is like the outdoors a few hours after a passing thunderstorm. The sun is coming out, the ground is drying, and the birds are chirping again. At the same time, the sunlight reveals fallen tree limbs and a few remnant dark clouds cautioning that threats still linger.
Where the sun is shining
Is your vehicle one of the over 8 million purchased during the first eight months of 2013? Decent chance it is. Auto sales are having their best year so far since before 2007. I expect this trend to continue as consumers replace their aging vehicles and take advantage of historically low auto rates. If you’re considering buying or refinancing, now would be a great time.
The jobs market is improving – albeit slowly – and is in far better shape than it was just a year ago. While the economy continues to add jobs, I’m closely paying attention to one important statistic: full-time positions. An increasing number of the added jobs this year have been either part-time or in low-paying industries. The economy will have much better traction when more full-time jobs are added and unemployment falls below 7%.
On the housing front, home sales continue to climb, and prices are up significantly over last year. To help stimulate the economy, the Fed has been buying $85 billion a month in long-term Treasury bonds and mortgage-backed securities to keep long-term interest rates low and encourage the purchase of homes, cars and business equipment. This is one of the reasons rates on auto loans and mortgages are still near historically low levels.
As the economy improves, the Fed will have to exit this stimulus program as keeping it in place for too long would result in higher inflation. In fact, I expect the Fed to reduce its securities purchases as early as this month. I believe this will happen in small increments and at a gradual pace so that rates don’t rise too quickly. Keep this in mind if you’re on the fence about buying a home within the next year.
Where clouds remain
Gross domestic product (GDP) – a measure of our economy’s total output of goods and services – grew at a modest pace of 2.5% during the second quarter (April through June). While consumer optimism is close to its highest levels in over seven years, slower-than-expected retail sales coupled with the onset of sequester-related spending cuts restricted stronger GDP growth.
Excluding food and energy, the price index for consumer spending nudged up only 0.1% in July. If gas prices rise or remain close to $4 per gallon, discretionary spending will get squeezed and could impact consumer spending – which would slow economic growth overall.
Reduced federal government spending and higher taxes could also drag against economic growth later this year, and the potential threat of a government shutdown could compound this problem. Political gridlock causes uncertainty for both businesses and consumers and can reduce their appetite for spending and investment. I’ll be watching this closely.
The economic forecast looks bright
Ultimately, the economy’s dark clouds are beginning to disappear and the sky is clearing every day.
Economic growth should accelerate later this year as the economy gradually builds strength and the effects of sequestration and other government-related spending cuts wane. As conditions improve, more businesses will look to invest and hire full-time employees. This will lead to growing incomes, increased confidence, and more consumer spending.
What’s your personal economic outlook for the rest of 2013?