Economic Review and Outlook: July 2013

Tim J. Randall has a Master of Business and Public Administration and is pursuing a Doctoral degree in Public Policy.
Tim J. Randall has a Master of Business and Public Administration and is pursuing a Doctoral degree in Public Policy.

By Tim J. Randall

“The First Law of Economists: For every economist, there exists an equal and opposite economist. The Second Law of Economists: They’re both wrong!”

No doubt readers have heard a joke about economists such as this, or perhaps like this: “If you laid all the economists in the world end to end, they still wouldn’t reach a conclusion! These witty aphorisms are in many cases true however, they overlook the importance of the economic discipline and what its fact finding and deliberation can provide for business executives.

Welcome readers to Commercial Executive Magazine’s foray into the landscape of economics. This column will provide Valley leaders with a unique insight into the larger trends that are driving the local, state, and national economies. Much of the economics parlance today involves the quantitative aspects, yet it is deciphering the data and making it understandable and useable for the business leader that is critical. This piece is not about rehashing a slew of economic figures that any executive can pull up from the Wall Street Journal or Arizona Republic, rather its purpose is to focus on what that data means for you. By providing a grounded qualitative approach to economics, the reader will develop the perspicacity to make sound and informed decisions in their business transactions. Let’s get started!

Economic Review

The second quarter of 2013 is following the similar slow growth trend that has characterized the recovery both statewide and nationally. Gross Domestic Product (GDP) continues it ponderous pace, less than two percent nationally and statewide. The Unemployment picture also shows ongoing improvement, but at a pace which is far too lethargic to drive long-run demand for Arizona products and services. With the Unemployment Rate at 7.5 percent nationally and at 6.6 percent for Metro Phoenix, income growth which is critical for sustainable economic gains cannot occur. Income gains for the median family must begin to increase concomitant with additions to hours worked and marked improvements in hiring from temporary and part time workers to full time positions.

Much of the unemployment picture at this point can be attributed not to policy uncertainty as the pundits and experts indicate, but rather the certainty that tax and regulatory burdens are increasing the hurdle rate for business owners to engage in profitable transactions. The connection between unemployment, GDP growth, and commercial transactions is a circular one: without income growth consumers will not spend as freely which keeps capital expenditure dollars on the sidelines, leading to slow GDP growth and a relatively static cycle.

While it is true that Corporate America has generated strong earnings growth over the last several years, quarter one of 2013 saw a mixed bag of earnings news with solid earnings per share, but weaker revenues, and poor forward guidance. Business has continued their charge of growing leaner, more efficient, and controlling expenses however, revenues must track higher both domestically and abroad if the economy is to churn ahead above the two percent “Mendoza Line”.

The first half of the year was essentially about consumers and business gauging the effects of higher payroll and income taxes, regulatory costs, and the impact of fiscal policy (think sequester). To this list do not forget the impact of monetary policy and the Federal Reserve (FED). With its emphasis on liquidity the FED is hoping that low interest rates continue to spur consumer demand and housing.

Economic Outlook

As the second quarter ends and the third begins the economy will continue its improvement. Housing is driving the recovery both nationally and statewide with home prices surging at their fastest rate since 2006. While the housing recovery is impressive remember that the gains are off a very low base and prices particularly in places hardest hit during the recession: Phoenix, Las Vegas, and cities in California have a ways to rebound.

Housing though is as much a function of FED policy as it is inherent supply and demand effects. Readers should pay attention to two key information pieces in the third quarter. First, statements from the FED on the continuation of their bond buying program, and second the trajectory of the U.S. Treasury Ten- Year note.

The FED has been buying treasury bonds and mortgage backed securities to the tune of 85 billion per month creating consistent demand for debt which has kept interest rates at historic lows. Any sign however, that the FED will tighten policy will cause the Ten- Year rate to rise appreciably. The number that executives should pay attention to is a 2.25 percent handle on the ten-year. From its holding point of around 175 basis points this would represent a massive decrease in bond valuations and a signal that the economy may be stronger than advertised.

However, the markets need the FED as a necessary player in the equation of growth for the economy, and a surge in treasury rates may only signal that the market is uncertain about FED policy moving forward. These forecasts for a FED pullback in bond buying are erroneous; the FED will be buying bonds and be active in the marketplace until at least the beginning of 2014. Any normalization of interest rates to reflect actual risk premiums would be welcomed however, the FED is not taking away the punch bowl any time soon.

Look for second quarter GDP to remain at below two percent, as the impetus for growth in business investment will decline as companies deal with a slowing revenue picture in the U.S., Europe, and China. As for unemployment the rates for Phoenix and the U.S. will mirror one another, some growth but not at a pace that will drive wage growth higher. Business should be able to continue their control of labor costs as well as commodities and raw materials, as low inflation and weaker global demand keep a lid on prices.

Key Indicator

One of the objectives of this column is to provide executives with tools that may not be readily known or discussed in other media sources. The Ten-Year note is one such example, but another extremely relevant informational piece is the Institute for Supply Chain Management’s manufacturing and non-manufacturing surveys. Published each month the data provide a very telling story about economic conditions. Surveys with values above 50 are expansionary while those below 50 are signs of recession. The last several months have seen these indices move in the low 50’s range. There is a good bet that a below 50 reading could come in the coming quarter!

Finis

Well that was hopefully more engaging and entertaining than your Econ 101 class in College. Information that is useful to business, the entrepreneur, and the policy maker is available if it is explained correctly. This column will look to turn what famous economist Thomas Malthus called the “Dismal Science” into knowledge that can empower your business. I welcome any suggestions from readers on what you would like to see in the piece and what can be explained better. I look forward to our next visit and hope that my conclusions prove to not be a punch line!       

 

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