By Tim J. Randall
That phrase about blind squirrels and acorns is right after all! As I referenced in the opening remarks to this column in the last issue, economists are right about as often as they are wrong. Yet, enough of my forecasts emerged correct that I can confidently say my accuracy falls between the perspicacity of Jimmy the Greek and a Magic 8 Ball. Let’s see what the economy had in store over the last six weeks.
The narrative of the end of June and July was the Bernanke balloon; he popped the bond market and spoiled the party, sending the 10-year note soaring past the 225 basis point handle and even approaching the 270 figure. The reality is the Federal Reserve (FED) chairman’s so called hawkish comments on reducing bond buying purchases from $85 billion, is still predicated on the economy breaking out of its slow growth pattern.
On the labor market front, the national trend continued with a strong June jobs report; 195,000 added to the payrolls, and upward revisions for the previous two months. This translated to the national unemployment rate holding steady at 7.6 percent (actually a good sign as more individuals were counted looking for work), and 7.4 percent and 6.2 percent in Arizona and Metropolitan Phoenix, respectively.
The picture of overall economic growth is still flat with real gross domestic product (GDP) growth nationally of 1.8 percent, according to late June revisions. Over the past five quarters, GDP has recorded 2 percent or lower growth in four of those quarters…ouch! Wage and income growth cannot occur in substantive amounts unless GDP picks up steam.
The Phoenix economy did quite well in comparison, with the fastest gross metropolitan product growth rate (think GDP for metro cities) of any of the largest 100 markets. This is a welcome sign and a trend that should continue, with a housing rebound, along with service and manufacturing sectors.
Interest rates were the big story for the end of the second quarter and the start of the third. Jumps in the 10-year Treasury boosted mortgage rates by 50 to 75 basis points – a clamp on the refinancing market and a slowdown in new home mortgage applications. While rates need to normalize, the exertion of less affordable mortgages will affect the housing side of the recovery.
As fall approaches, the second quarter earnings picture will have completed a three-month cycle that will not produce stellar corporate results. Earnings growth has slowed over the past six to nine months, and this trend will continue. Despite the FED’s Q-finity and zero interest rate agenda over the last several years, profits have been a real driver of this consistent albeit sluggish recovery. As the profit cycle has already peaked, look for continued slow growth in the economic outlook but no more than 2 percent, again, in GDP pace over the next three months.
Tangentially, the “Key Executive Indicator” in last month’s review was the Institute for Supply Chain Management’s manufacturing and non-manufacturing surveys value. The manufacturing index did indeed drop below 50 in June, only to pop its head back over in July. The 50 reading is the demarcation between expansion and contraction. The non-manufacturing index also drifted lower; closer to 50. Again, warning signs.
A positive for business may be the one-year delay in the implementation of the Affordable Care Act. While business does not typically respond to short-term incentives, this administration action may provide the welcome relief for companies looking to hire or expand.
On the issue of the 10-year note, again, do not be surprised if the valuation does an Icarus and moves back toward 225 basis points. The FED chairman must navigate the fine line between restoring normal rate function and keeping borrowing costs low for business, consumers and government. If rates increase too quickly, the result may be an even more effete economy that withers on the vine; a scenario Chairman Ben does not want as he ponders monetary policy impacts.
The Phoenix market should continue to have stronger comparative growth to other metro regions and the national economy, both in GDP and unemployment. Expect the Phoenix unemployment rate to touch six by the next issue of Commercial Executive Magazine. This positive economic story is a testament to solid market fundamentals and pro-growth legislative reforms such as the Data Center Coalition tax package passage in June.
This month’s “Key Executive Indicator” is in fact a statistic. According to The National Bureau of Economic Research (NBER), over the period from the mid-1940s until 2007, the average recession lasted 10 months, while the average expansion lasted 57 months. The NBER cited the end of the Great Recession in June of 2009, which puts the economy potentially 12 to 18 months away from a possible recession or slowdown that will affect hiring again.
An important figure to watch over the next couple of months is the order for durable goods; the May value saw a 3.6 percent increase, matching April’s rise, and two of the better data points in the last year. Durable goods represent the longer term purchases for business and consumers in the economic space, and durable goods spending translates into manufacturing activity, which portents stronger economic growth. If this value continues to remain steady or increase, there is a good chance of avoiding a recession in 2014 and 2015.
In wrapping this second column up, it is should be noted global central bankers and economists will meet in August as they do annually at Jackson Hole, Wyoming. Chairman Bernanke will not attend this year; a personal conflict cited, or the reality of the beginning of the end of his tenure. Take note of the coverage of this symposium, as the dialogue will provide clues to the next FED chairman and any policy changes. I, of course, have aspirations of attending this meeting of luminaries one day; if the Magic 8 Ball ever stops saying “All signs point to no!”