The U.S. Economy. . . Stuck in Neutral

Abstract

From all indications, the US economy appears to be stuck in neutral. Ray Perryman of the Perryman Group summed it up nicely with a comment attached to his forecasts, which cites an air of caution. That caution can be attributed to a whole host of factors including: Concerns over Europe, the looming domestic fiscal cliff, tension in oil-producing regions, a marked slowdown in the Chinese economy, and, of course, the upcoming election. The difficulty with this assessment is that there appears to be little relief in sight or even across an extended view over the horizon. The Consensus Outlook calls for real GDP to grow at a 1.7% rate over the next four quarters. Current PDI and PCE are expected to grow 2.4% and 3.3%, respectively, over the same time frame. A notable point in the forecast is that the Consensus does not have the nation's unemployment rate declining to under 8% until next fall.

PARTICIPANTS | Beacon Economics = LA, California; Conf Board = Conference Board, New York, New York; Global Insight = Global Insight, Eddystone, Pennsylvania; GSU - EFC = Georgia State University, Economic Forecasting Center, Atlanta, Georgia; Moody's Economy = Moody's Economy, com, Westchester, Pennsylvania; Mortgage = Mortgage Bankers Association, Washington, D. C; NAM = National Association of Manufacturers, Washington, D. C; Northern Tr = Northern Trust Company, Chicago, Illinois; Perryman Gp = The Perryman Group, Waco, Texas; Royal Bank of Canada, Canada; S&P = Standard & Poor's, New York, New York; U.S. Bank = Minneapolis, Minnesota; US Chamber = U.S. Chamber of Commerce, Washington, D. C; Wells Fargo = Wells Fargo Bank, San Francisco, California.

From all indications (both quantitative such as consensus economic variables included in the forecast tables and qualitative perspectives such as surveys of consumer confidence and business leader's confidence), the U.S. economy appears to be stuck in neutral. Nowhere in the attached tables of forecasts is there any indication of a return to a recessionary state. Nonetheless, spirit of noncommittal prevails. So, the good news may be that we are not backsliding into a downturn yet; the bad news appears to be that we definitely are not going to be growing much anytime soon.

Ray Perryman of the Perryman Group summed it up nicely with a comment attached to his forecasts, which cites an air of caution. That caution can be attributed to a whole host of factors including: Concerns over Europe, the looming domestic fiscal cliff, tension in oil-producing regions, a marked slowdown in the Chinese economy, and, of course, the upcoming election. The difficulty with this assessment is that there appears to be little relief in sight or even across an extended view over the horizon.

Rajeev Dhawan, Director of the Economic Forecasting Center at Georgia State University's J. Mack Robinson College of Business calls it the "Anticipation Effect." In his most recent press announcement, Dhawan essentially said that both consumer and business confidence are hurting. With that said, if firms are unwilling to take any long-term risks, then most certainly the impact of it will be significant as to the direction of the economy. In addition, if consumers are tending toward a more cautious assessment, then any unnecessary purchases such as the big ticket items of housing and autos will be postponed, contributing to a significant negative ripple effect.

Keith Hembre, Chief Economist at U.S. Bank, provided a valuable insight in his recent work when he made the point that the weaker growth trend inevitably leaves the U.S. economy more susceptible to shocks arising from jolts abroad and to domestic policy miscues at home.

The Consensus Outlook calls for real GDP to grow at a 1.7% rate over the next four quarters. Current PDI and PCE are expected to grow 2.4% and 3.3%, respectively, over the same time frame. A notable point in the forecast is that the Consensus does not have the nation's unemployment rate declining to under 8% until next fall.

THE CONSUMER

Household expenditures account for approximately 70% of all economic activity. As such, the active participation of the average family is required for long-term economic growth. As previously mentioned, consumers are becoming more skeptical relative to the direction of the economy. Bombarded by high gas prices, stubborn unemployment numbers, a political standoff in Washington, and expected higherfood prices,theirovertpessimismcanbeascertained. New auto sales are projected to increase just short of 3% and housing starts are forecast to improve somewhat. Both consumer inflation measures are expected to remain below 2%.

THE FIRM

Despite decent earnings reports and a more-than-ample supply of reasonably priced labor, firms are expected to ratchet down into a wait-and-see mode. The Consensus Outlook calls for nonresidential fixed investment to grow under 4%. While this by itself is not a bad number, it is considerably under the normal cyclical recovery expectations from the past. Capacity utilization is projected to be essentially flat.

THE FED AND CREDIT

A recent analysis of the economy offered an astute point that stabilization policies are nonexistent. The likelihood of any decisive measure emanating from the domain of fiscal policy before the first week in November is a long shot. Tax cuts, stimulus checks, and the like seem dead before the idea has even been uttered. Given the current fiscal cliff that awaits, Congress and the political deadlock, it is hard to imagine any substantive changes being realized soon. Thus the baton is passed to the Fed. Here with inflationary pressures building, it is unlikely the Fed has much room to maneuver at all. And so it seems that indeed the U.S. economy is stuck in neutral. For how long you may ask? Perhaps it will become more clear during the next quarter's Economic Consensus Outlook. ([email protected])