Since the end of the "Great Recession" and the start of a recovery, the U.S. economy has gone through two distinct phases, with the latter being the better, and expectations are things will continue to improve.
That was the overall message on Thursday in a State of Freight webinar hosted by the economic and transportation forecasting firm FTR and economy expert Bill Witte.
The first period, he said, was mid-2009 through mid 2013, with the second being mid-2013 through the third quarter of last year, which is the most current period for which data is available.
“If you average the whole [first phase] out, what you had was a period of a depressing pattern of steady but slow growth," he said. "The gross domestic product was growing at about 2% … in the labor market employment was picking up slowly, but it was averaging between 130,000 and 160,000 [new jobs added] per month,” he said.
Since mid-2013, Witte said, the economy has clearly stepped up from its previous pattern.
“The five quarters since mid-2013 has been averaging growth of over 3%, and that is even with the one aberration in the first quarter of 2014," when severe weather caused the U.S. economy to contract at a 2.9% annual pace.
"The other four quarters of this recent recovery period have all been above 3% to above 4%” growth, he said.
He noted employment growth has also picked up and has been accelerating, with an average for the past five quarters of 210,000 jobs per month, a step up from the early recovery period. Recently it's been doing even better, averaging close to 240,000 per month.
The unemployment rate has continued to decline, and not just due to the labor force participation rate dropping as people leave the job market, which appears to have slowed dramatically.
“If you compare the early recovery to the recent recovery, the acceleration has been due to roughly equal parts … a better contribution from personal consumption — higher recently than it was — business investment being the same, and government spending shifting from a drag on the economy to a very small positive …. [However], the recent recovery has been hampered by a recent contribution in the decrease from housing. Housing has been pretty flat over the past year,” Witte said.
In other words if you look at these four contributions to the economy as four cylinders in a vehicle’s engine, then in Witte’s view, “three of them are firing while one is sputtering at best.”
Not great, but not too bad when you consider the severity of the recession and how close the country came to economic collapse.
And as for the future, Witte sees things even brighter.
“What I think is going to happen is this year is going to see a further acceleration, especially in the first half of 2015. So we moved up a step over the past year from the new normal, sub normal period early in the recovery, and I think we are moving up another step during 2015, and that’s accompanied by continued strength in the labor market,” he said.
He pointed to what he described as solid job growth and is forecasting it will be better than what was seen in 2014, along with a continuing decline in the unemployment rate, although less rapid than what we have been seeing.
Beyond 2015 Witte is forecasting that things will decelerate, but that’s not cause for alarm, he said. Rather it only means the economy will be getting closer to full potential and full employment.
Adding to his optimism is his prediction that the sputtering one of those four economic cylinders, housing, will be firing better, with continued improvements in the three other cylinders.
“I see 2015 driven by a further step-up in the consumption and improvement in the housing sector … and the government sector continuing to move toward positive contribution, with business investment still contributing but not as strongly as what we have seen over the last year,” Witte said.
The main reason he believes housing will increase is due to growth in the population and the number of households in the country.
More specifically, Witte is forecasting personal consumption will increase from a 2.5% rate to about 3.2% this year. He sees housing, which grew the last five quarters, increasing 8% in 2015. Government spending is also projected to increase, from just 0.3% in the last five quarters to a growth rate of 1.2%.
The only downside he sees is that business investment will slow down, yet still grow, falling from a 7.2% growth pace to one of 5.3%.
Witte also touched on a couple of other areas while peering into his crystal ball, including the Federal Reserve and talk recently that it will increase short term interest rates from near 0% currently.
He expects a hike to 1% by the end of 2015 and 2.5% by end of 2016. That shift in policy, he said, “does not have huge implications for the economy, but could cause significant problems in financial markets and could in turn effect the economy." He didn’t seem overly concerned that would happen, since it was not accounted for in economic models he made for his forecasts.
He also forecast oil prices will move up slightly from their early year level of below $50 per barrel to $70 by the end of 2015 and $78 by the end of 2016, though he half jokingly said “he wouldn’t stake his reputation on this” noting all of the many factors that can effect oil prices.
Finally, he touched on the freight implications of what he expected in the overall economy, again going back to those four key economic cylinders, but instead broke them down into just two areas, goods versus services, which Witte said presents an interesting picture, one that could impact trucking.
“The pickup from the early recovery…was largely due to a pickup in goods producing sectors….but looking at the change from the recent recovery to this year, my model shows most of the action on the upside is going to come from services,” he said.
“Goods are still going to be contributing, but not much more than they have over the last year. I think the overall economy will be doing better in terms of the freight that’s generated. It might not be such a dramatic change, but it will be positive from what we have been seeing over the last year or year and a half.”