It is the beginning of July and days are becoming shorter as another year flies by. Let’s step back and take a look at what is happening in the domestic and global economy as we set our sights on Fourth of July celebrations with picnics, fireworks, parades and, in some cases, some steaks and barley utilization.
First, the U.S. economy is something of a mystery. First quarter gross domestic product (GDP) growth was negative 2.9%. Dusting off the old economics textbook, you will find two quarters of negative GDP growth indicated a recession, which may raise eyebrows and concern. However, the lead economic index (LEI) and its diffusion index, foretellers of the direction of the economy, indicate no concern as both are very positive. The purchasing manager index (PMI), another lead indicator, is in economic growth territory above 50. These indicators suggest solid economic growth should occur in the summer and fall quarters.
Housing starts, the bedrock of both employment and the U.S. economy, are above 1 million annually, but are still below the 1.1 million to 1.5 million metric indicative of sustained economic growth. A headwind to housing starts is the large amount of student debt – $1.1 trillion – which is causing young people to postpone housing purchases up to a decade to actually meet those financial obligations.
The unemployment rate as reported on the nightly news is 6.3%. However, the rest of the story finds this metric is really 12.2% when discouraged workers and those underemployed are included, referred to as U-6 workers. Workers are needed, but the skill base of available workers is mismatched. In some cases the incentive to work is lacking also.
Finally, interest rates should remain low because inflation is benign with a struggling employment and economic growth picture, which is good news for those who have variable rates on operating loans.
Globally, the economic slowdown of emerging nations along with unrest in Ukraine, and now Iraq, bears watching. Remember, spikes in oil prices have been a major contributor to every recession since 1969.
Overall, both the domestic and global economies are muddling along, uninspired by central bank stimulus both here in United States and abroad.