Road Warrior

State of the General Economy, Part 2

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In the last article we discussed the status of some the leading economic indicators that predict where the economy is headed three to six months into the future. The leading economic index (LEI) and the purchasing manager index (PMI) are both trending in a positive direction, which bodes well for 2014. Gross domestic product (GDP) growth rate increased in the latter part of 2013. It will be interesting to see if the rate of economic growth can sustain, particularly with the Federal Reserve slowly tapering stimulus.

Now let’s examine some additional economic indicators. Housing starts are a key component of the U.S. economy. Ideally, 1.1 million housing starts annually is a good solid number. The good news is that housing starts are approximately 1.0 million, the highest since the housing and economy crash of 2007. Pay attention to the 10-year treasury rate, which recently exceeded 3.0%, since home mortgage rates sometimes follow this variable. As the Federal Reserve continues to taper economic stimulus, the 10-year treasury rate may slowly move upward, stalling out the housing rebound. With one in seven jobs directly or indirectly tied to housing, this is a metric that we need to watch closely.

In many rural areas, a renaissance of manufacturing is occurring, tied to energy and agriculture. Factory utilization has been in the high 70s, which is just below the ideal metric of 80%. It will be important to note whether factories are going full steam ahead just producing inventory, or whether these goods are being sold. Numbers suggest inventory buildups over the fourth quarter of 2013 were extremely high.

Unemployment rate is another metric used to gauge the health of the economy. At the start of 2013, the unemployment rate was 7.9%, and it declined to 6.7% late in the year. Even when we consider the U-6 rate, which includes people who are underemployed and who have given up in the workforce, the rate has dropped from 14.4% in January to 13.1% in December. Watch the unemployment rate closely because a rate below 6.5% could represent possible wage inflation and a rise of interest rates by the Federal Reserve.

One sign of slowdown of the global economy is copper price per pound. When the price of copper is down over 50¢ per pound in 12 months, this is a sign of a slowdown. Copper price is a global lead economic indicator since copper is a component of many goods, and thus, it is a bellwether of change.

To summarize, the U.S. economy is a mixed bag with some indicators that are quite positive, while others are less than stellar. Will 2014 follow the economic trend of the three previous years, with a strong first quarter followed by a midyear slowdown? Only time will tell!

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What's Road Warrior?

Dave Kohl is an ag economist specializing in business management and ag finance. He can be reached at sullylab@vt.edu.

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