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What is Happening in the Economy?

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The rainy weather has played havoc in planting and harvesting crops on the East Coast, but it is better than a drought. That being said, let’s examine the global and general economy at the half-way point of 2013.

The U.S. economy is a mixed bag. The leading economic indicators are starting to suggest a slowdown in the economy. The purchasing manager index (PMI) was 49.0 for May, suggesting a contracting economy since it is below 50, but bounced to 50.9 for June, indicating an expanding economy. We will closely observe this metric throughout the remainder of the summer to see if a trend emerges. More concerning is the PMI in Europe and China which have been below 50 for many months now. Europe is in a deep recession with over 20 million people out of work and for the most part, negative gross domestic product (GDP) growth. With China’s manufacturing and consumer products linked to Europe, and U.S. agriculture exports dependent on China, only time will tell how it influences ag commodity prices, oil, and natural gas prices, and then eventually land values in agriculture and rural America.

The one positive point in the U.S. economy has been housing starts. The latest data shows housing starts up 6.8% from April to May. With one in seven jobs connected to the housing sector, this sector is critical to the health of the U.S. economy. A storm cloud on the horizon is the rise in mortgage interest rates in recent months. There is a saying that a 1% increase in interest rates equates to approximately a 200,000 decrease in housing starts, and vice versa.

Unemployment is still stubbornly high. The reported rate is 7.6%, while the real rate including U-3 through U-6 workers is at 13.8%. The labor force participation rate remains low, at 63%. If the labor force participation rate was near normal, the unemployment rate would likely be 11-12%. Factors such as automation, uncertainty about healthcare and mismatched skill sets of potential employees to employers’ needs are long-term systemic issues in the U.S. and global economy.

 

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Sizing up the economy at halftime, the U.S. is probably the strongest of the developed countries of the world. However, it is very dependent on the Federal Reserve stimulus. Watch for continued slowdown in the emerging nations, which is directly linked to agriculture and rural America. Only the second half of the year will tell how this situation plays out, so it will be an interesting summer and fall as we watch the economic tea leaves.

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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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