Coming into 2011, economists were fixated on the inadequacy of demand for labor, housing and commercial real estate, and they continued to search for indicators of the credit market thawing. Conventional wisdom says until banks begin lending more aggressively, the growth of the U.S. economy will continue to be lackluster and the recovery that began in mid-2009 will remain fragile.
With the first quarter now over, many of the principal economic concerns coming into the year have been addressed. For instance, demand is building on many levels. Retail sales are up 7.1 percent on a year-over-year basis through March. Moody’s
Economy.com predicts overall consumption will expand 3.3 percent in 2011, with motor vehicle sales rising 13.6 percent. Fixed investment is expected to rise nearly 9.6 percent this year, with investment in equipment up 10.3 percent.
Foreign demand also has been strong. Despite a sea of economic and political troubles in countries such as Portugal, Greece, Ireland, Egypt and Afghanistan, the world is increasingly looking to America for output of goods. Since January 2010, U.S. exports are up 6.9 percent on a seasonally adjusted basis (and 18.9 percent on a non-seasonally adjusted basis), with sales to India, China and Brazil up 42.2 percent, 17.3 percent, and 7.4 percent, respectively.
Employment growth has been tenuous. After increasing by 244,000 jobs in April, nonfarm payroll employment rose by a dismal 54,000 jobs in May, according to the Bureau of Labor Statistics (
BLS). Meanwhile, the nation’s unemployment ticked up to 9.1 percent.
The number of private sector jobs expanded by 268,000 in April, marking the best monthly performance since February 2006. BLS has observed job gains in professional and business services, health care, leisure and hospitality, and mining, among other industries. Employment in the retail sector rose by 57,000 jobs in April, with department stores adding 27,000 of those jobs.
In other words, consumer spending continues to help drive economic expansion despite all the negative news households hear on a daily basis. However, the number of long-term unemployed (those jobless for 27 weeks or more) totaled 5.8 million in April, and their share of the unemployed continues to be elevated at 43.4 percent.
Positive economic news has allowed equity markets to bounce higher, too. At the beginning of the year, the Dow Jones Industrial Average stood at 11,577. As of early June, the Dow stood at more than 12,190. That performance is remarkable given the headwinds that have emerged in recent months, including the tragedy in Japan, ongoing sovereign debt issues in Europe, civil war in Libya and oil prices hovering around $100 a barrel.
Inflationary Pressures
Recent core inflation data (all components except food and energy) indicate inflation remains mild. Through February, core inflation was running at a 0.2 percent monthly rate and 1.1 percent annual rate despite increases in medical care expenses (up 0.4 percent for the month and 2.9 percent year over year).
That said, inflationary buzzards have begun to circle. A number of factors support the theory that at some point later this year or in 2012, the U.S. Federal Reserve will find it necessary to constrain inflationary pressures by reducing money supply growth and increasing short-term rates.
While most of the focus has been on food and energy prices, commodity prices have been marching higher. For instance, steel and iron producer prices are up 16.8 percent through February on a year-over-year basis. Gold stands at roughly $1,500 a troy ounce, up roughly 30 percent from a year ago. Cotton prices recently set a record at well above $2 a pound. Certain non-commodity prices also have been drifting higher, including airline fares, which are up 12.3 percent on a year-over-year basis through February.
Import prices also are up, with a growing number of nations reporting widening inflationary issues. In India, inflation is up 18.9 percent year-to-date through February. In China, the corresponding statistic is 10 percent. In Mexico, consumer prices are up 10.8 percent through March. Presumably, this inflation will continue to be exported to America in the form of higher priced clothing, food and household items.
Thus far, many prices have been constrained due to productivity gains and the inability of producers to pass along input price increases (including those associated with oil prices) to consumers. But with the economy steadily improving, consumers are likely to face rising prices for many goods and services, and that ultimately will prompt the Federal Reserve to begin to meaningfully chip away at low interest rates.
Transition Toward a Private Construction Recovery
Since peaking in October 2008, the value of nonresidential construction put-in-place has declined 26 percent, according to the
U.S. Census Bureau. Any signs of recovery in construction spending largely have been in publicly financed segments, such as highways and streets, conservation and development, and water supply. Privately financed activities have continued to tumble with the exception of data centers and energy-related investment.
With state and local government budgets in disarray and with the impact of federal stimulus spending winding down, the expectation is the pending recovery will be led by privately financed activities. Unfortunately, the construction of office space, hotels and shopping centers are not yet positioned for recovery. Vacancy rates in these categories remain too high to be associated with a significant acceleration in construction activity.
Rising materials prices also represent a headwind to construction recovery. For instance, in April, the Architecture Billings Index fell almost three points following several months of relatively good news, perhaps because rising and volatile materials prices are beginning to have a chilling effect on private development. Though Associated Builders and Contractors’
Construction Backlog Indicator continues to show gradual improvement in backlog among firms, progress remains slow. The bottom line: Nonresidential construction should be fairly flat for the balance of 2011.