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Elliot Eisenberg, Ph.D.
GraphsandLaughs, LLC
March 2016
Despite all the news to the contrary, the US economy is in pretty good shape, better than the financial pundits think. Sure, the stock market has taken a battering of late, exploration and production activity in the oil patch has been declining, and exports are performing poorly, but the rest of the economy is fine. The service sector continues to grow nicely and construction activity continues to increase. Let’s take a closer look at the facts.
The recent tumble in equity prices has nothing to do with a slowing economy and is not the precursor of a recession. Rather, the declines are the result of three quite independent factors. First, as the Fed raises interest rates, the value of financial assets must decline. Remember, the Fed initially lowered rates to boost asset prices and stimulate spending. As this process slowly unwinds, the value of equities must decline. Second, corporate profits have been flat for several quarters, and third, even at today’s somewhat lower equity values, P/E ratios remain high by historic standards.
As for exports, the US is much less dependent on them than most nations. Exports of goods to China total less than one percent of GDP, while exports of goods to Europe are about 1.5% of GDP. While exports of services such as movies, music and intellectual property add to these totals, they do not vary much with economic conditions. As a result, while a 10% decline in exports certainly hurts manufacturers and their employees and reduces GDP by about 0.2%, it is far from catastrophic in an economy growing by a healthy 2.5%.
Regarding falling oil and gas prices, the benefits to the economy are just beginning. Until now, the price declines have resulted in large cutbacks in exploration and production (E&P) activity, as well as related manufacturing, construction and oil services activity that supports oil and gas E&P. The key here is that cheaper energy prices have boosted household incomes by about $130 billion or $1,000/household. While to date most of this money has been socked away, I expect that to change and to see increased consumer spending this year and next as households perceive the recent price declines as somewhat permanent.
Most importantly, the rest of the economy is already doing well. Unemployment is at 4.9% and will decline further as the year progresses, and at 4.9%, unemployment is already at one of the lowest levels in decades. Moreover, home sales and prices are up, as is loan demand. In addition, tight labor markets are finally leading to sizable increases in hourly earnings, which will boost household spending further, and inflation, which has been completely dormant for several years, appears to be rising. This is a particularly welcome development given that Japan and Europe continue to fight deflation.
Lastly, services, which account for roughly 84% of GDP, and construction activity, which accounts for about 6% of GDP, both of which are almost entirely domestically focused, are in fine shape and growing nicely. During the past 12 months, construction activity increased by 10.4% and services grew by 3%. In short, the parts of the economy that are inwardly-centered are doing well, and the negative impacts of softer growth from abroad are not nearly strong enough to derail our economy. As for the upcoming election, let’s fervently hope that the threats to dramatically raise taxes or increase the deficit do not come to pass.
Elliot Eisenberg will be presenting at Realcomp's Tools of the Trade REALTOR® Expo on April 28, 2016 at the Ford Community & Performing Arts Center in Dearborn, MI. Attend this fast-paced economic "STEADY GROWTH, NO RECESSION" presentation and learn not only how GDP will perform, but why, along with insights into household formation, anticipated house price increases, and credit conditions. Click here for more information on Realcomp's Tools of the Trade Expo.
Elliot Eisenberg, Ph.D. is President of GraphsandLaughs, LLC and can be reached at Elliot@graphsandlaughs.net. His daily 70 word economics and policy blog can be seen at www.econ70.com. You can subscribe to have the blog delivered directly to your email by visiting the website or by texting the word “BOWTIE” to 22828.
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