For those of us in the business of looking at charts and graphs about the economy, the last four years have made it hard to stay positive. Watching the recession take down our economic indicators one by one was tough enough, but it was perhaps even more difficult to see many of them start moving in the right direction while jobs remain stuck in neutral. And with businesses finding new efficiencies and technology threatening to replace an ever greater share of the workforce, we have wondered at times whether we’d ever start creating jobs at a rate that makes up any ground. Mix in our fiscal woes, Europe’s teetering, China’s slowdown, and the Middle East’s turmoil, and the future seems totally uncertain.
Into this uncertainty we warmly welcome…economists! Last Thursday, I had the pleasure of attending an executive briefing on the “U.S. Macro and Regional Outlook” put on by top economists from Moody’s Analytics, Mark Zandi and Steve Cochrane. I am happy to report that they who peer into the future have an optimistic outlook about the American economy in the near term and see great signs of life across many U.S. regions. While Mr. Zandi freely admitted that he was on the “optimistic” end of the consensus about where we are headed, I thought he made a convincing case. Or, perhaps, I just wanted to believe. You decide.
The following is a brief recap of the major points at the macro and regional levels.
Here’s the upshot from Mr. Zandi’s discussion of macro trends: The economic recovery is struggling, but will remain intact, and job growth will begin to rapidly accelerate in 2014, causing unemployment to fall back below 6% by 2016. This will happen because:
- The Euro Zone is not going to fall apart. By capitalizing the European Central Bank so heavily, they have basically gone all-in on the EU concept and debt mutualization. Greece may be forced out, but the EU will be more prudent with Italy and Spain.
- The slowdown in emerging markets is temporary, and places like India and Brazil that have over-reacted with policy controls and austerity will loosen up and begin to re-accelerate by 2013. They still have the resources to keep going forward…and will do so quickly.
- American businesses are looking incredibly competitive. We have cleaned up our balance sheets at every level. Prior to the Recession, we were mess. Now, our balance sheets look better than they have since World War II. Businesses and financial institutions are in much better shape.
- Credit is moving again. Households have reduced their debt service levels and are improving their credit quality, and banks are well-capitalized and profitable. Thus…
- Pent-up demand in the consumer and commercial realm will be released. Automobiles, houses, and commercial development (which appears to have bottomed out) are poised to get moving again.
However, threats to recovery certainly remain. Some of the most potent include:
- Failure to react quickly if we go over the fiscal cliff. If we do go over yet fail to resolve it immediately through policymaking, we will have a serious recession. This, says Mr. Zandi, is the greatest threat to an optimistic outlook.
- Businesses are incredibly nervous about the political climate. While job openings are back to almost pre-Recession levels, hiring is flat; businesses aren’t filling openings. If our policymaking institutions fail to provide a stable environment, business investment may slow further.
- Another round of brinksmanship over the debt ceiling, which will need to be raised again in March. Businesses have already shown signs of nervousness over how this will be handled.
- China’s growth rate might have permanently slowed. Productivity gains will be harder to come by going forward; until now, they have gotten them by shifting people from the rural inland to the industrial (and productive) coast. Now that they’ve emptied out the inland regions, they’ll have to make gains the hard way.
If there were two headlines from Steve Cochrane’s discussion of regional trends, they would be 1) The West Is Taking the Lead in Recovery and 2) The Northeast is Being Left Behind. It seems odd to think of the West taking the lead when it has higher unemployment rates and California’s finances are such a mess. However, the West has been adding jobs faster than any other region in 2012 and residential construction permits have been rapidly climbing since mid-2011. Meanwhile, in the Northeast, manufacturing employment growth lags every other region and exports have actually declined over the last year.
Their overall picture for the South looks pretty bright. The over-supply of distressed homes on the market in Florida and Georgia has been massively reduced in 2012 and residential construction permits issued across the South since January 2009 are leading every region except the West. While unemployment remains stalled, the South leads all regions in the job hires rate, and Moody’s expects employment to accelerate rapidly across all major Southern metros in 2013. A strong export sector should continue to help – the South has enjoyed the greatest growth in exports since 2008.
The game-changing impact of shale drilling was also heavily emphasized. While recent income growth has been concentrated in energy centers (see North Dakota’s 30 percent increase since 2007), employment related to oil and gas support has boomed in markets all over country, including the South. According to Mr. Zandi, the vastness of the deposits and the inevitability of continued fracking provide the strongest case for the competitiveness of American manufacturing (and most everything else) in the near and long term.