The United States has the strongest economy in the world, which is both good and bad news, according to Bill Strauss, senior economist and economic advisor at the Federal Reserve Bank of Chicago.
Strauss kicked off the Global Automotive Aftermarket Symposium (GAAS) May 20 with his presentation “Where’s the Economy Headed?”
“The outlook for the U.S. economy is good because it is doing relatively well,” Strauss said to a crowd of about 300 GAAS attendees. “Europe is emerging out of a recession and Asia’s growth has slowed to 7.4 percent in first quarter of 2014. Latin and South America should be doing better with the World Cup and the Summer Olympics on the horizon.
“The U.S. economy has the strongest economy in the world. Last year GDP growth was at 2.6 percent. The largest contributing factor was consumption, which represents two-thirds of our economy. Outside of consumption, all the other sectors were a drag to GDP growth in the first quarter.”
Last year manufacturers had a large build up of inventory, he said. The problem is that they built it but did not sell it. “They need to sell that inventory this year, which will be a headwind to growth this year. Fortunately, the consumer is still out there.”
Strauss examined several key sectors - including home prices, gross domestic product, unemployment and inflation - and their impact on the economy.
The housing sector continues to show a turnaround. “Home prices have begun to rise,” he said. “Real existing home prices fell by 40 percent since 2007, but have begun to rise. Forecasts call for a very gradual recovery in housing. The forecast is for 1.0 million housing starts in 2014. The actual number in 2013 was 929,000 housing starts, which is well below the normal of 1.5 million per year.”
The stock market has recovered from the dark days of the recession, he said.
Strauss forecast that the gross domestic product (GDP) will grow slightly above trend in 2014 and a bit faster in 2015. “In 2014 we expect a 2.4 percent growth and 3.0 percent next year and three percent over the next three years,” he said. “That is above trend but not substantially above trend.”
The business cycle recovery path of the current recovery is restrained compared with past deep recession recovery cycles, he said. “In past severe recessions, the economy surged with 20 percent to 25 percent growth afterwards. That has not beenthe case after themost recent recession.”
While GDP is higher than it has ever been, there is only a 2.2 percent average annualized growth since the 2008 recession. “We are not growing the economy fast enough,” he said.
Employment fell by over 8.7 million jobs from December 2007 to February 2013, but has since added nearly 8.6 million jobs, with over 2.3 million jobs added over the past 12 months, he said.
“After peaking in October 2009, the unemployment rate has fallen by 3.7 percentage points,” Strauss said. “This is not a key measurement of how the labor market is doing. The April labor force participation rate fell to a level last seen in 1978 because we are an aging work force. Also, some people have dropped out of the labor force. The share of those unemployed for more than six months remains significantly high.”
The unemployment rate is forecast to move lower. “It will be 6.1 percent to 6.3 percent in 2014," he said. "It will take two years to get that down to under 6 percent.
“We have growth in the economy, but not growth above trend,” he said. “But we are still the strongest economy in the world.”
Inflation is expected to be at 2 percent this year and forecast at 2 percent next year and below 2 percent through 2016, he said.
Inventories for passenger cars are above desired levels, which makes him “concerned if the industry is building the kinds of cars consumers want to buy.”
Overall, the outlook for U.S. economy is to expand at a pace slightly above trend in 2014 and at a faster pace next year, he said. Employment is expected to rise moderately with the unemployment rate edging lower. A slackening in the economy will lead to a relatively steady inflation rate.
“I’m less concerned about the U.S. economy,” Strauss said. “Most risks are outside the U.S. I’m concerned about China because I don’t think they are growing at 7.5 percent. China has very similar problems to the U.S. in terms of income disparity and aging population. In fact, those problems are more severe in China than in the U.S.”
Strauss said he would not attempt to predict the next major recession in the U.S. “Usually a shock causes a recession, such as September 11 or the housing market collapse,” he said. "I can’t predict the next shock, so I can’t predict the next recession.”
Subscribe to Aftermarket Business World and receive articles like this every month….absolutely free. Click here.
About the Author
Bruce Adams
Bruce Adams is a former managing editor of Aftermarket Business World magazine and content manager for the distribution channel at UBM Advanstar. He was editor with UBM Advanstar Automotive Group since 2007 and was managing editor of ABRN. Bruce is a veteran journalist and communications professional who worked 10 years in corporate communications and publications at The Goodyear Tire & Rubber Company. He also worked as a senior editor at Babcox Publications and as a reporter and columnist for a daily newspaper in Northeast Ohio. He is also a former senior editor of Hotel & Motel Management Magazine.