Ballew: Another Recession? Not So Fast, My Friend
As a clearer picture of third quarter economic activity is beginning to take shape an interesting image is being formed.
The quarter is starting to look like the picture of economic activity most forecasters were projecting back in May and June—before the summer of discontent emerged in Washington and in financial markets.
For those fearful of another recession, I borrow that famous phrase from college football analyst Lee Corso: “Not so fast, my friend!”
During the mid-spring many economists, including myself, assumed that the second quarter would be restrained due to a fragile recovery being hit broadside by a number of factors including auto production disruptions from the tsunami in Japan, higher gas prices and events overseas. We also assumed that the third quarter would improve due to the lessening of short-term factors, accommodative monetary policy, healthy corporate balance sheets and the gradual healing process.
My prediction was that growth should recover to roughly 2 percent. Of course a 2 percent growth rate was nothing to celebrate, but given the structural issues in the economy, 2 percent would be a reasonable pace of growth.
The events of June and July clearly took the winds out of the sails of forecasters and observers. Debt issues, the stock market correction, and the European debt crisis raised serious questions about a secondary contraction or at least another quarter of 1 percent growth.
However, as economic indicators are rolling out, it is increasingly likely that these fears are not being realized. The picture right now looks like the following:
- Manufacturing: The recovery is getting a lift, at least short-term, from the expected bounce back in auto production. In the month of July industrial production was up 0.9 percent, factory orders jumped 2.4 percent and durable goods orders improved (even excluding transportation). So manufacturing will provide the support in Q3 to growth that was originally anticipated.
- Consumer behavior: Consumers have partially re-emerged after taking it on the chin from gas pump prices in Q2. Consumer expenditures were up 0.8 percent in July and early indications are that personal consumer expenditures are recovering for the quarter in-line with the 2 percent growth pattern we expected. 2 percent growth in spending appears to be the sustainable path given income and employment growth. So, consumers are doing their part.
- Employment: Labor markets are performing in-line with a hesitant recovery growing around 2 percent. Top-line August employment numbers were below expectations but the private sector net of short-term distortions has generated about 100,000 net jobs a month. Not enough to dent the unemployment rate but in-line with a slow recovery.
- Housing: Housing remains a drag and a secondary contraction appears to be underway, but that was expected. Even in this sector, there is little new news that wasn't taken into account.
Legitimately there are some warning signs to keep an eye on, including the drop in consumer confidence. However, in many cases measures such as confidence levels drop due to short-term events and then recover. With August auto sales coming in above the 12 million selling rate despite the drop in consumer confidence it is pretty clear that the quarter is shaping up to be better than what was feared a few weeks ago. And interestingly it may land where we thought it was originally going to land — 2-2.5 percent growth. By the way this was the pattern in 2010. A challenging second quarter prompted concerned over the back end of the year, but final performance was in-line with original expectations.
I wouldn't argue that the recovery is sprinting ahead but it may be on firmer footing than many feared, and that would be a positive sign.
Paul Ballew currently serves as Nationwide’s Senior Vice President and Chief Economist. In this capacity Mr. Ballew is responsible for the company’s macro consumer analytics, economic forecasting and analysis, industry forecasts and strategy support. He is also the company’s primary spokesperson on financial markets, economic and industry related issues.