How’s the economy really doing?

By David J. Haas CFP®, June 10, 2016

I am writing this post on June 10th and we are close to 1/2 way done with the year. So how is the economy really doing? I’m not talking about the markets. They tend to have their own schizophrenic rhythm. I’m talking about main street. There are some statistics we can look at, but first how about some anecdotal evidence. My apologies if you can self-identify in the stories below, but I assure you no one else will be able to identify you.

Stories from Main Street

There is a CPA I know who I talked to yesterday and I asked him how its going. “Terrible” is what he said. “Taxes and Regulation are killing business.” “Everything is just so hard to do.” He seemed to be very pessimistic and I assume he is hearing some of that from his clients. After all, a CPA who handles small business really has a good idea of how his clients might be doing and might have a good handle on how Main Street is doing. It’s certainly true that regulation and taxation are big factors with small business and its not surprising that a CPA’s clients are complaining to him about it. Tax and regulation has definitely gotten more difficult and expensive to navigate. I see that in my own business.

I also had a meeting the other day with some small business owners of various businesses. There was someone there who owned a small business which offered services to business. She was struggling with how to handle all the business she was getting. She needed more help, but was scared to hire a full-time employee to help her and couldn’t find enough qualified free-lancers. Now this is a great problem to have and shows that not only is her business doing well, but the businesses that are hiring her company are also investing money in their own firms. I talked to another business owner last week who had a very similar problem. He was getting so many contracts for his business that he was concerned about fulfilling them and managing the projects.

So what conclusions can we draw from the anecdotal evidence? Maybe taxes and regulations are a problem holding the economy back, but in spite of this, small business is doing well. Finding qualified applicants for hiring is actually a problem. Do the statistics back this view?

Statistics

According to 19th century British Prime Minister Benjamin Disraeli, there are three kinds of lies: lies, damned lies, and statistics. Still, statistics are all we really have, so let’s take a look.

The first quarter US Gross Domestic Product (GDP), which is one of the broadest measures of an economy went up 0.8%. This would indicate that the US economy overall is growing, but not by much. Still, its not shrinking and the estimate of first quarter GDP has actually been rising, from an original estimate of 0.5% to the 0.8% figure released in late May. So that’s the past. How’s the economy doing right now?  The Federal Reserve Bank of Atlanta has a GDP estimator on its website. They are currently estimating that second quarter GDP growth will be 2.5%. That’s actually quite good!  So maybe what GDP is saying is we started the year with a fairly slow, although still growing economy, and now the economy might actually be doing better.

How about some other statistics? There’s the unemployment rate. It has been hovering just under 5%. A lot of economists think full employment in this country is 4.5%, so 4.7% unemployment definitely means people are working. It doesn’t mean everyone can find a job quickly, but it does mean there are jobs out there. In fact, the amount of slack in the labor market is one of the factors the Federal Reserve Bank is concerned with when deciding if they need to raise interest rates. They are probably close to making that decision and rates might rise slightly later this year. What higher short-term rates might do for the economy is a separate discussion, but lets just say that I expect it will not cause a recession.

Another thing to look at is the housing market. The housing market is a very important part of the US economy because a lot of wealth is locked up in our homes and we spend a lot of money building, buying, and furnishing our homes. Part of what made the great recession so bad was the fact that housing prices plummeted and our housing was over-leveraged.

Here’s a picture of housing starts for new residential construction:

As you can see, while we are not at the level before the great recession, new housing starts have increased from the depths of the recession and are still increasing, although perhaps with a slightly lower slope. This is a very good sign for the economy. Not only that, but look at the Case-Shiller 20-city home price index for the past year ending in March.

These higher prices on our homes are quite good for the economy. It means we can afford to sell our houses and move for jobs. We can also afford those home improvements and higher prices means the construction industry will start to build more housing. All good for the economy, although home prices rising can be inflationary. I would expect that as the Fed normalizes short-term rates, it might moderate house price increases a bit.

Conclusions

So here’s what I think. Our main street economy is doing OK and is likely to be getting better as we go through the year. Business are hiring and home prices are increasing, both very important to the health of Main Street. But, I also think many people don’t recognize the improved economy and are still very pessimistic. For instance, the New York Times did a poll to find out what people think the unemployment rate is for college graduates aged 25-34. The average rate people guessed was 13%. The rate is really 2.4%. What this says is that most people perceive that the economy is worse than it really is. With the presidential election this year, we get bombarded with crisis messages saying how bad things are. People start to believe it or at least they think others believe it, so there must be a germ of truth. Perception is reality? Its best to keep an open mind, get as much hard evidence as possible and form your own opinions.