Economic Outlook: Green Light, Red Light

As economy heats up, speed bumps and detours threaten greater industry growth

By
Samantha Oller, Senior Editor/Special Projects Coordinator

David Nelson warned that today’s economic revival is typified by growing income inequality, which threatens the financial prosperity of middle-class consumers.
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It’s been a tough, long slog, but the U.S. economy is finally moving reliably in the right direction. That’s the word from David Nelson, founder of Finance & Resources Management Consultants Inc. and professor of economics at Western Washington University, who presented his annual economic outlook at the 2014 NACS State of the Industry Summit.

Nelson pointed to several factors, including falling unemployment rates, growth in household income, higher housing starts and vehicle sales, as well as a projected increase in the growth rate of gross domestic product, as positive signs. “There are a lot of green lights for refreshing change as we look at the economy,” he said.

Perhaps one of the clearest signs? The Federal Reserve is finally indicating that it will raise interest rates in the not-too-distant future. Fed chair Janet Yellen has said that the increase may begin as soon as early 2015, surprising many economists who anticipated a timeline of fourth-quarter 2015 or early 2016.

“Rates are going to be going up; it’s just a matter of timing,” said Nelson. According to projections shared by Bloomberg from the FOMC Summary of Economic Projections, the federal funds rate—or the interest rate banks charge each other to borrow money—is expected to stay at 0.25% for the rest of 2014. In 2015, it is projected to bump up to 1.00%, and then 2.25% in 2016.

“If the economy is as strong as we’re projecting it to be in 2016, that’s a very low interest rate for a healthy economy,” said Nelson. “Longer-term rates have to go back up.”

For the longer term, Bank of America, Merrill Lynch and Comerica Bank are projecting 10-year treasury rates to rise from 2.35% in 2013 to an average of 2.9% for 2014, and up to 3.35% in 2015. “If you’re thinking of doing projects, of locking in money, don’t wait another year, don’t wait two years. This is the time to do it,” Nelson said.

Back to Full Power

The Fed is attempting to keep inflation at a low, stable level—right now it sits under its target of 2%—while moving the unemployment rate from its current 6.7% to around 5.5%, which is considered “fully employed.”

Over the past two years, unemployment has continued to steadily, slowly inch lower, by every measure. From February 2012 to February 2013, the official unemployment rate fell one full point. Even the rates for the long-term unemployed, discouraged and marginally attached workers decreased from the year prior. “The higher the unemployment base … the bigger the drop,” said Nelson. “There’s no doubt about it that the economy is recovering, is continuing to recover, and we’re getting closer to that point where we’re going to say we’re back at a full employment level for the economy.”

Uncertainty about economic policy has also dropped to the lowest level since before the financial crisis of 2008, Nelson pointed out. Excess capacity is down to nearly normal levels, household net worth hit a record high in 2013, and the ratio of debt to income has narrowed. Meanwhile, household equity, the middle class’ biggest piece of wealth, has risen from 38% to nearly 52% of real-estate values. New housing starts have doubled from their low point in 2009 but are still modest.

“When the construction sector gets going, this is great news for your industry,” said Nelson. “These construction people are wonderful c-store customers, shopping multiple times a day.”

In the end, the overall rate of growth should quicken. According to Bank of America Merrill Lynch and Comerica Bank, real economic growth, as measured by gross domestic product, should grow in the range of 2.5% to 2.8% in 2014, and 3.2% to 3.3% in 2015.

But there are some yellow lights. Despite overall low inflation, costs are up for consumers in a few important areas. For one, the employed are paying more toward their health care. Regulatory changes via the Affordable Care Act—such as children’s ability to stay on their parents’ policy until the age of 26, and the removal of a lifetime cap—have increased costs for insurers, which are trickling down to covered employees. Figures from Bank of America Merrill Lynch and the Kaiser Family Foundation show that the percentage of covered workers at small firms with a $1,000 or greater annual deductible for single coverage has grown from about 16% in 2006 to nearly 60% in 2013.

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