4th Quarter Decline in GDP is Not
a Harbinger of Bad Times for 2013
Oceanside, CA – Many of us have accepted the likelihood of slow growth for 2013, but were caught off guard when the Commerce Department announced that Fourth Quarter GDP went negative, falling (0.1)%. It was the first quarterly decline since the end of the Great Recession and a sharp “about face” from the 3.1% growth rate in the Third Quarter. Economists expected growth of about 1%. “The surprise contraction may raise fears about the economy's ability to handle tax increases that took effect in January and the looming sequestration,” said Frank Chow, chief economist for Trade Show Executive Media Group. Already, a key measure of consumer confidence by The Conference Board plummeted in January after Americans noticed the reduction in their paychecks. Naturally, executives are wondering if this is the start of another recession.
Chow believes the negative Fourth Quarter GDP number will be revised upward, noting, “The encouraging economic data and reports for December, as outlined in last month’s column, have not been fully captured in the GDP calculation.” He said export data takes longer to gather than most other economic information and there is evidence of a backlog of petroleum products shipments overseas at the end of the year. Also, a slew of corporations accelerated dividends into 2012 to avoid a tax increase that kicked in on January 1, 2013. Dividend payments soared 50% in December to propel the biggest increase in personal income in five years. “I don’t believe the impact on spending has been recorded yet,” Chow said. Some analysts say the dividend increase will cannibalize future distributions in 2013, but Chow believes that is not certain because many companies have huge cash balances and shareholders are clamoring for a return of that cash in some form like dividends.
Q4 Weakness is Not Likely to Stick Around
Furthermore, most economists think a large segment of the Fourth Quarter weakness will not carry over into 2013, Chow noted. The two main factors causing the GDP decline were, (1). Defense spending dropped by the most in 40 years, and (2) Companies scaled back in restocking inventory. “Both situations are likely one-time events,” he said. “The defense cuts and inventory slowdown were cautionary reactions to the rancorous fiscal cliff debate. The eventual fiscal cliff agreement signaled to businesses that future fiscal deals will be greatly scaled back, thus likely encouraging spending and investment to return to normal soon,” Chow believes.
So far in 2013, the economic data continues to support slow growth:
- The Empire State Manufacturing Index moved into positive territory for the first time since last July. The index rose to 10.0 in February from a negative (7.8) in the prior month. Economists expected to fall into the red to (2.0).
- The January ISM Manufacturing Index increased to 53.1% from December's reading of 50.2%, indicating expansion for the second consecutive month. All five of its component indexes were above 50% — new orders, production, employment, supplier deliveries and inventories.
- The January ISM Non-Manufacturing Index was at 55.2%, down from 55.7% in December, but still indicating expansion. But the employment index rose to 57.5%, up from 55.3% in December.
- Nonfarm payrolls expanded by 157,000 in January, below forecasts of 185,000. The unemployment rate ticked up to 7.9% as more people entered the labor force. A broader measure that includes underemployment was steady at 14.4%.
- Retail sales barely rose 0.1% in January after a 0.5% rise in December as tax increases and higher gasoline prices restrained spending. So-called core sales, which strip out automobiles, gasoline and building materials, also ticked up 0.1%.
- Industrial production slipped (0.1)% in January on declines in manufacturing and mining output, but only after the Federal Reserve significantly revised production for November and December.
Looking forward to the rest of 2013, there are two powerful trends gaining momentum in the U.S. One is the housing revival we have already written about in past columns and this trend is expected to continue into 2013 with home prices gaining steam in 88% of U.S. cities during the Fourth Quarter, according to the National Association of Realtors (NAR). “Home sales are on a sustained uptrend,” said Lawrence Yun, chief economist for NAR. The other trend is in energy. “We all know about the use of horizontal drilling and fracking that has exploded in certain U.S. regions where shale deposits are located,” said Chow. “What you may not know is that the two products from the drilling — crude oil and natural gas — are playing a vital role in increasing jobs and bringing some jobs back to the U.S. ”
Last November, the International Energy Agency (IEA) predicted the U.S. will become the world's top oil producer probably by 2020. This is mainly due to the explosion of oil extracted in “shale” regions such as North Dakota’s Bakken and Texas’ Eagle Ford. The IEA sees U.S. production at 10 million barrels per day (bpd) in 2015 growing to 11.1 million in 2020. Meanwhile, Saudi Arabia, the leading producer currently, will produce 10.9 million bpd in 2015 but dip to 10.6 million by 2020. “If this happens, it will be dramatic,” said Chow.
Historically, U.S. refineries have relied on foreign crude to make refined products because it was more prevalent and cheaper. “This is no longer the case with the discoveries of U.S. shale deposits,” said Chow. “In fact, domestic shale crude is so overflowing that refineries and oil drillers are scrambling to find somewhere to store it because of our inadequate oil transport system.” He pointed out that industries near the extraction sites or refineries are able to benefit from the cheaper oil, but those in regions such as the East and West Coast have much higher gas prices in part due to no pipelines or rail available across regions. This is an example of the lack of government investment and planning in infrastructure over the decades.
Since U.S. refineries are now more efficient than their foreign rivals, so that U.S. refined products are increasingly more competitive globally. For 2012, fuel oil exports climbed 14% to $60.2 billion, and exports of other petroleum products rose 4% to $57 billion. This translates into high paying jobs. Global demand for refined products is estimated to grow 33% over the next two decades, according to Rodrigo Favela, executive director for refining, planning and evaluation at Hart Energy. The drilling process itself is a long-term economic driver for thousands of new U.S. jobs as well as investment in steel and technologically advanced equipment, said Chow. Also, foreign companies are expanding investment in U.S. oil companies to learn about the new drilling technologies, which will create even more jobs.
Furthermore, hydraulic fracking has unlocked huge reservoirs of natural gas causing its price to plummet in the past few years. “This trend may not help drilling companies, but it has been a boon to the broad U.S. industry and manufacturing sector as a cheap energy source and chemical feedstock,” Chow pointed out. “Even electric generating plants are switching to natural gas to take advantage of the low prices. That, with other factors like rising foreign wages, is spurring a return of some manufacturing back to the U.S.,” he said. Dow Chemical and Royal Dutch Shell are building chemical plants in the U.S. while Nucor plans to make more steel here using natural gas. Potash Corp. is reopening an ammonia plant closed in 2003. "We're at a very interesting inflection point in the U.S. trade balance," said Robert Dye, chief economist at Comerica. In addition to the steel and chemical industries, cheap U.S. oil and natural gas will benefit a variety of other energy-intensive sectors, Dye added.
Energy will Transform the U.S. Economy
These new energy developments may have far-reaching potential to transform the U.S. economy. “The building of pipelines by itself could jumpstart the recovery, but it has unfortunately become a political football in D.C.,” Chow said. “Besides the proposed Keystone pipeline holdup, the EPA is attempting to propose more regulations on fracking citing danger to the water supply,” he said. This potentially could be a burgeoning opportunity for future trade shows serving that sector because of the varied international, government, environmental, and industrial sectors involved. Its impact and interest will surely grow dramatically over the next ten years.
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