A Five-Year Déjà Vu Time Loop for the U.S. Economy
Oceanside, CA - Like the movie Groundhog Day, the U.S economy has been repeating itself for five years now. Ever since the first full year of recovery in 2010, each year started with high expectations, got waylaid by some unexpected event during the Winter or Spring, and then recovered robustly in the Summer or Fall — but the momentum didn’t last. By year-end, overall GDP growth tended to limp in at 2.5% or less, averaging about 2.2%. “Compared to most developed countries, 2.2% is good,” said Frank Chow, chief economist for Trade Show Executive Media Group, “but it always left a bad taste — like we should have done better.” Chow said 2015 seems to be headed in the same direction.
January kicked off the year with both the University of Michigan’s Consumer Sentiment Index and The Conference Board’s Consumer Confidence Index soaring to new highs during this recovery. The optimism was largely driven by a surge in the job market that began in the second half of 2014 and continued into January. In February, employment expanded by 295,000 jobs and the unemployment rate dropped to 5.5%. Over the last three months, job creation averaged 288,000 per month. Consumer spending spiked at 4.3% for the Fourth Quarter. “Add in rising wage growth for the past few months, and the good news fanned hopes of the breakthrough year we all have been waiting for five years,” Chow said.
Falling Apart at the Seams
But in February and March, Chow pointed out that the seams of the economy began to unravel:
- Construction spending declined sharply in January and November, bookending a mild bounce-back in December.
- Factory activity slowed in February as the ISM Manufacturing Index registered 52.9, the fourth consecutive month of diminishing growth.
- U.S. housing starts plunged (17.0)% in February to their lowest level in a year.
- U.S. producer prices fell in February for the fourth straight month. Over the past year, overall producer prices have fallen by (0.6)%, the first 12-month decline on record.
The clincher was February retail sales falling (0.6)% in the wake of even larger drops in January and December. “The last time this occurred was in 2012,” Chow noted. Excluding autos, retail sales were down only (0.1)%, but the momentum in auto sales in 2014 may be stalling. After the grim retail report, the Atlanta Fed cut its First Quarter GDP forecast in half to 0.6% growth. Most other economists are forecasting higher at 1% to 2.5%. “But after a downward revision from 2.6% to 2.2% growth in the Fourth Quarter, the economy does appear to be sputtering again,” Chow said.
Just like last year, the extreme weather is getting much of the blame. “But bad weather alone doesn’t explain all the poor data,” said Chow. “Much of the effects of bad weather should have been offset by seasonal adjustments, including the Polar Vortex.” He said some weakness is due to the deteriorating global economy, especially for manufacturing. However, the sales torpor since December has been widespread and moving to other parts of the economy, Chow pointed out.
In the years after the Great Recession ended, the common denominator has been a significant drop in consumer spending, below prior recoveries. “So far, this year is no different,” said Chow. Recent data reveals consumers are still deleveraging from the recession. Consumer spending accounts for more than two-thirds of U.S. economy and fell for a second straight month in January, slipping (0.2)% after falling (0.3)% in December. “It’s obvious by now consumers are not spending their gas savings,” Chow pointed out.
Consumers Learned Their Lesson
Since the recession, consumers have been wary of increasing credit card debt, and many would-be borrowers are unable to obtain a mortgage. The only forms of consumer debt really growing are auto and student loans. The latest flow of funds data from the Federal Reserve reveal that individual debts as a percent of disposable income have fallen from a peak of 129.7% in 2007 to 102.4% at the end of 2014. As a percent of net worth, debt has fallen from a peak of 25% to 16.3%.
Instead, consumers are saving. For the second straight year, the personal savings rate in 2014 was 9% of disposable income. Before the recession, the savings rate was a low 3.5%. Data from the January consumer credit report shows credit-card borrowing is still tepid, signaling that the high savings rate will likely continue. “The income inequality characterizing this recovery strengthens the resolve of middle and lower income households to save instead of spend in the face of such uncertainty,” Chow said. “In the long-term, high savings will help keep interest rates down without the Fed artificially keeping it at near zero.” However, Chow pointed out that such savings are worrisome because they are driven by a lack of confidence in the economy, stagnant wages, the rising cost of living, and shrinking opportunities for career advancement.
Consumer Confidence Waning
Consumer optimism took a hit as the University of Michigan preliminary March Sentiment Index declined to 91.2 from a final February reading of 95.4, which was below January's 98.1 – the highest reading in 11 years. "Consumer optimism slipped in early March among lower- and middle-income households," said Richard Curtin, chief economist for the U of M survey. “The renewed concerns expressed by lower- and middle-income households were mainly income declines and higher utility costs, as well as disruptions to shopping and businesses due to the harsh winter." Chow believes this disenchantment isn’t going to disappear until the private and public sectors find a way to retool citizens with skills to address the growing technological needs of a fast-changing workplace and implement lower business costs so companies are less compelled to use foreign workers or relocate overseas.
Record Corporate Profits Have Fueled Trade Show Budgets
Fortunately for the exhibition industry, lackluster consumer spending has not impeded trade shows from thriving the past few years, according to TSE’s monthly Dashboard reports and the Center for Exhibition Industry Research’s quarterly CEIR Index reports. Record corporate profits fueling marketing budgets have helped support the industry during the tough recovery from recession, Chow pointed out. The industry’s ability to integrate new technology and strategies to address business ROI needs and adapt to a challenging political and global economy has propelled its above-average performance, he said. But eventually, to have a breakout year, we need the consumer to thrive too or we will be visiting the same groundhog again next year.
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