The U.S. economy has entered a slow growth environment, where 3 to 4 percent GDP growth is likely a thing of the past. And although employment is increasing year-over-year, it still has not rebounded to prerecession levels in some areas.
This article is a summary of the MDM Webcast: The 2015 Mid-Year Economic Update.
Although the wholesale distribution industry is still growing faster than the overall economy, growth in the U.S. has slowed and a “breakout year” is unlikely, according to Brian Lewandowski, associate director at the Business Research Division of the Leeds School of Business at the University of Colorado Boulder.
“I think what’s interesting when looking at GDP growth and forecasts is there is this broad expectation that next year is going to be our breakout year, and we’ve had that broad expectation for about five or six years now,” he says in the MDM Webcast: The 2015 Mid-Year Economic Update.
In late 2014, and even into early 2015, economists were forecasting 3 percent or more growth for the year, Lewandowski says. However, similar to past years, that expectation was revised downward by the middle of this year, and the breakout year everyone was anticipating was again pushed out to next year.
According to Lewandowski, it is finally becoming apparent that an economic breakout year may never come. The U.S. may have entered a slower growth environment where 3 to 4 percent growth just doesn’t happen; 2 to 3 percent may be all that is possible.
Part of that may be due to the first quarter GDP report, which showed -0.7 percent growth, he says. Expectations are that the first quarter report will be revised upward and the second quarter will show a strong number – but not to the levels seen previously.
Data from the Congressional Budget Office shows that a GDP gap started during the recession has closed about 90 to 91 percent of the way, meaning “we have excess capacity in the market,” according to Lewandowski. The U.S. is not at full potential output, and it remains below full employment and production. However, with only about 10 percent left, the gap should completely close by the end of 2016 or early 2017, Lewandowski says.
Even though employment is increasing, not every state has returned to prerecession levels. And the unemployment rate is highest among the youth and lower-educated workforce.
The distribution industry specifically has shown substantial employment gains. However, only four sectors have reached total prerecession peak levels of employment: alcohol distributors, apparel wholesalers, industrial distributors and motor vehicle after-market parts/supplies wholesalers.
Construction jobs are growing year-over-year, but they are still below the prerecession peak by about 16 percent. According to Lewandowski, the shortage of workers is due to many workers leaving the industry or occupation after the recession, while others may have retired or are now self-employed. This shortage now seems to be holding back capacity for homebuilding, as well as driving up wages.
Globally, the U.S. economy, despite its slow growth, is outperforming many other economies, especially Eastern and Western Europe. “Maybe we’re not growing quite as fast as some of the Asian markets, but we’re still doing relatively well from the global standpoint,” Lewandowski says.
Overall “the U.S. economy is on a much firmer footing,” he says. However, global economic growth and fed policy will still provide headwinds to growth.
Lewandowski also points out that an area of concern for the distribution industry is growing inventory values. He notes that the inventory-to-sales ratio is “getting a little bit uncomfortably high for the wholesale distribution industry.”
Increasing inventory levels can lead to buying less from suppliers, which “could be some sort of indication that this buildup of inventory is a reflection of a softer, broader economy that’s not showing up elsewhere yet,” he says.
Access the MDM Webcast: The 2015 Mid-Year Economic Update at mdm.com/2015MidYearUpdate.