Mark Zandi, chief economist at Moody’s Analytics, and Bradley Holcomb of the Institute for Supply Management provide their perspectives on economic conditions in 2014-2015.
The economic road ahead looks more stable, according to Mark Zandi, chief economist at Moody’s Analytics. After several years of GDP growth at the “OK level” of about 2 percent, Zandi is forecasting growth to pick up to 3 percent in 2014 and reach 4 percent in 2015.
“Four percent is booming … but 4 percent can’t be sustained for very long,” Zandi said in an interview with MDM.
The reasons for his optimism at least in the near-term include his expectation that growth in global trade will continue over the next two to three years, and housing will be a source for growth. In addition, “with the tax hikes and spending cuts behind us, that drag on growth will fade,” he says.
Another good sign is that there are no indications that raw material and commodity prices will increase significantly in the near future. “Emerging markets will continue to grow more slowly,” Zandi says, “and change in their demand is what drives global commodity prices.”
In fact, “there’s a healthy inflow on the raw materials side,” says Bradley Holcomb, chairman of the Institute for Supply Management Manufacturing Business Survey Committee. The only commodity reported to be in short supply in the May 2014 ISM Manufacturing Report on Business was truck freight services. Copper prices were up for a second month, but not significantly, Holcomb says.
Manufacturing revenue growth is expected to outpace overall GDP growth in 2014, Holcomb says, and current forecasts are significantly higher than what the ISM committee expected just a few months ago.
Revenue in 2014 is expected to increase 5.3 percent for the year, compared to 3.4 percent in 2013. In December, the ISM committee forecast manufacturing revenue growth of 4.4 percent.
On top of revenue growth, capital expenditures are expected to increase 10.3 percent in 2014; capital expenditures grew 8 percent last year. But even more telling, according to Holcomb, is that all 18 industries tracked in the Manufacturing Report on Business are growing, something that hasn’t occurred in several years. “It’s never happened under my watch (at ISM),” Holcomb says.
Uncertainty has been dampening growth over the past few years, Zandi says, but there’s a shift in the “collective psyche” about the health of the economy.
“Washington should fade from the front pages,” he says. “… The brinksmanship that shut the government down last year was really costly politically for both Democrats and Republicans, and no one wants to go down that path again.”
A budget deal was passed that will eliminate that barrier for a few years, and the treasury debt limit was increased for at least a year – meaning Congress won’t be toying with the idea of letting the U.S. default on its existing debts.
Jobs will continue to be a key component of economic growth. “(Jobs) are both a signal of strong growth and a driver of growth,” Zandi says. More jobs mean companies are hiring and expanding. And more jobs mean more income, which leads to more spending and more confidence.
The U.S. has a competitive labor cost structure because labor costs are low, and there is a very compelling energy story unfolding, he says. As a result, the long-term prospects for job growth in the U.S. are very good.
When job growth reaches 250,000 to 300,000 jobs per month, “that will be sign that we’re off and running,” Zandi says. Currently, growth is hovering around 200,000 per month.
But wage growth remains slow, which has the effect of reducing the labor force. “It’s certainly not enough to pay for child care costs, commuting costs and all the other costs related to working,” Zandi says. “So we see a lot of workers just stepping out of the work force and not being counted as unemployed.”
Labor costs in the U.S. today are at about the same level as where they were 10 years ago; in manufacturing, they’re where they were about 30 years ago.
While through the recession and even into the recovery, older workers were putting off retirement, that segment of the work force is starting to leave. “Five years from now, our biggest problem is not going to be unemployment, it’s going to be a lack of labor,” Zandi says.