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The Budget Deal: It was the Least They Could Do


By: Bill Wood, MoldMaking Technology's Economics Editor 13. December 2013

Congressional budget negotiators reached a deal on Tuesday that will prevent a government shutdown in the first quarter of 2014. It also reduces some of the automatic budget cuts next year that were scheduled as a result of the sequester, and it replaces them with more sequestration cuts in later years. This means that the total effect of the sequester on GDP in 2014 has been greatly reduced. And since this agreement also sets the budget levels for fiscal years 2014 and 2015, it means we will not face the likelihood of another government shutdown for at least two years.

Overall, this is a very modest deal that merely postpones the real issues facing this country. Budget negotiators are going to have to meet again in two years and confront all of the same problems that they avoided this time.

It is difficult to be optimistic about this incessant habit of "kicking the can down the road." But there are a few factors that might turn favorable, and thereby justify this decision at this time. One of those factors is that there is a good chance this nation's economy will be stronger in two years than it is at the present time. Yesterday's decision will eliminate some of the uncertainty that business leaders were having about 2014, and this will likely result in significantly stronger confidence levels next year. I for one am more confident in my forecast for GDP growth in the range of 3 percent for 2014.

Another factor that will develop during the next two years is the potential for a change in who controls Congress. We will have a midterm election in 2014, and by the end of 2015 we will have a strong sense of who is running in the big election scheduled for 2016. There is no guarantee that these elections will result in any significant change in this country's leadership, but I expect that it will. So maybe it will actually be easier to make the tough political decisions two years from now. One can hope.

One final set of factors that will play a role in budget negotiations two years from now will be the status of several other major reforms that Congress will debate between now and then. These include, but are not limited to: corporate tax reform, immigration reform, multi-national trade agreements and Obamacare. These issues could dramatically alter the political landscape during the next two years.

For now, moldmakers and most other manufacturers should look forward to improving economic fundamentals in 2014 and 2015. After that, we are going to get another chance to face up to our huge federal budget deficit and the mounting national debt. I can hardly wait.
 

 

A Lot of Data, but Only One Conclusion: There is More Work to Do


By: Bill Wood, MoldMaking Technology's Economics Editor 5. December 2013

This week is heavier than usual in terms of important economic data releases. We have already seen the construction spending, new home sales and vehicle sales data from October, as well as the ISM manufacturing and non-manufacturing indices from November. We have also seen the November data on employment from ADP, and we will get the government’s employment data on Friday. It pleases me to say that all of these data indicate that the recovery in the U.S. economy is getting stronger.

But we have seen this before. In fact, we have seen this several times during the past five years. Since the recession ended in 2008, there have been a handful of times when it appeared as if the economy was gaining long-term momentum. And just when it looked like the pace of economic growth would break out of the 2-percent-per-year range, some dark clouds would emerge on the horizon that would constrain confidence and keep the pace of recovery subdued. I will not bore you with the whole list of issues that have killed our recovery groove during the past few years, but I will say that Congress was to blame on more than one occasion.

Looking forward, there are a number of potential threats (both global and domestic) to a more rapid pace of economic growth in 2014. And it saddens me to say that the most obvious one is yet again our elected policymakers in Washington, D.C. Until the business sector gets more clarity about how Congress is planning to resolve the issues surrounding the budget and the federal debt ceiling in the first quarter, it would be imprudent to expect a large acceleration in economic growth next year.

There are also some longer-term issues pertaining to things such as the Affordable Care Act and corporate tax reform that will keep the brakes on economic activity until Congress can get over its dysfunctional state and demonstrate an ability to get something done. These longer-term issues will not likely be resolved until after the election late next year, if at all.

Many of the recent trends in the economic data suggest there is potential for a very positive outlook, but recent history suggests that such a positive outlook is far from certain. And that is the problem. We need to see more rapid growth before we become more confident in the recovery, and we must act with more confidence if we want to see more rapid growth. It is a chicken-and-egg type of dilemma that will most likely not last forever, but I cannot say with certainty it will end anytime soon. When the recovery finally does break out of its current lackluster pace of growth we will hear about it from the politicians and we will see it in the data, so stay tuned.

We Will Not Shop Our Way to Prosperity


By: Bill Wood, MoldMaking Technology's Economics Editor 29. November 2013

These two quotes pretty much sum up my feelings about holiday shopping in general. So there is not much more that needs to be said on that subject. But for better or for worse, the U.S. economy is best described in terms that are consumption-based. For the sake of our future prosperity, we need to become more of a production-based economy, but that is a story for another blog piece. Today I will focus on the trends in consumer spending, and what that means for the economic outlook for 2014.

The consumer spending data from the Bureau of Economic Analysis is divided into two major categories: goods and services. Americans spend roughly two-third of their income on services (housing, health care, transportation, etc.). They spend the other one-third of their incomes on goods (nondurable goods such as food and clothing, and durable goods such as motor vehicles). Demand for molded products, and by extension demand for new molds, will be most affected by consumer spending on goods.

So far this year, real consumer spending for goods is up about 3.5% when compared with last year. This follows an expansion of 3.3% in 2012. This rate of growth is very close to the long-term average for this category, and it compares favorably to the pace of overall economic growth during this time which was just about 2% per year in each of the past two years. By far, the fastest growth has been in the data measuring spending on motor vehicles and parts—up 7.3% in 2012 and up 6.2% this year.

Our forecast for 2014 calls for a moderate acceleration to 4% in consumer spending on goods. This forecast is based on expectations for improvement in the employment data and a continuation of the recovery in the residential real estate and construction sectors. The rising employment data will generate moderate gains in household incomes, and the recovery in the real estate sector will raise household wealth levels. Both of these are important drivers of growth in consumer spending. The gains will not be large, but it will be an improvement.

This forecast is not based on what the major retailers report about holiday shopping patterns. I do not consider holiday shopping reports to be reliable indicators of future economic activity. The large retailers would have you believe that shopping is what Americans do best. I prefer to think that making things is what we do best. So please stop telling me how much Americans consumed in the fourth quarter, and start telling me how much stuff Americans produced when they were not taking a few days off to be with their families.
 

Trends in Retail Sales Data Offer Clues to Future Mold Demand


By: Bill Wood, MoldMaking Technology's Economics Editor 21. November 2013

Consumers do not buy molds, but they do by a lot of molded parts. They usually do not realize they are buying molded parts. They think they are buying autos, appliances, or packaged goods. But to those of us in the industry, they are buying molded parts. And if they start to buy a steadily increasing amount of molded parts, then sooner or later someone is going to need more molds. So it makes sense for moldmakers and other industry watchers to monitor the trends in the retail sales data that are compiled and reported each month by the Census Bureau.

The latest monthly report was released this morning and it includes data through the month of October. For the year to date, total retail sales in the U.S. are of 4.2% when compared with the same period in 2012. The long-term average for annual growth in retail sales is in the range of 4% to  5%, so from a historical perspective 2013 is just about average overall. However, there is a wide divergence of growth rates amongst the various categories of retail establishments.

The categories with the strongest growth so far this year are online retailers (i.e. Amazon.com) and motor vehicle dealers. Both of these segments are enjoying an increase of greater than 10% when compared with last year. Building material and supplies stores are also enjoying solid growth – up nearly 7% from 2012. Total receipts at furniture and home furnishing stores are running 4% ahead of last year.

Most of the other categories of retail establishments (that represent large end-markets for molded products) are growing in the range of 2% to 4% this year. These include: restaurants and bars (up 4%); sporting-goods stores (up 4%); food and beverage stores (up 3%); and finally, health and personal care stores (up 2%). One other category of interest, receipts at electronics and appliance stores are up less than 1%.

So it looks like Americans are willing to spend money on big-ticket items such as autos, but they are restricting their purchases on many other types of discretionary goods. In other words, they are saving up their money to replace worn-out cars, but they are not carrying large balances on credit cards to pay for many other types of goods. Spending for necessities such as food and healthcare products is growing at a rate that is a bit below the long-term average.

It is likely this type of spending behavior will persist for at least another year or so. Household income growth is stagnant, and this trend will not improve until the trend in the employment data starts to accelerate. I expect the fundamentals that affect retail sales to improve moderately in 2014, with more rapid improvement coming in 2015 and 2016.

One other trend that is worth noting is that sales at gasoline stations are actually down by about 1% so far this year. Lower gasoline prices would be a bonus for almost every consumer. Less money spent on energy products means there is more money to spend on durable manufactured goods and packaging products.

‘Tis the Season for a Spotlight on Consumers


By: Bill Wood, MoldMaking Technology's Economics Editor 14. November 2013

If you are like me, then with each passing year you get just a little bit more annoyed with "holiday drift." That is the name given to the incessant expansion of the holiday season. This year, the Christmas season got started just after Halloween, and it completely gobbled up Thanksgiving. Next year, I'm going to dress up as Santa Claus for Halloween. I will not have any need to change my clothes for two months. The only kind of candy I will expect to receive whilst trick-or-treating will be candy canes. But enough of the satire …

Another thing that annoys me about this time a year is the hyper-focus on consumer spending. Everybody wants to express an opinion about whether or not consumers are going to spend a lot during the holiday shopping season. I am going to try to avoid adding noise to all of this holiday hype. But that does not mean that the recent trends in the data that measure consumer fundamentals are not relevant.

Through the first three quarters of 2013, inflation adjusted consumer spending is up about 2 percent when compared with the previous year. This is very close to the rate of growth for the total inflation-adjusted GDP in the U.S. Consumer spending accounts for more than two thirds of the total GDP figure, so it should come as no surprise that these two trends are moving at about the same pace. The good news is that both of these trends are poised to accelerate in 2014.

Spending growth is driven by income growth. The trend in real household income growth has been negative since the year 2000. This is a long term structural problem for the U.S. economy, but in the short term the consumer fundamentals are improving. The number of jobs created in the U.S. continues to expand, and if we experience further gains in the employment data, then the income data will respond positively. The stock market, another source of wealth and income for many households, is on a tear. House prices are also rising rapidly. Both of these factors should continue to push incomes and spending higher.

Pent-up demand for many kinds of consumer goods, such as autos and appliances, is large. Access to credit is still a problem for many households, but the credit markets are starting to ease. Most households have reduced their debt burdens significantly. This will support spending growth in the future.

And despite what they say in the media, the pleasure that is derived from the holiday season has nothing to do with the percentage change in the consumer spending data when compared with the previous year.
 




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