Has the economy finally turned a corner? Local experts weigh in

After five years of modest economic growth and equally modest consumer spending, it’s hard to ignore the surprisingly strong economic news that emerged last week. Does it mean the U.S. economy has finally gained enough traction to enter a more robust phase?

We contacted local business executives in banking, wealth management, and retail to get their take on improvements in various economic indicators. The consensus view seems to be that if the economy hasn’t completely turned a corner, it’s in the process of doing so.

That bounce in our step

For starters, The Conference Board Consumer Confidence Index improved for the third consecutive month, rising to 90.9 in July, the highest level since October of 2007, when the index stood at 95.2. The Conference Board considers an index above 90 to be indicative of a strong economy.

Second, surprisingly strong growth in the gross domestic product, a broad measure of the national output of goods and services, was recorded in the second quarter. Citing higher consumer confidence, plus upticks in business spending and inventory growth, the U.S. Department of Commerce reported a healthy 4% increase in GDP, defying projections of lower growth in the 3% range and providing some reassurance following a contraction, revised to -2.1%, in the first quarter.

Even more telling, an upward revision of growth for the second half of 2013 provided more confirmation that the first-quarter downturn was a weather-related outlier. The revision showed the economy expanded at a 4% pace during that six-month period, which represents the best six-month GDP performance in 10 years.

Throw in a solid but not spectacular jobs report for July, with preliminary reports showing a gain of 209,000 jobs (the sixth consecutive month with job growth above 200,000), and it would appear the economy is reaching a higher gear. The number of new jobs is down significantly from the 298,000 created in June, but the latest three-month average is an encouraging 245,000.

The July unemployment rate ticked up one-tenth of a point, to 6.2%, but that’s partly because slightly more people entered the labor force, more confident they could find work.

Can this momentum be sustained in the second half of 2014? Yes, if improving consumer sentiment is any indication.

Job growth and a brighter short-term outlook for the economy have convinced consumers to proceed with long-delayed purchasing plans. For July, The Conference Board reported a 2.8% increase in the percentage of consumers expecting more jobs in the months ahead.

“I’ve long felt the consumer would be the key to the bounce-back,” said Mark Meloy, president and CEO of First Business Bank in Madison. “The fact that economic data is positive and consumer confidence is up is a real indication that something tangible is happening.”

Nowhere is consumer confidence reflected more than in the retail industry, which reported more job gains (+27,000) in July and 298,000 new jobs in the past year. No retailer was immune from the impact of consistently harsh winter weather, which prevented consumers from venturing out, but the National Retail Federation’s most recent retail sales forecast projects a 3.6% increase for all of 2014, including growth of “at least” 3.9% in the second half, when back-to-school and holiday spending represent the bulk of annual sales.

One local retailer has already seen improvement in consumer sentiment. “We have had a good year, and I find that consumers are not as worried,” noted Sandi Torkildson, owner of A Room of One’s Own Bookstore in Madison. “They are willing to purchase new hardcovers more readily and not wait for the paperback, but they are also looking for a good buy. The used books we sell are doing well also.”

Another barometer of a Q2 retail comeback will be Kohl’s, the Milwaukee-based retailer that reported lower earnings in the first quarter due to declining sales (-3.4%) and higher operating expenses. The company will release its second-quarter earnings and sales report on Aug. 14.

Big swing

Economists noted the six-point swing in quarterly GDP includes some pent-up demand from the weather-challenged first quarter. Business spending on items such as equipment, buildings, and intellectual property rose by 5.5%, while spending on equipment, which declined in the first quarter, grew at a 7% rate.

The housing sector, another significant component of GDP, has been hit and miss. Nathan Brinkman, president of Triumph Wealth Management in Madison, noted the Dane County housing market has been flat; nationally, the signals are mixed, as sales of new homes have slowed, but purchases of existing homes picked up in the spring. After declining the two previous quarters, national spending on home building and improvements rose 7.5% in the second quarter.

“A lot of it is the confidence that interest rates will not be raised in the near future, so people are still willing to make those buying and selling decisions as it relates to real estate,” Brinkman noted. “The unfortunate part is that even though a lot of people are doing refinancing activities or even upgrading their homes, we haven’t seen significant increases in home values.”

(Continued)

Some economists and market watchers believe that barring an outside shock, the economy will continue to recover, perhaps accelerate, by year’s end. The more optimistic observers cite the consistent addition of jobs in recent months and the fact that banks are better capitalized, which helps set the table for accelerated growth.

Others are cautious, noting that job growth in temporary fields of employment has led the way. Among the industry sectors reporting job gains in July were professional and business services, which includes temporary help. In this sector, 47,000 employees were added to payrolls in July, up 0.3% over June, and 648,000 have been added during the past 12 months, up 8.1% over July of 2013. In addition, 7.5 million people are still working part-time jobs because they can’t find full-time work.

Meloy said temporary staffing services are operating at all-time high levels because of the flexibility offered by temporary work arrangements. “I think employers are still somewhat cautious about hiring,” he said. “They’ve learned their lesson from the last business cycle, and they want to have as much flexibility as possible with all their costs of operation.”

Potential headwinds include a negative reaction to world events, which have been increasingly chaotic, and a change in the timing of the Federal Reserve Board’s schedule for raising interest rates. Both factors, plus lingering concerns about the European economy, were cited as reasons for the July 31 stock market tumble, but recent Fed guidance suggests a gradual increase in interest rates to begin sometime in mid 2015.

Following the second-quarter GDP report, the central bank indicated that short-term rates would remain near zero for a “considerable time” after its asset-purchasing program ends later this year.

While the Dow Jones lost 317 points Thursday, erasing all of 2014’s gains in one day, and slid another 70 points on Friday, Brinkman likes the long-term trend lines. “What you’re seeing is that people are taking money out of cash and putting it into the market,” he explained. “That’s been a consistent theme for at least two years now.”

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