As Rhode Islanders celebrate this holiday season, they may be enjoying a
somewhat better economy than they had expected in consumer confidence
polling of the third quarter. Then, that latest reading by the
BankBoston/URI survey registered a sharp decline.
Besides, though the state’s Index of Leading Economic Indicators did
recover somewhat from a sizable second-quarter decline, in their
November press release the compilers of that URI/Providence Journal
survey expressed concerns that the economy seems ” very uncertain”.
Is the economy as troubled as these polls say? Or, perhaps like the more
timely national polls that showed confidence recovered significantly in
November, might a more current reading for Rhode Island also show some
regained confidence?
We think so. Since, much as the recovery in the stock market from the
August meltdown and the finale of Presidential impeachment boosted
national confidence in November, so too might Rhode Islanders have had
their confidence boosted more recently.
And, with somewhat better confidence during the critical holiday buying
season, Rhode Islanders may very well have spent generously enough to
give local retailers good, if not great, holiday sales this season.
Meanwhile, latest employment readings painted a pretty good picture for
the state. In November the labor market strengthened somewhat from its
early-autumn bout of weakness, bringing November payrolls to a level
1.2% above the prior year’s. And that comparison was the best in five
months.
The unemployment rate dipped to 4.9% in November, quite an improvement
from October’s 5.2% reading that was a 15-month high.
Other good news implied better consumer confidence as well. For what
expenditure requires higher confidence than the commitment to purchase a
home? In what has been the state’s best-kept secret, housing has been
soaring throughout the year. And this bullish trend continued through
the third quarter when home reseals hit another record: Based on sales
volume through the third quarter, activity reached nearly 14,000 units.
As the other graph shows, this was up nearly 19% from last year’s
comparable period, for a new record high!
And home resale prices are also very bullish, the median rising to
$127,500 in the third quarter, an eight-year high. Besides, it is not
just reseals that are bullish. New construction this year is headed for
a nine-year high as single-family construction permits exceeded 2,100
through October. This was the best 10-month reading in this decade!
But what’s in store for the state and national economies? Of course, no
one expects these strong trends to persist in 1999. In fact, despite the
good employment performance of November, the second half of 1998 has
seen jobs growth in the state slow to about 1%, versus about 1.6% during
the first half.
In other words, the first five months of the new fiscal year has seen
employment slow to the 1% pace forecast by Rhode Island’s Consensus
Revenue Estimating Conference in its November proceedings. In setting
the state’s revenue projection for the fiscal-1999 budget, the
Conference adopted such a slowdown in jobs growth as the economic
environment underlying their projection for slower fiscal 1999 tax
revenues.
In sum, viewed on a calendar-year basis, 1999 likely will record the
eighth consecutive year of job growth in the state, but the pace will
slow to about 1% versus the 1.3% pace estimated for 1998.
This would be consistent with prospects for slower jobs that I expect
for the national economy: National employment should slow to about a
1.2% gain for the new year, versus the 2.4% pace likely recorded in
1998. Yet, there is no recession in sight so long as consumer spending–
and the confidence and the stock market that support it–avoid a sharp
setback.
Now, consider recent national performance that is so important for
regional economic prospects. Much as we suspect for Rhode Island,
national evidence since October showed capital markets, consumer
confidence, and the economy responding positively to the recent Fed
easing moves and new initiatives for resolving the global economic
crisis.
In fact, the economy now seems positively re-energized after the dog
days of August. For it was only a couple months ago that we suffered a
stock market correction and pervasively troubling developments on the
President’s impeachment. Then, in a sharp upturn from the summer swoon,
major stock market indices were again setting new record highs as the
year ended.
Giving further evidence of renewed confidence after the August market
scare, investors are again voting with their pocketbooks, modestly
resuming their contributions to stock mutual funds in September and
October. While running only one-fourth the strong inflows of prior
months, the two-month recovery is still quite an improvement over
August’s record outflow that accompanied the stock market meltdown.
Likely in reaction to rising stock prices–and the vanishing likelihood
of the President’s conviction of impeachment in the Senate–consumer
confidence staged a turnaround, pushing up spending plans and outlays
along with it. National consumer confidence recovered in November from
October’s one and a half year low. More importantly, national consumer
expectations about the future also picked up in November, after plunging
to nearly a three-year low.
In response to improving confidence, national retail sales during the
September-November period were up a very strong 5.5 percent from the
year-prior. Besides, these trends indicate that consumption likely
continued robustly right through the holidays.
Other signs of the renewed spree showed consumers literally “spending
thrift”: consumer outlays actually exceeded disposable income in
September and October. This sent the saving rate below zero for the
first time in the monthly history for savings, a record that extends
back to the 1950’s.
The upshot: though consumption was bent on a strong trend during the
holiday quarter, that pace was eminently nonsustainable and will be
followed by a significant slowdown as consumers exhaust their appetite
for borrowing and “spending thrift.”
Among the sectors showing weakness, the manufacturing sector remains
stalled and is drifting backward as U.S. foreign trade accounts sink
further. In this environment, it is not too surprising that capital
spending suddenly declined during the third quarter as outlays for
producers’ durable equipment fell, its first quarterly decline since the
recessionary year of 1991.
Accordingly, business investment–a sector that has accounted for a
disproportionate share of national economic growth this cycle–is
beginning to succumb to plunging overseas demand, rampant imports,
overcapacity, flat pricing power, and falling profits
Of course, the Asian economic crisis continues to pelt the U.S. economy,
cramming in imports while canceling export orders. Besides causing
direct damage to our trade deficit, the Asian crisis also continues its
destructive effects on factory orders, production, and related
employment.
Turning to inflation trends unfortunately for producers hoping to raise
product prices, the low ebb of capacity use points to several more
months of flat or declining product prices for many competitors.
Consumer price inflation also continues muted, reflecting deflation at
the producer level and the moderate inflation in wages that slowly
pushes up prices of consumer services.
Ascendant labor costs still present the only risk to the sanguine
inflation outlook. But, so far productivity gains, profit erosion, and
layoffs have been taking pressure off price inflation.
Firms continue to cope with the ongoing wage-price pinch by
restructuring, merging, and engaging actions to cut their labor force.
So it is not surprising to see the latest gush of press releases
announcing new mega-mergers, accompanied by layoff announcements that
are approaching levels not usually seen except during recessions.
As U.S. corporations continue to face the twin banes of rising labor
costs and limited, even deflationary, pricing power, the “profit
recession” that we have warned of is well underway. The latest release
of third quarter profits painted an ugly picture of total earnings of
U.S. corporations: after-tax profits fell for the third quarter of the
past four quarters.
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During the tricky period that lies ahead, we hope that the U.S. stock
market will continue to turn a blind eye toward the profit recession and
ignore the decline in S&P-500 earnings that is underway this year. The
last thing our spendthrift consumer needs is another scary stock market
correction. That could derail consumer spending, and with it both the US
economic engine and the long train of troubled economies that it is
pulling.
The risk is that the economic slowdown we foresee, for both Rhode Island
and the nation, could degenerate into a nasty full-fledged downturn, if
consumers flag in their spending zeal. For, a strong consumer is the
linchpin securing the US economy from recession. Strong consumption
spending is critical to keeping us out of recession and stimulating
troubled world economies with our demand for their exports.
