2014 Economic Outlook for Manufacturers: Will US GDP Ever Break Out?

What do you do when the US government shutdown prevents data releases? Start quoting Benjamin Disraeli.

That’s exactly what Bill Strauss, chief economist at the Federal Reserve Bank of Chicago, resorted to doing during his keynote speech at Day One of our conference, Commodity/PROcurement EDGE.

As Disraeli said, “there are lies, damn lies and statistics,” Strauss quipped, when talking about the labor market. Of course, national statistics are harder to come by as the federal government shutdown drags on, and agencies that usually report them are forced to take a break. That’s the case for the BLS, and the latest unemployment report, which was to come out last week and is now delayed.

Labor Outlook

Shutdown notwithstanding, looking over the last several years, 6.8 million jobs have been added since 2010 and over the past year added 2.2 million jobs over past year. By the middle of next year, there will be a new record high in US employment, which politicians will celebrate. “I will not be celebrating,” said Strauss. His take is that we’ll still be in the hole a year from now. The most recent reading was for August, a 7.3% unemployment rate, which is very misleading.

For example, according to Strauss, if you’re looking for a full-time job and can’t find it, you’re working part time – and you’re considered employed; that boosts the number, which masks some of the problems, as does the ‘underemployed’ situation. That means that the teenage/young person unemployment rate is incredibly high – if you don’t get kids engaged in the labor market early, you may not ever do so in the long term.

The forecast for the unemployment rate: it looks to edge lower. For Q4, it will stay roughly where it is right now – 7.1-7.3 percent – and next year dropping to mid to upper 6 percent. And to get below 6 percent? You have to wait for 2016, according to Strauss.

Housing Outlook

In the housing market, prices have moved up – is this suggesting a bubble? Since inflation has been very low, Strauss said he is not worried about the higher price movement. The forecast calls for a very gradual recovery in housing.

Housing starts, for example, are well below the normal rate. “The numbers suggest to me that this market is being very cautious,” Strauss said. “There could still be a year’s worth of excess inventory out there.” Household formation remains very low.

US Economic Growth

“If you want to think about how manufacturing is doing, you have to think about GDP,” said Strauss.

The Fed expects 2.9-3.1 percent growth in 2014, and 3.0-3.5 percent in 2015, but then back to 2.5-3.3 percent in 2016.

Interestingly, the path of the current recovery is restrained compared with past deep recession recovery cycles, in the mid-70s and early 80s. According to Strauss, the economy became 20% larger a year or so after those recessions, which translates to a 5-5.2% average annualized growth. We’ve been nowhere close post-2008/2009.

Key Commodities Tidbit?

Strauss is bullish on what natural gas and LNG are doing to energy in the manufacturing sphere. Between 1994 and 2005, the natural gas to oil price ratio averaged 13.4%, it fell to average 3% in 2012, according to Strauss. LNG is a much better choice for fuel because it takes up a lot less space, for tractor trailers, railroads, and on in Great Lakes shipping.

Here’s our sister site’s take on Bill’s outlook. Much more Commodity/PROcurement EDGE coverage on Spend Matters.