July 3, 2013

Economic indicators point to gains for the rest of year

With a spate of good economic reports, 2013 is shaping up as a rebound year for the economy. Here’s what the evidence is showing for the rest of the year.

With a spate of good economic reports, 2013 is shaping up as a rebound year for the economy. Here’s what the evidence is showing for the rest of the year:

Steady jobs. Some of the more reliable leading indicators of the labor market are pointing to the same sort of steady employment gains in the months ahead that have been apparent throughout the year and, in truth, for most of the past couple of years. The nation added 175,000 jobs in May — and an average of 176,000 a month over the past year and 181,000 each month over the past two years.

Given that track record, the safest prediction would be that the second half of 2013 will offer more of the same: job gains in the range of 150,000 to 200,000 per month, with the jobless rate falling slowly. Indeed, some key indicators for the job market point in the same direction. For example, the number of people filing new claims for unemployment insurance benefits, a useful leading indicator of jobs, has been moving steadily downward, but in recent weeks it has been locked in the same pattern of the past year or two.

Bolstered business investment. Regardless of how much hiring companies do, leading indicators for business investment are looking pretty good. The stock market is up, which should boost executive confidence and implies that good investment opportunities exist. And the data support the idea that business investment will keep rising in the second half of 2013. For example, take new orders for non-defense capital goods, excluding aircraft. These are new orders for the equipment that businesses use, whether factory machinery or desks and chairs for office workers. The order data tend to presage future investment. And such orders have continued to rise fairly steadily in recent months.

Low, low, low inflation. What about prices? All signals are that they will be rising only modestly — indeed, quite likely below the 2 percent annual price gains that the Federal Reserve aims for. Not only do markets now price in inflation of only 1.86 percent a year over the next five years, but that expectation has been falling since late March.

Risks? Higher rates. Low inflation means that “real,” or inflation-adjusted, interest rates are higher. The inflation-adjusted interest rate that the U.S. government must pay to borrow money for a decade is still low by historical standards. But a sharp run-up began at the start of May and accelerated after the Fed’s meeting two weeks ago where officials discussed winding down their program of bond purchases.

That may dampen investment and spending that have been spurred by low interest rates. In particular, it will be a test of how resilient this housing recovery truly is. Housing starts were 29 percent higher in May than they were a year earlier, but those gains were driven in no small part by low mortgage rates that made homes more affordable. Anecdotal reports have pointed to demand for homes surging as consumers rush to take out mortgages before rates rise further. But over time, higher rates will mean homes are less affordable, which could work against the recovery.

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