For more than 60 years, AIER has used our BCC indicators to warn of potential economic weakness. On average, our leading indicators have signaled impending recession approximately 3 months before an official downturn began. As of November, our index of leading indicators has exceeded 50 percent since September 2009, a run of 63 consecutive months. Consistent readings well above that midpoint suggest a low probability of recession over the next six to 12 months.
In addition to our index of leading indicators, we also calculate three other AIER measures: a cyclical score for our 12 leading indicators, an index of coincident indicators, and an index of lagging indicators. All of our indexes suggest continued economic growth in the quarters ahead (Chart 1). Overall, we remain optimistic about the U.S. economic outlook.
THEMES FOR 2015
Last June marked the fifth anniversary of the Great Recession’s end and the start of the current expansion. Several milestones were reached this year: Employment finally exceeded its prerecession peak and the jobless rate fell below 6 percent; the Fed ended its QE asset-purchase program; yields on 10-year U.S. Treasury notes remained above 2 percent for the entire year, and the dollar hit its highest level since 2009.
These milestones are all positive signs. But the strength of the recovery is still considered subpar by historical standards. Growth in real Gross Domestic Product (GDP), the broadest measure of the economy, has been, on average, slower during this recovery compared with previous ones. Unemployment has come down substantially, but the labor market remains soft by other measures. Taken together, slow but steady improvement and a lack of severe imbalances suggests that the expansion, while somewhat subpar, is likely to continue for quite some time.
A closer examination reveals a number of important qualities that support a favorable outlook for next year. First, consumers have paid off a significant amount of debt that accumulated during the previous expansion. Combined with recovering home values and record high equity prices, consumer balance sheets are the healthiest in decades.
Likewise, corporate America looks to be in generally good financial health. Balance sheets for publicly traded businesses are flush with cash, sales have been rising at a moderate pace, profit margins are high by historical measures, interest rates are low, and more recently, energy prices have dropped. Even the federal government’s fiscal position has improved markedly over the past few years, though longer-term deficit and debt trends remain concerns.
So with a slowly improving economy, positive readings from our BCC indexes and few imbalances, what will be the key macroeconomic themes to watch in 2015? We will be paying particular attention to three areas: consumer purchasing power, i.e. jobs, wages and debt growth; global expansion; and energy prices.
American consumers account for about 70 percent of U.S. GDP, so as the consumer goes, so goes the economy. Crucial to projections of consumer spending is the outlook for growth in purchasing power, or spending ability. This can come from income, like wages or dividends, from capital gains when assets like stocks and bonds appreciate, or from an increased capacity to borrow. The key elements to watch for next year will be continued employment gains, accelerating wage growth and consumer borrowing, especially using revolving or credit card accounts.
Global economic growth is expected to accelerate slightly in 2015, according to the International Monetary Fund (IMF) as well as many private forecasters. While faster expansion is positive, the aggregate growth rate is still expected to be weak and uneven. Much of the weakness is in Europe and Japan, which together account for about 21 percent of non-US global output. Other developed economies on average appear to be fairing a bit better.
Among emerging economies, the story is also mixed but on balance, a bit stronger compared with more mature economies. Not surprisingly, the key player is China. Though still considered an emerging economy, its size is only eclipsed by the U.S. With well over 1 billion people and annual growth often ranging above 10 percent in past decades, policies to manage China’s domestic expansion can have an outsized impact on the global economy. Over the past 15 years, China’s real GDP has expanded at an average annual rate of 9.6 percent. It slowed to 7.3 percent through this year’s third quarter and is expected to fall to just 7.1 percent in 2015.
Energy is the third area deserving extra attention next year. Because these resources are so critical to the functioning of all modern economies, developments in commodity markets for natural gas, coal and crude oil are particularly important. Recently, crude prices fell sharply amid rising supplies and sagging global demand. U.S. domestic prices dropped almost 40 percent from a 2014 high of about $108 to about $66 a barrel at the end of last month, levels last seen in 2009.
While lower energy costs are good for consumers and many businesses, oil producers suffer. Energy production from shale rock has been a rapidly growing source of U.S. jobs and economic gains in recent years, particularly in places that have been bypassed for decades, such as North Dakota, west Texas and western Pennsylvania. While the net benefit to the U.S. economy from lower energy prices is positive, there are several areas related to energy production, transportation, and capital investment that may suffer. AIER will be monitoring the developments in domestic and global energy markets carefully and analyzing the impact across the economy’s major sectors.