The start of the year is an ideal time to offer our economic view. Many signs continue to point upwards. A key consideration is the labor market, which has been steadily improving. We will leave it to others to examine the impact of the precipitous decline in crude oil prices on certain states, such as Texas and North Dakota, In terms of New York City, it is likely to be beneficial. Gas prices have plummeted, fattening wallets and give consumers more dollars to spend.
Stronger economy leads to job growth
The economy has shown signs of steady improvement. In the latest estimate, third quarter GDP rose a strong 5%, up from 4.6% in the second quarter. Although the harsh winter in 2014 shaved growth from the first quarter, which fell 2.1%, the latest data show it was merely a temporary blip. Moreover, the growth rate has increased. In the second half of 2013, GDP expanded by 4.5% and 3.5%, in the third and fourth quarters, respectively.
The accelerating economic growth has led to increased jobs. The nadir on jobs was in early-2010. Since then, more than 11 million private sector jobs have been created. In 2014, an average of about 250,000 new jobs were created each month. The unemployment rate fell to 5.6% in December, down from 10% in October 2009.
We expect the improved employment picture to continue this year. Businesses appear to have more confidence. This is showing up in increased investment. After plummeting during the recession, it has spiked upward, at better than 5%. Similarly, profit margins have jumped since the recession. It has gone from 5% to about 10%, according to the Bureau of Economic Analysis. However, it has drifted slightly lower, but lower oil prices may fuel improvement going forward.
Wage growth will need to pick up. The increased employment has not translated int higher wages, yet. The average hourly wages were $10.31 in January 2014 and stood at $10.40 in December. However, as the labor market tightens, we expect workers’ pay to rise as competition heats up and employers become more anxious to fill openings.
Low gas prices fatten wallets
Crude oil prices have fallen by more than 50% since June. This has led to gas prices falling. Nationwide, the average price for regular unleaded gas has declined by 38% to $2.04 a gallon over the past year.
The average family is expected to spend $750 less on gas this year, according to the Energy Information Administration (EIA), an arm of the Department of Energy. This is essentially a tax cut and will stimulate the economy. Consumer spending represents two-thirds of GDP and is, therefore, an important component of the economy.
Mortgage rates remain low
The stronger economy makes it likely the Federal Reserve will raise short-term interest rates. It appears the Fed will increase rates sometime this year. The Fed Funds rate has been held near 0% for several years, an unusual circumstance.
However, most mortgages, particularly the 15 year and ever-popular 30 year fixed, are based on longer-term Treasury yields. Although the Fed helped keep these rates low, it has ended the program known as quantitative easing in October. Many, particularly those shopping for a home were concerned.
Treasury yields have remained low. We attribute this to the lack of inflation, and the outlook will be helped by falling crude oil prices. The 10 year Treasury yield stands at 1.83%. Last year, the yield fell from 3% to 2.17%.
The housing market is poised for another strong season heading into the spring. Although the European economies are weakening, and Russia is going through turmoil, we do not see U.S. growth greatly impacted. These countries are not large trading partners of ours and slower growth overseas does not meaningfully impact GDP growth, historically.
Meanwhile, the economy is gaining strength, with an improved employment picture and greater consumer spending power.