What Changes of Fortune Will 2011 Hold for the U.S. Economy?
It’s all in the indicators.January 6, 2011
by Ron Box, CPA.CITP
The past few years have seen the worst economy since the great depression of the 1930s. What changes of fortune will 2011 hold for the U.S. economy?
This question is best answered by examining indicators that, when examined collectively, can help predict how we all invest, save, spend and find jobs. The best combination of indicators is a matter of opinion, but there are several that are generally accepted to provide a reasonable picture of the next 12 months.
There are a number of organizations that compile enormous amounts of data in order to provide guidance on segments of the economy. No one indicator can supply a total picture of the economy six or twelve months from now. Which indicators are most important? The answer to this question will vary, depending on the most troublesome factors deemed to be holding back progress. Unemployment, new housing starts, consumer confidence and gross domestic product are just a few of the primary drivers of economic performance. At one time inflation was considered to be the biggest problem facing the U.S. Now many believe unemployment to be the reason consumers are not spending. Therefore, the unemployment rate is currently thought of as the prime indicator. Looking to the future, many fear that massive government spending will re-ignite inflation as a significant weight on the economy. So, what will happen in 2011? The answer lies in aligning the best combination of indicators.
How to Use Indicator Analysis
The indicators examined here are generally considered to be important leading factors, meaning that positive or negative movement in the indicator will precede a similar effect on the economy. For example, a decrease in the unemployment rate means more Americans are working with more disposable income to spend. Of course, increased consumer spending is generally good for the economy, especially if inflation is in check. Think about the collective effect of the following information on the United States economy over the next year:
Unemployment Rate — Issued by the U.S. Bureau of Labor Statistics, the national unemployment rate stands at 9.8 percent (as of November 2010). By comparison, the unemployment rate in October 2007 was 4.7 percent. The Federal Reserve estimates 2011 unemployment rates to range from 8.9 percent to 9.1 percent in 2011, so only a modest improvement in employment is expected over the next 12 months.
Composite Index of Leading Indicators – Issued by The Conference Board (an independent economic research organization), this leading indicator is actually an index made up of 10 key factors. The November 2010 index scored at 111.3 (in which 2004 = 100) and has been increasing for several months. Ken Goldstein, economist at The Conference Board says “The economy is slow, but latest data on the U.S. LEI suggest that change may be around the corner. Expect modest holiday sales, driven by steep discounting. But following a post-holiday lull, the indicators are suggesting a mild pickup this spring.”
Consumer Confidence Index — Also issued by The Conference Board, the Consumer Confidence Index (CCI) is based on a survey of 5,000 households in the United States. As of November 2010, the CCI stands at 54.1 (the index is based on the 1985 index of 100). Says Lynn Franco, director of The Conference Board Consumer Research Center: “Consumer confidence is now at its highest level in five months, a welcome sign as we enter the holiday season. Consumers’ assessment of the current state of the economy and job market, while only slightly better than last month, suggests the economy is still expanding, albeit slowly. Expectations, the main driver of this month’s increase in confidence, are now at the highest level since May (Exp. Index, 84.6). Hopefully, the improvement in consumers’ mood will continue in the months ahead.”
Gross Domestic Product — Determined by the U.S. Department of Commerce, the Gross Domestic Product (GDP) of a nation is considered to be a reflection of the health of an economy and a standard of living. It is the cumulative output of goods and services in the United States. The GDP for the third quarter of 2010 increased 2.5 percent following a 1.7 percent increase in the second quarter. According to the National Bureau of Economic Research — an independent group of economists — “economic data now clearly point to the economy turning higher last summer. That makes the 18-month recession that started in December 2007 the longest and deepest downturn for the U.S. economy since the Great Depression.”
Consumer Price Index — Published by the U.S. Department of Labor, this index is a measure of inflation at the consumer level. The Consumer Price Index (CPI) is set on a 1982 to 1984 timeframe so comparisons from 2010 are made to that baseline. The October 2010 CPI was 0.2 compared to a 1.2 percent increase over that past 12 months. The “core inflation” rate (which excludes more volatile food and energy prices) was unchanged in October, for the third month in a row. Federal Reserve policymakers have a long-run goal of 1.7 percent to two percent inflation that they see as consistent with achieving legislative mandates for maximum employment and stable prices. Therefore, inflation appears to under control at the moment. Theoretically, this allows the federal government more latitude to stimulate job growth that if inflation was registering at a significantly higher rate.
What Do We Make of This?
Many economists believe that job growth will be the key to an improved economy. American consumers could spend more, increasing demand and creating more jobs. However, many consumers are either unemployed or very concerned about the stability of their jobs. Many of those consumers spend as little as possible, which suppresses demand for goods and services and limits job creation. Since unemployment is expected to remain relatively high and consumer confidence near historic lows, we cannot expect significant increases in spending from American consumers in the near future. Borrowing to support increased demand is unlikely because of a tight credit policy for both consumers and business from many financial institutions.
There is significant concern about massive government stimulus causing inflation, even though inflation is currently viewed to be relatively low. So, we cannot count on large “new deal” programs to dramatically reduce unemployment. Certain sectors of the economy are growing, as evidenced by a modest but increasing GDP. Corporate profits are up but they are not hiring in large numbers to support the growth, which can mean that businesses are learning to do more with fewer employees. So, the increase in GDP is occurring without significant job creation.
What Can We Expect in 2011?
Speaking of the Federal Reserve Open Market Committee meeting held in November 2010, The Washington Post said "Though the economic recovery was continuing," fed policymakers considered progress to be "disappointingly slow," according to minutes of the meeting released Tuesday. "Moreover, members generally thought that progress was likely to remain slow."Based on a review of the leading economic indicators and comments from the Federal Reserve, the United States can probably expect continued high unemployment and modest growth. Of course, any number of other factors can affect the direction of the economy. Many issues, such as a bailout crisis in Ireland, Portugal and Spain can lead to a destabilized European Union, causing significant turbulence in the United States. However, considering the facts as they currently exist, it appears that the United States will continue to struggle through the “Great Recession” for some time to come.
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Ron Box, CPA.CITP, CFF, CISSP, is the chief financial officer and chief information officer for Joe Money Machinery, a Birmingham, AL.-based regional heavy construction distributor with operations in Georgia and Florida. Ron also serves as chair for the 2010 AICPA Top Technology Task Force and is a member of the AICPA Certified Information Technology Professional (CITP) Credential Committee.
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