With Memorial Day behind us, school is ending in many parts of the nation and summer vacation destinations are a hot topic of conversation. But we were recently reminded of the significant impact the unusually cold and snowy winter of 2013–14 had on the U.S. economy. The Bureau of Economic Analysis of the U.S. Department of Commerce released revised figures on economic growth for the first quarter of 2014 as measured by gross domestic product (GDP). The GDP data are closely watched, as GDP is the broadest measure of the nation’s economic output. The pace of GDP growth is a critical driver of corporate earnings, which, in turn, are the key driver of stock market performance.
The GDP data revealed the economy contracted at an annualized 1% pace in the first quarter, just the second time since the end of the Great Recession in mid-2009 that the economy contracted. Could the first quarter GDP report be a harbinger of another wrenching recession? We don’t think the weather-related economic weakness is the start of another recession or even a slowdown in growth. We continue to expect that economic growth will rebound and expand 3.0% in all of 2014.* In fact, the return to a more normal weather pattern nationwide has already led to a sharp snapback in economic activity. The U.S. economic data released thus far for April and May 2014 suggest that economic growth will accelerate in the second quarter to well above the economy’s long-term average growth rate after a weather-induced slowdown in growth in the first quarter of 2014.
Importantly, many of the other indicators that can provide an early warning of recession are not signaling a downturn in the economy. The Index of Leading Economic Indicators (LEI)—compiled by the Conference Board—a private sector think tank—is comprised of 10 indicators and designed to predict the future path of the economy, with a lead time of between six and 12 months. The year-over-year increase in the LEI in April 2014 was 5.9%. Since 1960—652 months, or 54 years and four months—the year-over-year increase in the LEI has been at least 5.9% in 211 months. Not surprisingly, the U.S. economy was not in recession in any of those 211 months. Thus, it is highly unlikely that the economy is in a recession today, despite the below zero reading on real GDP in the first quarter of 2014. Looking out 12 months after the LEI was up 5.9% or more, the economy was in recession in just nine of the 211 months, or 4% of the time.
On balance then, we would agree with the LEI indicator that the risk of recession in the next 12 month is negligible at 4%, but not zero. However, a dramatic deterioration of the fiscal and financial situation in Europe, a fiscal or monetary policy mistake in the United States or abroad, or an exogenous event (a major terror attack, natural disaster, etc.), among other events, may cause us to change our view that the odds of a recession in the United States remain low. But for now, based on the LEI, it looks like we are still in the middle of the economic cycle that began in mid-2009.
As we look to forward to enjoying the summer sun, we continue to believe the foundation is in place for you to make further progress toward achieving your financial goals in 2014. As always, if you have questions, I encourage you to contact me.
Jeffrey Foster, CFP®
Senior Partner, Wealth Advisor
* As noted in the Outlook 2014 The Investor’s Almanac, LPL Financial Research expects GDP to accelerate from the 2% pace of recent years to 3% in 2014. Since 2011, government spending subtracted about 0.5% each year from GDP growth. Government spending should be less of a drag on growth which would result in +1% increase for 2014.
The economic forecasts set forth may not develop as predicted.