U.S. Economy Gains Steam, World Hits the Brakes

America Widens the Growth Gap

The second and third quarters of 2014 represent a marked improvement from the weather-afflicted start of the year. Construction projects that were delayed by the harsh winter are now underway, auto sales are surging, the nation supports 2.635 million more jobs than it did a year ago, and for the first time in six years, unemployment has fallen below 6 percent.  Even the quality of jobs being added seems to have improved of late, with more middle-income jobs being produced in construction, manufacturing, energy, professional services and IT.  After shrinking during the first quarter, the U.S. economy bounced back with a robust 4.6 percent annualized performance during the second.  Stakeholders can expect around 3 percent growth for the latter half of 2014.

The U.S. economy continues to benefit from a series of tailwinds, including lower gasoline prices and a Federal Reserve that for the time being remains committed to extraordinarily low short-term interest rates. Though Quantitative Easing appears to be a thing of the past, monetary policy is rarely as supportive as it is right now – remarkable given that the nation is now in its sixth year of economic recovery.

Inflation remains mild. Even though job creation has continued to be healthy, for now, there is little evidence of wage inflation.  In real terms, wages are only up about 2 percent over the past year.

Perhaps the most remarkable aspect of this reasonably benign set of affairs is that America has been able to produce additional economic momentum even as much of the balance of the world seems to be spinning out of control. In addition to ISIS, Ebola, the Ukraine, China/Hong Kong, China/Japan, N. Korea, Iran, and Afghanistan are indications that the Europeans are headed back into recession. While recent economic weakness in Europe, Russia and Brazil has undoubtedly affected U.S. exports, the balance of the economy continues to steam ahead.  The International Monetary Fund recently downgraded its outlook for both 2014 and 2015 for much of the world, but not for America.

Of course, our nation faces a bevy of country-specific issues: a broken immigration system, corporate tax inversions, infrastructure spending gaps and a national debt approaching $18 trillion. Furthermore, the upcoming mid-term elections may lead to even more profound gridlock in Washington, D.C. and the nation faces another fiscal cliff next spring.  Despite all of this, the economic outlook for the next several quarters remains hopeful.  Even the U.S. dollar has been rising against many currencies of late, a reflection of America’s increasing growth advantage over much of the world.  Accordingly, the euro is roughly at a two-year low against the greenback.

This does not mean that 2015 should be a time for complacency. In fact, even as the U.S. economy has manifested more momentum, U.S. equity markets have become more volatile with 200 point swings (up and down) in the Dow Jones Industrial Average becoming commonplace in October.  The world’s issues are clearly affecting our markets, with bond yields tumbling and gold mounting a bit of a comeback.  There might be more of that in 2015, which is shaping up to be a newsworthy year for our planet.

One additional note of caution is in order. For years, the Federal Reserve has effectively been free to focus on accelerating economic growth in light of suppressed inflationary pressures.  That could change in 2015 as the labor market continues to tighten.  Trucking companies, construction firms, manufacturers, and healthcare providers are among the chorus of economic actors indicating that skilled labor has become very difficult to locate.  Eventually, this will translate into wage inflation and force the Federal Reserve to become less accommodating.  That could become a major economic and financial news item within the next two years, perhaps even next year.

MD and VA Slow to Grow

Once again, Maryland’s job growth failed to impress. The Free State added just 11,300 jobs between August 2013 and August 2014.  That translates to 0.4 percent growth, ranking 44^th among all states over that period, 45^th if one includes the District of Columbia.  Month-by-month job growth remains sporadic and altogether underwhelming.  The State added 600 jobs in August after losing 11,500 jobs in July.

Exhibit 1: State-by-State Job Growth, 12-month Percent Change, August 2014 v. August 2013

Rank	State	% Change	Rank	State	% Change	Rank	State	% Change
1	North Dakota	4.4	18	Missouri	1.8	35	Kansas	0.8
2	Nevada	3.5	18	South Carolina	1.8	35	Pennsylvania	0.8
2	Texas	3.5	20	Massachusetts	1.6	37	Illinois	0.7
2	Utah	3.5	20	Minnesota	1.6	37	Michigan	0.7
5	Florida	2.8	20	Wisconsin	1.6	37	Mississippi	0.7
6	Delaware	2.7	23	Arkansas	1.5	37	New Mexico	0.7
6	Oregon	2.7	23	Louisiana	1.5	37	South Dakota	0.7
8	North Carolina	2.4	25	Kentucky	1.3	42	Nebraska	0.6
9	Colorado	2.3	25	Maine	1.3	43	Idaho	0.5
10	Georgia	2.2	27	Iowa	1.2	43	Virginia	0.5
11	California	2.1	27	New York	1.2	45	Maryland	0.4
11	Tennessee	2.1	27	Rhode Island	1.2	45	New Hampshire	0.4
11	Washington	2.1	27	Wyoming	1.2	45	Vermont	0.4
14	Arizona	2.0	31	Alabama	1.1	48	Connecticut	0.3
14	Indiana	2.0	31	Hawaii	1.1	48	Ohio	0.3
14	Oklahoma	2.0	31	West Virginia	1.1	50	New Jersey	0.1
17	Montana	1.9	34	D.C.	1.0	51	Alaska	-0.8

Source: Bureau of Labor Statistics

The only region of the state experiencing decent job growth is the Baltimore metropolitan area, which according to the Bureau of Labor Statistics added 27,800 jobs from August 2013 to August 2014. This implies that the balance of the state lost 16,500 jobs over that period. The rural economies in Maryland continue to struggle, in part due to slow population growth and challenging housing markets.  Suburban Maryland has been brought low by sequestration and other policies that shape federal government outlays.

Statewide home sales in August were up only 0.5 percent from the same month one year ago and average sales price has actually slipped by 1.1 percent. Foreclosure filings were up 15 percent in August 2014 relative to the year-ago period.

Looking Ahead

Among the key economic drivers nationally has been growth in energy and industrial production. Neither is among Maryland’s strong suits.  What Maryland specializes in is government contracting, a sector of the economy that has been in retreat of late.

The implication is that Maryland’s economy is likely to continue to underperform in terms of job growth during the year ahead. Howard County has not proven immune to the sequestration syndrome.  The hope is that Maryland’s next governor, whether (D) or (R), will look for ways to render Maryland more attractive to private employers.  This would help Howard County, with its rising (but still low) unemployment and its flat housing market – one that has generated 1 percent growth in average sales prices and 0.0 percent growth in median sales prices over the past year.

 

 

Lowe Wealth Advisors is an SEC registered investment adviser that maintains a principal place of business in the State of Maryland. The Firm may only transact business in those states in which it is notice filed or qualifies for a corresponding exemption from such requirements. For information about the registration status and business operations of Lowe Wealth Advisors, please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov.

 This commentary is intended for the dissemination of general information regarding market conditions to Lowe Wealth Advisors clients. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results, and there is no guarantee that the views and opinions expressed in this report will come to pass. While any general market information and statistical data contained herein are based on sources believed to be reliable, we do not represent that it is accurate and should not be relied on as such or be the basis for an investment decision. Any opinions expressed are current only as of the time made and are subject to change without notice.

 The views and opinions of Sage Policy Group and Anirban Basu do not necessarily reflect the views of Lowe Wealth Advisors

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