As this year comes to a close, it’s time to start planning for 2016. While it’s important to focus on your organization’s capabilities and goals, you also need to consider the state of the economy, both current and what you can anticipate in the coming year. Evaluating the economic big picture can seem overwhelming, but we’ve identified a few indicators that can help you see – and capitalize on – trends.
Beyond the GDP: Four real-time economic indicators
The gross domestic product (“GDP”) has been used by financial analysts and economists as one of the primary ways to gauge the health of the overall U.S. economy, and remains a highly valued economic indicator. But it presents information from a historical perspective. There are other economic indicators that can be monitored in real time or near real time, and can help you understand where the U.S. has been and where it is going.
- Unemployment/Underemployment as a Percentage of Civilian Labor Force by Year (Figure 1)
Figure 1 shows a comparison of the U.S. unemployment rate (U3) and the U.S. underemployed rate (U6) as published by the Bureau of Labor Statistics from January 2005 to August 20151. The U3 rate is generally referred to as the official unemployment rate in the U.S. The U6 rate represents those individuals who are marginally employed or employed part time. In both cases, the rates are trending in a positive, downward direction. The gap between the U3 and U6 rates suggests there is additional capacity (a good thing) within the civilian labor force that can be utilized as the economy continues to grow.
- Regional Unemployment as a Percentage of Civilian Labor Force by Year (Figure 2)
Figure 2 shows the comparison of the Ohio, Kentucky and Indiana unemployment rates, along with the U.S. unemployment rate, as published by the Bureau of Labor Statistics2 from January 2005 to August 2015. The comparison suggests that unemployment in the region we predominantly serve is relatively consistent with the overall U.S.
- Household Financial Obligations as a Percentage of Disposable Income by Year (Figure 3)
Figure 3 shows the decline in household financial obligations as a percentage of disposable income, as reported by the U.S. Federal Reserve System from January 2005 to January 20153. The types of financial obligations incorporated in the ratio include mortgage debt, credit card debt, property tax, lease payments, and homeowner’s insurance. At this point, the household financial obligations burden is at the lowest point in 10 years. The decrease in the ratio means more disposable income is available to households.
- Consumer Sentiment Index by Year (Figure 4)
Figure 4 shows the trend in consumer sentiment as reported by the University of Michigan from March 2005 to March 20154. The index seeks to measure consumer confidence in how they view prospects in (1) their own financial situation, (2) the general economy over the near term and (3) the economy in the long term. At this point, the Consumer Sentiment Index is at the highest point in 10 years. The higher the Consumer Sentiment Index, the more optimistic consumers are about the state of the economy.
How the numbers affect industries and organizations
So what do all these data points and trends mean? Consumer spending impacts a significant portion of U.S. economic growth and, generally, with lower unemployment rates comes higher consumer buying power and spending. Considering we have the highest consumer confidence since 2005 with the fact that household financial obligations are the lowest level they have been since 2005, and average consumer FICO credit scores are at their highest point since 2005 (as reported by Fair Isaac Corporation), you see multiple positive economic trends forming and correlating.
You would expect these trends to have a positive impact on common big-ticket items like homes5 and autos6, and the stats below indicate this.
New Housing Starts (in 000’s) by Year (Figure 5)
U.S. Car Sales (in 000’s) by Year (Figure 6)
Factors out of our control
Of course, the complexities of the U.S. economy cannot necessarily be distilled down to a few data points and trends. Also, our economy doesn’t exist in a vacuum – other factors influence its health. Consider the following:
- The effects of globalization — events in Europe, Asia (namely China) and elsewhere — impact the U.S. more and more.
- Discussion and/or decision making (or lack thereof) in Washington D.C. impacts taxation, industry regulation, the prime rate and foreign policy, and creates a level of uncertainty and volatility.
- The U.S. Census Bureau projects that over the next 45 years, the fastest growing percentage of the population will be those aged 65 years and older, which tends to be a group that consumes less than younger cohorts.
Moving forward with optimism
So what do we really know about the state of the U.S. economy as we head into 2016? While the GDP will continue to remain a highly valued economic indicator, we probably won’t see the double-digit or near-double-digit growth that we have historically seen. But perhaps a silver lining to this is the likelihood that we won’t see the high inflation that usually accompanies high GDP growth either.
Jeffrey Korzenik, Chicago-based Chief Investment Strategist for Fifth Third Bank, recently described the U.S. economy as a car engine that is not firing on all cylinders: it’s slow and it doesn’t feel quite right, but it does move forward. While there are still some challenges that lie ahead, there are reasons for continued optimism. We have definitely come a long way since the financial crisis of 2008 and 2009.
The CPAs and advisors at Clark Schaefer Hackett stand ready to work with you and your business to capitalize on opportunities, avoid problems and manage risk. Contact us today to start planning for tomorrow.