The Cold Won't Stall This Revved Up Economyby
President Clinton must have felt pretty good as he prepared for his first official State of the Union address. His ratings in the polls have rebounded strongly, consumer confidence is the highest in more than three years, and the economy hasn't looked this good since the Buffalo Bills were not in the Super Bowl.
Both Clinton and the economy head into 1994 on the momentum from a strong showing at the end of 1993. Lower long-term interest rates, for which the White House can take at least partial credit, helped to rev up spending for cars, homes, and durable goods generally, boosting factory orders and production, while better growth in jobs and incomes kept people happy (chart).
The good news for the first quarter is that the fundamentals that lifted the economy at the end of last year remain in place, ready to support growth this quarter. It might not look that way as the January data come in, though, given the chilling influence of the Arctic Express and shock from the California earthquake.
For example, about one-third of California's manufacturing base lies within 40 miles of the quake's epicenter, according to a study by Dun & Bradstreet, and the more than 177,000 companies within a 20-mile radius employ more than 1.6 million workers. Many affected companies were already showing financial strains, says D&B, and the Federal Reserve went so far as to issue a statement on Jan. 25 urging bankers to be flexible in dealing with borrowers hit by the quake.
Nationally, retail buying dropped sharply in the third week of January, says the Johnson Redbook Report, reflecting the cold and the quake. Seasonally adjusted sales held 1.3% above December, but that was way down from the 3.5% gain in the first two weeks. However, Mother Nature's negative effects on these and other data should wane with the February and March reports.
Weather aside, Clinton probably begins 1994 with a strong sense of d j vu. A year ago, he rode into Washington on a wave of postelection euphoria, rising consumer spirits, and a stronger-looking economy only to see it all fade in the first half of the year. In 1994, though, the economy isn't likely to become a political liability, as consumer spending, business investment in equipment, and housing continue to buoy growth.
In particular, consumers seem to be in the game to stay. Recent gains in consumer attitudes suggest that households are feeling the economy's improvement in their everyday lives. And unlike consumers' election-related leap of faith this time last year, the latest jump is grounded in better economic fundamentals.
Indeed, the breakdown of the Conference Board's index of consumer confidence shows that households' assessment of pres-ent conditions is markedly more upbeat. The overall index rose to 83.2 in January, from 79.8 in December. Confidence hit a low in June, 1993, but since then, the present-situation component has risen 62%, while the expectations index is up 34%.
To be sure, consumers are still worried about jobs, but less so than before. Although the number of households in January who said jobs were "hard to get" outnumbered those who said they were "plentiful" by 3 to 1, the percentage reporting that jobs were "hard to get" fell to the lowest level in nearly 3 years.
But it's more than just solid economic growth. Add in low inflation, and the White House enjoys a win-win combination. It assures that any hikes in interest rates by the Federal Reserve will be few, far between, and small--and that monetary policy won't intrude into Clinton's 1994 agenda.
Labor costs, the best gauge of inflationary pressures, show no signs of acceleration. The Labor Dept.'s employment cost index rose 0.8% in the fourth quarter, putting labor costs for both wages and benefits in the private sector 3.6% above a year ago. For nearly two years, the annual growth has ranged from 3.4% to 3.7%, and better productivity is offsetting much of the increase.
Moreover, benefit costs are slowing (chart). They rose only 5% last year, the slowest pace in six years. In 1994, labor-market slack and corporate cost-cutting will hold down wage growth, and the Clintons' efforts to reform health care will keep downward pressure on benefits.
Although in his speech President Clinton took credit for the entire economy's peppier tone, his Administration's actions helped only a few sectors. One important area was housing, where the drive to reduce the budget deficit touched off the bond-market rally that made home buying very affordable.
Indeed, housing ended 1993 with a bang. Housing starts soared 6.2% in December, to a four-year high of 1.54 million, at an annual rate (chart). The gain was the fifth in a row and pushed starts for all of 1993 up to 1.29 million, the best year for homebuilders since 1989.
Activity in the existing home market was also furious. Resales in December hit an all-time best of 4.49 million, at an annual rate, replacing the previous record set just a month earlier. For the year, 3.8 million existing homes were sold--the highest pace since 1979. The combination of high new-home construction and record resales suggests that consumer spending on home-related goods should continue its solid upward trend in early 1994.
Can housing enjoy another good year in 1994? Probably, especially because of the rebuilding in California. But the frenzied pace of last quarter--when starts reached 1.46 million--isn't sustainable.
That's because two factors--demographics and a glut of apartments--will not support housing starts at such a high rate. Most important, household formation is the best indicator for housing demand, and only 1.3 million new households will be formed this year.
Moreover, many of those new households will move into apartments that are now vacant. Indeed, the biggest drag on the residential-construction sector has been the glut of apartments built in the 1980s. Starts on housing with five or more units have fallen for eight straight years. In 1993, just 130,000 units were built--the lowest number in 30 years of record-keeping.
Fortunately, the recent uptick in mortgage rates
doesn't dim the housing outlook. Even with the rise in rates and in home prices, the average monthly mortgage payment has increased by less than $50 since the third quarter. That's probably not enough to cut many buyers out of the market, especially with jobs and income growth likely to continue to strengthen this year.
Of course, housing won't look like a hot sector when the January data are released. It's a good bet that construction in general took a big hit from the record low temperatures that froze the U.S. from the Plains to the East Coast and as far south as Georgia (table).
Moreover, other sectors likely felt the effects of an icy January--as well as the California earthquake. In addition to housing and retail sales, nature's fury probably will have a big impact on the January data on utility use, industrial production, and overall hours worked in the economy.
For the most part, however, the weather's damper on growth is temporary. Homes not started in January will be built in February. Moreover, because the freeze came early in the first quarter, the drag on gross domestic product may be minimal if winter returns to a more seasonal pattern. That's because retailers, builders, and other businesses have two months to make up lost sales.
Apart from January's data, the economy is clearly on a healthier uptrend than during Clinton's first address to Congress this time last year. And the solid expansion is the big reason why Clinton has shifted his focus away from the business cycle and refixed his laser beam on health care, welfare, and crime in 1994.