I Don’t Want To Say I Told You So – Mid-Year Economic Forecast: Signs of Strength Tempered With Notes of Caution

Posted by Paul Brindley
on August 07, 2015

.. but I told you so.economy_blogimage

In my article, Full Steam Ahead for US Economy in 2015? – Just Hold Your Horses There from February, I rebutted an assersion in the California Apparel News article, Full Steam Ahead for 2015 as Economy Accelerates and Gas Prices Drop from January that “just about everyone agrees that 2015 is shaping up to be a good year for the U.S. economy”.

I won’t restate my case. You can read the article yourself.

In short, 2015 has been a very choppy economic year on many levels. The stock market has been swinging wildly, the job market is still soft, wage growth is non-existent, retailers are struggling badly, the negative effects of international events have been a drag and the bizarre inverse relationship between the health of the economy and the effects of the prospect of a Reserve Bank interest rate rise is ever more evident. I mean how is it that the Reserve Bank thinks the economy is strong enough to consider an interest rate rise but even the consideration of a rise is forcing the stock market down?

The phenomenon is explained by Robert R. Johnson, President and CEO of The American College of Financial Services in Bryn Mawr, PN, and author of “Invest with the Fed.” He said the following about the effects of a rate hike on the markets in an interview with Forbes:

The market will likely react very negatively in the short-term and continue to perform poorly over the long-term. Some pundits are claiming that the market may view a rate hike as positive for the stock market because it signals that the Fed believes the economy is sound.  I disagree.

The research presented in Invest With The Fed shows that long-term stock market performance has been dramatically better in expansive monetary policy environments than in restrictive monetary policy environments.  Expansive monetary environments are defined as those periods during which the Fed is lowering rates.  Alternatively, restrictive monetary environments are when the Fed is raising rates.

Over a 48-year period from 1966 through 2013, the S&P 500 (SPY) returned 15.18% during expansive periods and only 5.89% during restrictive periods.  The Fed was expansive and restrictive about the same amount of time.  One of the most interesting findings of our research is that stock market returns are not as correlated with the level of interest rates (whether rates are high or low) as they are with the direction of interest rates (whether rates are trending up or down).

With all that said, the uneven economic performance of the first half of 2015 has validated the measured approach to the year that I was advocating in February. Such prudence seems to have been internalized by many in the financial media and the business community.

Following is a repost of an article from an early July edition of California Apparel News with which I mainly agree. There is no burying the lead here. It’s all in the title – Mid-Year Economic Forecast: Signs of Strength Tempered With Notes of Caution.

The only point I would argue with is with the prospects for retail in California. I think we are going to play out a weak retail year. My discussions with independent retailers in the greater Los Angeles area reveal an unhappy retail environment. There have been too many very slow days this year. With lack of quality jobs out there and virtually no wage growth for those with jobs, it is impossible for there to be a significant uptick in retail activity unless we go back to the very bad old days of shopping on plastic.

2015 may turn out to be the best economic year since The Great Recession (a.k.a The Great Financial Crisis or GFC in other parts of the world) but I think it is going to continue to splutter all the same.

Some see a strong second half: Kiplinger’s Economic Outlooks

Bloomberg agrees: Signals Flashing Green for U.S. Economy as 2015 Road Clears

Some think we are headed for catastrophy: Doom and gloom: 2015 global recession warning from financial seers of the century

Who knows? After so many lean years and so many false dawns of better days, I think its best to do to what so many of us have done since 2008: stay in the present, keep your resources close, carefully manage your spending and cash flow, and be very much the more financially wiser for the experience whether you are running a business or a household or your own finances.

Paul Brindley
Principal Adviser


Apparel News


Mid-Year Economic Forecast: Signs of Strength Tempered With Notes of Caution

California’s economic outlook for the remainder of the year is good, but it’s not exactly time to pop the champagne cork because the forecast is served with a helping of caution.

A recent economic report by the UCLA Anderson School of Management showed strong job recovery across the U.S. and in California and forecast increased growth in construction, business investment and consumer demand.

“I think things are on solid footing,” said Esmael Adibi, the director of the A. Gary Anderson Center for Economic Research at Chapman University.

The year got off to a slow start, due to several factors, including the work slowdown and chassis shortage during contract negotiations at West Coast ports, which left holiday merchandise stranded on cargo ships. But Adibi said in recent years, the first quarter has been typically been slow.

“Our first quarter for the last 10 years has been lower than what should have been,” he said. “Barring any unexpected events, we think the remainder of [this] year is going to show strong growth in terms of real GDP.”

Events such as the Greek financial crisis threaten to affect the U.S. economy for the remainder of the year, but with no such impediments, Adibi said, the country and the state could see job growth continue.

“That suggests that job creation, which has been relatively strong for the U.S. and California, is going to continue to be strong,” he said. “Job creation is the most important factor affecting California’s economy and consumer spending, retail and manufacturing.”

The Los Angeles County Economic Development Corp. (LAEDC) pegged the employment forecast as flat for nondurable goods in its recent “Los Angeles: People Industry and Jobs 2014–2019” report.

But Ilse Metchek, president of the California Fashion Association (CFA), said the LAEDC’s employment numbers don’t paint the full picture of the apparel industry’s economic health.

“You really can’t talk about the industry as a monolith,” she said.

The state’s employment numbers for apparel manufacturing are down, but the value of imported goods is significantly improved.

“In terms of apparel and textile sales [and the] value of shipments in the LA region, we are above 2010 and 2011 levels—and 2011 was our biggest year,” Metchek said. “It’s not made here, [but] it is part of the industry [and] it is not reflected in the employment numbers.”

Retail rebound?

Traditionally, summer in California has been strong for the state’s retailers, who typically benefit from tourism spending, Chapman’s Adibi said.

“It all goes back to the broader economy,” he said. As the job picture improves, people will have more discretionary income to spend on travel and tourism activities.

“Tourism should be very strong this year,” he said. “The only negative is foreign tourism is not going to be as strong because the dollar is strong. We’re not expecting as many foreign tourists. They will still come—but not as many as you would hope for.”

Still, more discretionary income overall points to good prospects for California retail.

“When it comes to the retail sector, there is some good news,” Adibi said. In addition to a better job market, consumers have also reduced their debt load, and there’s the “positive wealth effect” of a strong stock market and higher home prices, Adibi said.

“People feel good when they’re a little bit wealthier,” he said.

Plus, the ongoing low gas prices promise to also have a favorable effect on retail spending.

“We have not fully seen the benefit of lower gas prices in terms of shopping,” Adibi said. “I think that’s going to kick in as people realize gas prices are not going to spike back up.”

The only negative Adibi noted was the “anemic wage growth.”

“Even those people who have had jobs haven’t seen a significant raise,” he said, but added, “I think the positives are going to offset this negative, and consumer spending should be relatively strong for the remainder of the year, which should help the retail sector.”

A recent report by real estate investment commercial real estate brokerage firm Marcus & Millichap found that commercial real estate developers are accelerating the timeline on several projects in response to “heightened demand” and pre-leasing commitments are “above 80 percent, indicative of pent-up demand from retailers seeking premium space.”

But according to CFA’s Metchek, some of that demand is coming from non-traditional and start-up retailers. Online retailers are looking for go “clicks to bricks” to drum up additional sales, she said.

“You have the malls opening up their leasing space to start-up companies—not just legacy brands—because they need people to fill the space,” she said.

The retail sector is very fractured, Metchek said, adding that the bricks-and-mortar retailers who are faring the best are those with a “significant online following that brings [shoppers] back into the store.”

New retailers—such as H&M’s minimalist sister brand, COS, which opened its second U.S. store late last year in Beverly Hills—see strong business because they’re the “new kid on the block,” she said.

But Metchek says she sees such success stories as “Peter to pay Paul.”

“That business is coming from somewhere else,” she said. “The business in Eagle Rock or Echo Park or Silver Lake is coming from Robertson. If somebody’s hot, somebody else is cold.”

What’s needed is a significant fashion shift to drive consumers to the store.

“There is nothing you need to buy now to make yourself feel current—even for a fashionista,” Metchek said. “When the contemporary consumer —these people who are fashion leaders—think of a new look, then you’ll see business turn around.”