September-October 2015

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he U.S. economy is definitely on the mend. Economic growth rebounded in the second quarter. Unfortunately, the growth in Gross Domestic Product (GDP) was a bit weaker (2.3%) than expected. The slow growth in the first quarter (.6%) was due to the severe weather, the West Coast port strike, and a drop in business investment for oil rigs. Most economists had focused on how lower gasoline prices should benefit the consumer. As it turned out, investment spending contracted very quickly, while consumers were slow to spend the windfall. Since consumer spending is nearly 70% of the U.S. economy, it is the key driver of growth. Consumer spending did rebound from less than 2% growth in the first quarter to over 3% in the second quarter. The latest retail sales report suggests that spending growth will be even higher this quarter. Given the sustained growth in employment (over 240,000 jobs per month over the last year) and an unemployment rate finally near 5%, consumer spending should continue to improve over the next year. Housing starts are also finally on a firm recovery track and should bolster economic growth later this year. Two recent reports are very encouraging. First, housing starts pushed above 1.2 million in June and July. Single-family housing starts in July were near 800,000 units—a level not seen since early 2008. The other report for household formations (the key driver for future housing starts) was very bullish. Household formations averaged only 600,000/year from 2007-2012—a household formation rate consistent with housing starts near 1 million units per year. The recent estimate for 2015 is above the trend rate of 1.2 million per year. Younger adults are finally finding jobs and are able to form their own households. The current household formation rate is consistent with 1.5 million housing starts per year. Thus, housing starts will continue to improve over the next year and finally move above 1.5 million units by late 2016 or early 2017. Another plus has been the improvement in spending by State and Local governments. One of the primary constraints to overall economic growth after the recession was large cuts in State and Local government spending. Unlike the Federal Government, they had to balance their budgets. They were forced to cut spending as revenue from sales and real estate taxes fell. Revenue is growing again and so is their spending. The Problem Areas As mentioned in the April 2015 article and at the NWPCA annual conference, I was very concerned about how international 20 PalletCentral • September-October 2015 T Trade Winds Slow U.S. Growth By Lynn O. Michaelis ECONOMY

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