January-February 2016

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30 PalletCentral • January-February 2016 Stuck in 2nd Gear By Lynn O. Michaelis ECONOMY he U.S. economy has NOT been able to get any momentum going. The main driver of the U.S. economy—the consumer—continued to do its part last quarter. Overall GDP was up only 2% from year ago levels, but consumer spending grew over 3%. With employment growth averaging 220,000 per month and unemployment near 5%, the consumer is feeling pretty confident about the future. This is reflected in the boom in vehicle sales which pushed above 18 million units—the best in 15 years. Residential investment is also finally boosting growth, running nearly 9% over year ago levels. Two other major segments are growing, but very slowly. Business investment grew only 2%, despite very healthy balance sheets and improving operating rates. State and Local government spending is up only 1%, but will grow even faster over the next year in line with tax revenue increases. Economic Growth Summar y There are two major segments dragging overall growth down. First, Federal Government spending continues to contract. Many of us believed Federal government spending would improve given the dramatic reduction in the budget deficit. The budget deficit as a share of GDP is now near 2%, near a low point for the last 35 years. Even so, the debate about government spending in Congress keeps pushing expenditure levels lower. Next, the foreign segment (Net Exports) is proving to be an even bigger drag than expected, especially for industrial production. Over the last year, imports of manufactured goods grew over 6%, while exports of manufactured goods grew less than 1%. While industrial production historically grows faster than GDP in a recovery period (which happened in 2010-12), the manufacturing segment stalled in the second half of 2015. Overall industrial production was up only 1.2% over year ago levels, and non- durable manufacturing was up 2.7%. Since pallets are used to move manufactured goods, this is THE part of the economy the pallet producers care about. Industrial Production Closer Look at Surging Dollar One of the primary causes for the pathetic growth in manufactured products was the recent surge in the value of the U.S. dollar. Even though the U.S. economy is growing only 2%, our economy is still one of the healthier global economies. Because the U.S. economy looks so healthy, the Federal Reserve finally boosted short-term interest rates by .25% on December 16. Strong employment gains, improving wages, and a core inflation rate near 2% were key factors in making the decision. The Fed feels the U.S. economy is in a good position to sustain growth over the next few years, and higher interest rates are consistent with controlling the growth rate to keep inflation near 2%. Meanwhile, the European economy continues to struggle. The European Central Bank has announced further cuts in interest rates (already below zero) and additional asset purchases to promote growth and fight deflation. Growth in China's economy has also fallen below the desired target rate. Policymakers are taking actions there as well to promote growth. The Chinese slowdown has ripple effects on a range of countries that produce and export commodities. As a major buyer of oil, steel, copper and even wood products, the slowdown in China has fueled the decline in commodity prices. On the one hand, these price drops are a plus for consumers but they are hurting countries that export commodities. The policy actions (including sanctions on Russia), plus the drop in commodity prices, has led to the dramatic exchange rate declines. T

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