Economic Activity Will Continue to Build Momentum into Next Year

The annual revisions to the gross domestic product (GDP) data revealed that the U.S. economy has gained momentum over the last year and now more closely corresponds with the employment data, which showed clear improvement during the first half of this year.
           
Real GDP has risen 2.4 percent over the past year, which is modestly better than the 2.1 percent pace averaged during the first four years of the recovery. The unemployment rate has fallen to 6.2 percent.
           
Consumer confidence, small business confidence and job openings have all improved in recent months, while homebuilding and commercial construction continue to slowly come back on track.

United States
The general consensus of the Economic Advisory Council calls for economic activity to improve further during the second half of 2014 and in the coming year. The recovery in housing, commercial real estate and business fixed investment is expected to gain momentum, while improved public finances are expected to reduce the drag from government spending cuts.
           
Real GDP is expected to average between a 2.5 percent and 3 percent pace over the next several quarters. Such a pace would be sufficient to further reduce the unemployment rate, but not be so strong as to stoke inflationary pressures.
           
Interest rates should rise modestly, with the Fed expected to begin to hike the federal funds rate around the middle of next year. The pace of rate hikes is widely expected to lag behind previous tightening cycles, with the Fed moving more cautiously and ultimately less forcefully than it has in the past.
           
Long-term interest rates will also rise more modestly than in the past, held back by sluggish economic conditions around the globe, continued low inflation and increased demand for fixed income instruments from an aging population in much of the developed world.

California
California’s economy continues to grow at a slightly faster pace than the rest of the nation, but appears to have moderated slightly during the first half of this year.
           
Growth has been driven primarily by the technology boom, most evident in the Bay Area. The rapid growth of new information technologies, most notably social media, cloud computing and mobile devices, has driven employment growth up at its strongest pace since the dot-com boom.
           
Rebounding home prices, the resurgence in international trade and strong growth in tourism have also driven gains in recent years, with most of the improvement occurring in California’s coastal areas. All three have shown signs of cooling in recent months, however, possibly reflecting the impact of the Fed’s tapering of securities purchases as well as slower economic growth in Japan, China and much of Europe.
           
The winding down of the Fed’s asset purchase program is helping cool off some of the more speculative aspects of California’s recovery. The rapid rebound in home prices has cooled off in recent months and run-up in equity valuations for technology and life sciences companies has subsided somewhat.
           
Home sales struggled during the first half of the year, with traditional buyers having more difficulty affording the higher home prices resulting from the influx of investor buyers or qualifying for mortgages under more stringent underwriting and income standards.
           
The tech sector also appears to be cooling off, with several hardware manufacturers announcing job cuts in recent months and the IPO market for new technology firms becoming more selective.
           
Forecasts for California remain generally upbeat. Nonfarm employment estimates have been revised higher in recent years and the latest forecasts from members of the Economic Advisory Council are on balance slightly higher than the most recent year-to-year growth.
           
California’s unemployment rate is expected to drop further over coming months, but the pace of the decline is expected to slow. The jobless rate should end the year at around 7 percent and end 2015 at 6.5 percent or less. Homebuilding is expected to increase further this year, with single-family starts rising 25 percent to 30 percent this year and multi-family starts rising 15 percent to 20 percent.
           
Home prices have moderated considerably over the past year and are expected to rise even more modestly during the coming year, with the 6.7 percent gain in median home prices reported by the California Association of Realtors over the last year moderating to less than 5 percent a year from now.

Employment Growth Shows Signs of Moderating
Nonfarm employment increased 0.2 percent in July, as California added 27,700 net new jobs. Health care and social assistance, professional and technical services, and the leisure and hospitality sector accounted for the bulk of July’s job gains. Most other major categories also added jobs during the month, including manufacturing and local government.
           
While employment gains remain fairly broad-based across most major industry categories, there are also signs that growth is moderating in some areas. Construction employment fell 1 percent in July, as builders cut 6,400 positions. The drop followed an 8,000-job loss during the prior month. Hiring has also slowed in wholesale trade and in transportation and warehousing.
           
California’s unemployment rate was unchanged in July at 7.4 percent, as both civilian employment and the civilian labor force declined by the same proportion during the month. The California unemployment rate has fallen by 0.9 percentage points since the end of last year and is down 1.6 percentage points over the last 12 months.
           
The drop in the unemployment rate over the past year has primarily come from stronger job growth. Civilian employment has risen 1.7 percent over the last year while the labor force has fallen 0.1 percent. The drop in the labor force pulled California’s labor force participation rate down to 61.9 percent, which is a full percentage point below the comparable national rate.
           
The continued slide in California’s labor force participation rate reflects the rise in retirements associated with the aging of the state’s large baby boom population, stubbornly high long-term unemployment, and a greater hesitance by younger persons to join the workforce.
           
California faces greater challenges on all three fronts, with the state’s larger and slightly older workforce retiring at a faster rate than the nation. Long-term unemployment is also a greater problem in the Golden State, with many longtime major employers and industries restructuring or leaving the state.

Source: California Chamber of Commerce, Alert          

Economic Activity Will Continue to Build Momentum into Next Year

- CMSA Communicator