On Monday we brought you a mid-year update on how the U.S. economy is doing so far in 2013, showing continued growth but not the rapid liftoff that millions of unemployed Americans would like to see. But what are the prospects for the remainder of the year? Might the economy finally get on track? Here's what the evidence shows, in SEVEN MORE charts.
Steady as she goes for jobs
Some of the more reliable leading indicators of the labor market are pointing to the same sort of steady job gains in the months ahead that have been apparent throughout 2013, and, in truth, for most of the last couple of years. This chart shows the number of jobs the United States added (in thousands) in May, and on average for the last 3, 6, 12 months and so on. The fact that the bars are all pretty much the same height says a lot about how consistent, if unexceptional, this job market is.
Given that track record, the safest prediction would be that the second half of 2013 will offer more of the same: Job gains in the 150,000 to 200,000 a month range, with the unemployment rate falling slowly.
Indeed, some key leading indicators for the job market point in the same direction. For example, the number of people filing new claims for unemployment insurance benefits, a useful leading indicator of jobs, has been moving steadily downward, but in recent weeks has been very much locked in the same pattern of the last year or two.
Things look good for business investment
Regardless of how much hiring that companies do, leading indicators for business investment are looking pretty good. The stock market is up, which should help executive confidence and implies there are good investment opportunities out there. And the data support the idea that business investment will keep rising in the second half of 2013. For example, take new orders for nondefense capital goods excluding aircraft. This is new orders for the equipment businesses use, whether factory machinery or new desks and chairs for office workers. The orders data tend to presage future investment. And it has continued rising fairly steadily in recent months.
Low, low, low inflation, as far as the eye can see
What about prices? All signals are that they will be rising only modestly--indeed, quite likely below the 2 percent annual price gains that the Federal Reserve aims for. Here, for example, is the average annual inflation that investors are expecting over the next five years, according to bond market data. Not only do markets now price in inflation of only 1.86 percent a year over the next five years, but that expectation has been falling since late March.
But risks from higher rates!
That's not necessarily a blessing, however; low inflation means that "real," or inflation-adjusted, interest rates are higher. This chart shows the inflation-adjusted interest rate that the U.S. government must pay to borrow money for a decade (that is, it's the yield on a 10-year inflation-protected bond. While it is still low by historical standards, the spike on the right is a sharp runup that began at the start of May and accelerated after the Fed's meeting two weeks ago where officials discussed winding down their program of bond purchases.
That may dampen investment and spending that have been spurred by low interest rates. In particular, it will be a test of how resilient this housing recovery truly is. Housing starts were 29 percent higher in May than they were a year earlier, but those gains were driven in no small part by low mortgage rates that made homes more affordable. The National Association of Realtors index of housing affordability, for example, has hovered near all-time highs:
The most recent data in that chart is from April, before the interest rate swings. So expect the number to decline in May and June to reflect higher mortgage rates, which make homes less affordable.
But there is also some good news for consumers heading into the second half of the year. Prices for gasoline, stable over the last few years at between roughly $3.50 and $4 a gallon, have fallen in the last several weeks. That should free up more cash for everything else consumers might want or need.
So the pieces are in place for more growth ahead in the second half of 2013, but with the drag from higher interest rates and the continuing impact of federal government spending cuts, there isn't much reason to expect any rapid acceleration in growth.