FAIRLAWN, Ohio—The economy is showing signs of more engaged consumers, but a gradual softening in the consumption of automobiles could be cause to worry, Roger Tutterow, professor of economics at Kennesaw State, said at the Hose Manufacturers Conference in Fairlawn, Oct. 24-25.
Consumer confidence has been gradually rebuilding from its low in November 2008, according to the University of Michigan's Index of Consumer Sentiment, Tutterow said. By the fall of 2014, it reached between 85 and 95 points. Last year's election caused a jump on that scale of 11 points from October to January.
"The good news is that surge in sentiment gave us a pop in terms of retail sales," Tutterow said. "We reached a point where we had retail sales growth of 5.5 percent for the 12-month period ending late last year."
Though the Index of Consumer Sentiment did jump after the election, that boost didn't carry equally throughout the country. In the metropolitan Atlanta counties where Tutterow collects similar data to the index, the index didn't budge after the election, he said.
"It dawned on me that Clinton carried eight of the 11 counties in the survey. Trump carried three. It made me wonder if, in general, consumer sentiment in the U.S. is connected with political identity," he said.
American households have been bifurcated in terms of their near-term view of the economy, heavily driven by political affiliation, he said.
"As we work our way through 2017, this gap has been narrowing gradually. And I expect that as we reach a date of reckoning about what kinds of campaign statements can be actually morphed into policy, we'll see even greater convergence in terms of how various individuals see the economy versus their political affiliation," Tutterow said.
In automobile sales, despite a big jump after the Cash for Clunkers program and steady light truck sales as gas prices drop, the consumption of automobiles has been gradually softening in the U.S., he said.
One of two explanations for that slowdown is pent-up demand after the recent recession.
"We as economists have recognized for a long time that every time the economy goes through a soft patch, whether it's a full-blown recession or a pullback in job creation, people postpone purchases of big-ticket items, particularly durable goods," he said. "It's quite likely that we had a surge of consumption between 2010 and 2014 associated with satisfying some pent-up demand that was created between '07 and '10."
The other explanation is "we're seeing a pullback because the consumers are getting tired," he said. "When consumers get tired, big ticket items show it first. So there's some possibility there."
But finding those explanations got much tougher after Hurricanes Harvey and Irma came through, he said.
"It's very interesting. We're now going to have a period of anywhere from four to eight months where we're going to have elevated sales patterns trying to replace automobiles that were destroyed," he said.
Another metric to watch is the Conference Board Leading Economic Index, which watches statistics such as building permits and new orders for consumer goods to forecast economic activity, he said. The American economy has never had a recession not predated by the LEI going negative, typically by more than 1 percent.
The LEI increased every month in 2014 and 2015, but 2016 "got a little dicey," he said. Through April 2016, the data showed the LEI down by 0.1 percent, not enough to look for recession, but enough to raise the possibility of recession in the near-term. The most recent data show the LEI up at 2.6 percent, though there was a drop in September caused by the hurricanes.
"The point is, everything in the economic data today says that while we may be frustrated with the pace of economic growth, while we may not hit that 3.5 GPD that everyone is cheering for, the odds of full-blown recession here in the fourth quarter or in the first several quarters of 2018 still remain relatively low," he said.
Also related is the recovery of the job market, he said. Generally, the states that lost the most jobs during the recession had heavy exposure to residential real estate or durable goods manufacturing, such as Ohio, Michigan, Illinois and Indiana. Among the states that held up the best were those with connections to energy extraction, refining and distributing, such as North Dakota and Alaska.
Compared to December 2007, about 40 states currently have an increased net change in jobs by a statistically significant amount, with places like North Dakota and Texas at the top, he said.
The falling price of oil has affected that growth, as some energy-industry states have lost jobs in the last 12 months, leading off with Wyoming and including others such as South Dakota, Alaska, Kansas, Oklahoma and Louisiana. The price of oil has recovered to about $45-$55 a barrel in the near term, Tutterow said.
"We're at ranges where you can make some money in West Texas and North Dakota pumping in a way where you couldn't at $30 a barrel," he said. "But we're not at levels that justify the incredible infrastructure and investment."
While rig counts are rising again, the industry isn't seeing the same surge in the energy sector that existed in 2010-12, he said.
"We have an administration now that's going to encourage investment and infrastructure associated with the energy sector, so some of that should be positive news to folks in this room," Tutterow said.
Other change is showing up for non-residential markets in three main areas: industrial, lodging and office, he said.
In industrial, so much industrial space was built in the early recovery of the recession that less is being built today than in the past two years, he said.
"We're pulling back a little bit in new industrial space," Tutterow said.
In lodging, growth has moved through two phases already as occupancy rates increase, but should show a moderate downturn as new construction in lodging-oriented projects eases off, he said. More often, changes in the lodging industry will be changes in control of already built properties.
The office market is starting to move into a new phase of growth, as commercial groups have started to work on purely spec builds, he said. Additionally, many modern offices are shared spaces, with employees needing less space and smart developers building to accommodate.
The housing market also is continuing to recover, but is still down by about 40 percent from its peak.
"There's not much of a story on home prices yet, but for the first time in this economic recovery, I'm hearing the word 'affordability' in the last two quarters," he said. "Home prices are back nationwide above where they were at the peak of the housing market."
The manufacturing market stands as a key sector to the American economy, pays the highest compensative wages and has the biggest spillover in multiplier effects in regional economies, he said.
"I am an unapologetic defender of those who produce products for a living," Tutterow said.