Master Builder

June 2016

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BY ELLIOT EISENBERG, PH.D. GRAPHSANDLAUGHS, LLC D espite all the news to the contrary, the US economy is in pretty good shape — better than the fi nancial pundits think. Sure, the stock market has been very volatile, exploration and production activity in the oil patch has been declining and exports are performing poorly, but the rest of the economy is fi ne. The service sector continues to grow nicely and construction activity continues to increase. Let's take a closer look at the facts. The recent tumble and recovery in equity prices has nothing to do with a slowing economy and is not the precursor of a recession. Rather, the declines were the result of three quite independent factors. First, as the Fed considers raising interest rates, the value of fi nancial assets must decline. Remember, the Fed initially lowered rates to boost asset prices and stimulate spending. As this process slowly Until now, the price declines have resulted in large cutbacks in exploration and production (E&P) activity, as well as related manufacturing, construction and oil services activity that supports oil and gas E&P. The key here is that cheaper energy prices have boosted household incomes by about $130 billion or $1,000/household. While to date most of this money has been socked away, I expect that to change and to see increased consumer spending this year and next as households perceive the recent price declines as somewhat permanent. M ost importantly, the rest of the economy is already doing well. Unemployment is at 5% and will decline further as the year progresses, and at 5%, unemployment is already at one of the lowest levels in decades. Moreover, home sales and prices are up, as is loan demand. unwinds, the value of equities must decline. Second, corporate profi ts have been fl at for several quarters, and third, P/E ratios remain high by historical standards. As for exports, the U.S. is much less dependent on them than most nations. Exports of goods to China total less than one percent of GDP, while exports of goods to Europe are about 1.5% of GDP. While exports of services such as movies, music and intellectual property add to these totals, they do not vary much with economic conditions. As a result, while a 10% decline in exports certainly hurts manufacturers and their employees and reduces GDP by about 0.2%, it is far from catastrophic in an economy growing by a decent 2.5%. Regarding falling oil and gas prices, the benefi ts to the economy are just beginning. In addition, tight labor markets are fi nally leading to increases in hourly earnings, which will boost household spending further. And infl ation, which has been completely dormant for several years, appears to be rising albeit slowly. This is a particularly welcome development given that Japan and Europe continue to fi ght defl ation. Lastly, services, which account for roughly 84% of GDP, and construction activity, which accounts for about 6% of GDP — both of which are almost entirely domestically focused — are in fi ne shape and growing nicely. During the past 12 months, construction activity increased by 10.4% and services grew by 3%. In short, the parts of the economy that are inwardly centered are doing well, and the negative impacts of softer growth from abroad are not nearly strong enough to derail our economy. As for the upcoming election, let's fervently hope that the threats to dramatically raise taxes or increase the defi cit do not come to pass. Elliot Eisenberg, Ph.D. is President of GraphsandLaughs, LLC and can be reached at Elliot@ graphsandlaughs.net. His daily 70 word economics and policy blog can be seen at www.econ70.com. At 5%, unemployment is already at one of the lowest levels in decades and home sales and prices are up, as is loan demand." There Will Be No Recession in 2016! 30 master builder 06.16 government advocacy

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