2015 Economic Outlook: Georgia Manufacturing Sector and the Rest of the Nation

Smith and Howard’s Atlanta Manufacturing and Distribution Practice Leader Debbie Torrance  recently caught up with prominent economist Roger Tutterow, director of the Kennesaw State University Econometric Center, to get his views on how the economy was shaping up for 2015, in particular for the manufacturing industry.

Economic Outlook for 2015

2014 was a pretty good year for economic growth. That’s important because while we’re in the sixth year of this economic recovery, it’s only recently that things are beginning to feel somewhat normal. In late spring 2014, we finally reached the point where we had more individuals working nationwide than we did right before the Great Recession. While labor markets aren’t back to where they were, that metric was a necessary condition to achieve for people to begin feeling somewhat normal. 

Our outlook for economic growth in 2015 is 2.75%. That number might be softer than consensus, but it’s driven by two concerns:

1. The U.S. dollar has strengthened. That will make U.S. exports more expensive and foreign imports cheaper. While that’s good for consumers, it will probably be an albatross for gains associated with the foreign trade.
2. The US has invested a lot of capital expenditure in the energy sector; with oil prices plummeting over past several months, many energy companies are choosing to continue extracting from existing wells but slowing investment in infrastructure and exploration. Typically, a drop in energy prices is paired with OPEC cutting production. This time, that’s not happening. The domestic benchmark, West Texas Intermediate, dropped from over $100 per barrel in the Spring of 2014 all the way down to $45 per barrel in January of this year. So, for now, prices should remain below $70. Long-term: oil prices will edge higher, but we’re not seeing anywhere near $100 per barrel in 2015.

Manufacturing Sector

Manufacturing is one of bright spots in this economic recovery, as measured by the Purchasing Managers Index (PMI). We’ve done as well in the last several years as any time in the decade leading up to recession. There are two reasons to be bullish about the long-term outlook for manufacturing.

1. Energy: Manufacturers are gaining confidence that they will have access to energy that is affordable and dependable and increasingly, modern manufacturing processes are more energy dependent than they were in the past.
2. Labor Costs: After a couple of decades of good trade with Asia, wages have been rising quite quickly and to a point to where the labor cost differential between trading in Asia and the U.S. has been narrowed. As that has happened, manufacturing in the U.S. has become more advantageous.

Labor markets

Nationwide, labor is doing better. However,  it’s not clear the degree to which the reduction in the unemployment rate reflected job creation versus individuals opting out of the labor force, but it looks a mix of the two. There’s the question of whether they have opted out permanently. Many are more mature workers who may be exiting: will they stay out or enter in again? Are they permanently retired or looking for more lucrative jobs?

Inflation

Near-term: Softness in commodity prices will likely ensure that inflation will not be an issue in the coming months. But, unit labor costs have been rising. Down the road, there will some modest pressure due to higher labor costs.

After the Federal Reserve’s most accommodative monetary policy in history, we will eventually see that monetary accommodation show up in increases in the money supply and potential inflation. Right now, there’s really not much of an inflation story, but watch for it to head north to see if that changes later in the year.

Interest Rates

The Federal Reserve has been signaling that 2015 is the year it will finally start raising short-term rates, probably in the summer.  Prime rate tends to run 3% above the federal funds rate, which is the Fed’s target rate for interest rate policy. We’re effectively guaranteed a prime rate below 6% through 2016. In any case, short-term rates won’t increase enough to be detrimental to economic growth.

The 15-year Treasury bond dipped below 2% earlier this year, now it’s slightly above that threshold. Expect just modest increases in long-term yields throughout year. But, as long as our European counterparts continue to have interest rates as low as they are now, that will hold down long-term rates in the US.  Long-term rates will gradually rise higher throughout 2015 but not at levels problematic to U.S. economy.

Atlanta

2015 will be the third year in which Atlanta’s economy will grow faster than the national average. Keep in mind that Atlanta was hit much worse in the economic downturn than the national average, and it has taken us a while to get back to pre-recession employment levels.

The good news is we surpassed pre-recession levels last summer and are now up 2.6% for non-farm employment for the last 12 months.

Home values continue to appreciate but the pace is moderating. Year over year existing home prices are rising approximately 5% nationwide and in Atlanta according to the Case-Shiller Index.

Contact Smith and Howard’s Manufacturing Industry Accountants

Have questions about accounting for your manufacturing business? Contact Debbie Torrance at 404-874-6244 and or simply fill out our contact form and we’d be glad to help.