US Videos

3 Economic Surprises in 2012

Jason Stipp
Robert Johnson, CFA

Note to readers: Bob Johnson is on vacation this week; we are posting this recent video report in place of his regular Saturday column.

Jason Stipp: I'm Jason Stipp for Morningstar.

At the end of 2011, Bob Johnson, our director of economic analysis, had a few things on his radar that did come to pass in 2012.

There were also a few surprises that he wasn't necessarily expecting.

He is here with me to talk about both of those topics today.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: Let's start with some of the things you expected to happen that did come to pass; there were four key ones that you mentioned in December 2011. What were those and how have they come to pass in the way you expected?

Johnson: I think certainly one of them was the strength in the auto industry, and I think we really saw that with some recent numbers that we’ve gotten out of the industry. We just got 14.52 million units [seasonally adjusted annual rate] for the month of August, which is the best number since the "cash for clunkers" number way back in 2009, when you had all those incentives. So, that's been really a great number, and it's been better than everybody thought it was going to be; at the start of the year, they were thinking maybe it would go from 12.8 to 13.5 million, now it looks more like 14.5 million.

Stipp: So, good demand in autos. Another one, sticking with the industrial sector, is in aerospace. What was that?

Johnson: That was Boeing, which is slowly getting better, but it hasn’t taken off like a rocket--no pun intended--yet. But we have gotten better; we’ve gone from practically no airliners to two or three a month in terms of the new 787 program, and they hope to get up to a number more like 10 over the ... next 18 months. So, some of that is yet to come, but we've gotten some of it.

Stipp: You had domestic energy production as a bright spot, and we are seeing that playing out in the Dakotas, for example.

Johnson: Yes, North Dakota is now a bigger producer than Alaska, which was kind of a dream when we started all this, and now North Dakota is indeed bigger.

I thought, especially as gas prices stabilized a little bit, that maybe we’d see some slowing in that North Dakota production growth rate, but we’ve actually still continued to grow right up through the most recent monthly data that we have in terms of the amount of oil that they are producing. And they now produce 10% of the U.S. oil in North Dakota.

Stipp: And the last one you pointed out in December 2011, and I think a lot of economists would now agree with you, is the housing market. And we've seeing some great data there over the last few months.

Johnson: Yes. My hope was that we’d see some better starts, and so that one really has happened--housing starts are up about 25% year-over-year. So, that’s been a great number. And that, maybe you could say, could be slightly anticipated. The one that's really been the huge surprise [is housing prices]. I was just hoping that prices stayed flat, and now it looks like we’ll probably have a 5% price appreciation during the full course of 2012, and that’s just really great news for the consumer.

Stipp: So, four things you expected at the end of last year playing out to various levels in 2012.

What about the surprises, though? What are some of the things that you didn't expect to happen, or that you expected to happen but haven't yet happened, in 2012. What were the surprises?

Read Full Transcript

Johnson: Well, I think exports were probably the number-one surprise. We thought [exports would suffer] with Europe clearly already slowing and some rumors about what might be happening in China and some of the other emerging markets, but we actually ended up having an acceleration in exports during the first two quarters of 2012. So, that was a huge surprise.

And as you alluded to, that probably goes away in the second half, but we really did have a nice export number. And some of that's gasoline and some petroleum product things that happened, which were somewhat unique. Auto exports actually [contributed]--you won't believe we are exporting autos. But there are some other things that have helped as well. Pharmaceuticals is another area that's always been good for exports. And surprisingly, agriculture was not a huge contributor to the export.

Stipp: And this is particularly unusual--especially in the first part of the year when we had some pretty good strength in the economy--that you would actually see exports outpacing imports or canceling out the negative GDP effect of imports in an economy that's at least slowly improving, or in the first part of year, improving at a pretty good clip?

Johnson: That really was the biggest surprise. ... Because imports in the U.S. are a bigger category by quite a bit compared to exports, usually when you are growing, and they both grow along with the economy, you end up widening the gap in dollars a little bit, and that didn't happen this time. I think some of it's related to the whole petroleum issue, that we’ve got more petroleum here, that we’re actually exporting some gasoline from this country. So, we’ve got a few things going on.

Also we hit the product cycles right, I think. We’re importing less computers, iPhones, and TVs right now. Some of that’s product cycle, and we’re going to probably have payback this fall on that, but imports of electronics were probably off a little bit from their usual type of growth rates, and that certainly kept a lid on imports.

Stipp: So, some interesting trends there.

Second surprise that you noted is the government sector. This is a sector I don’t think a lot of folks have expected would contribute much to the economy because it's been under fiscal pressure. What surprised you about how government has contributed to the economy so far in 2012?

Johnson: Well, I thought it would have gotten better by now. We had a lot of the big cuts and layoffs early in the process, and I thought by now we would have burned through some of that, because you've got the personal income tax collections going up as incomes have begun to improve. So that certainly should have helped. The sales tax--we've talked again and again about the consistency of retail sales growth--and so that should have been another thing that helped [the economy] along--tax collections, which tend to get spent. But I think some of the local government and some of the burn-off of some of the federal stimulus money wore off, and that began to hurt some of the government numbers.

Remember, government's about 20% of the economy. So, to have a negative number in a category that's that big for an extended period of time is not helpful, and it's not what we typically see in a recovery. Usually government grows in line with the economy, and this time, it's gone in reverse.

It's gotten a little better over the last quarter, but it was a negative 0.6% contributor to GDP in the first quarter, and that's huge on an economy that was growing about 2%.

Stipp: Sure. And looking forward for government, do you think that we'll see some turnaround and some improvement in government's contribution? And what about a lot of those headwinds that are still out there, and uncertainties that are still out there, regarding the fiscal cliff? Are you surprised that some of these things haven't gotten closer to resolution yet?

Johnson: I am very much surprised by that. I thought that maybe they would have taken care of at least a couple of the big easy things, like adjusting the alternative minimum tax patches around a little bit--at least agree to give the tax extensions to some groups of people for some period of time and then leave the rest for later. But they got nowhere this year in Congress. I thought they would have done a little bit, because, I'll tell you, you can't do a lot in the six to eight weeks that you have between the election and year-end, and that's going to be a hard fight. They've left far too many issues on the table, unfortunately, to negotiate during that period.

Stipp: The last surprise, and I think this probably was a surprise for a lot of folks, is what we're seeing in interest rates in the bond markets. You'd think they couldn't possibly go lower, but yet we still see interest rates kind of stuck at those historical lows. Is that a big surprise to you?

Johnson: That was a huge surprise to me. I've been warning people to keep their duration on their bond portfolios low, that you use bonds for stability in your portfolio, and you can't walk away for them, and you get nice secure government bonds and ... just stay short in terms of your duration and your term of interest rates--but rates went down again. I was just looking--and these are monthly averages--but in December 2011, we were at about 2% for a 10-year Treasury bill, and for the month of July we were down at about 1.5%. I would have said that the rate probably would have gone up, especially if you had told me that the GDP growth was kind of in the 1.5% to 2% range.

Stipp: So related to the GDP growth--and even though it's not gangbusters growth by any means--we are still seeing growth. Does it surprise you also, connected to interest rates, that we haven't seen at least a little bit more hint of inflation coming into the market. It seems like the Fed still has some latitude to work on his side without having to worry so much about inflation at least right now. Was that a surprise?

Johnson: Well, you know what's been a little surprising to everybody is that we've had some volatility in that inflation rate. We were probably dead-on what the rate was going to be, but we had a huge scare with gasoline prices running up this spring, which made it look like, oh geez, maybe it's going to be 3% instead of 2% inflation. Then the prices came rocketing back down, and now we've got to worry about the drought, which might cause another little bump up and then ratchet back down again. So inflation has been more volatile than I expected. I thought it would be one directional--the commodities boom is over, coal, copper, aluminum is going down--and it didn't happen that way.

Stipp: All right, Bob. There were some surprises on your front from your expectations, but also a lot of things you got point-on. Thanks for joining me today and offering those explanations.

Johnson: Thank you.

Stipp: For Morningstar I'm Jason Stipp. Thanks for watching.