Johnson: Economy More Stable Than Many Think

Jeremy Glaser: For Morningstar,I'm Jeremy Glaser. I'm joined today by Bob Johnson--he is our director of economic analysis. He thinks the economy is more stable than many observers believe, and we're here to talk about why.

Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: So, going into the year, people were really excited about the prospects for the economy, and now it seems like everybody is very fearful about the prospects for the economy. When you look at the state of the U.S. economy right now, why do you think people are in this feast-or-famine mindset?

Johnson: The right thing to do over the long term is not to use the feast-or-famine analogy but instead to use the ocean-liner analogy, meaning that the economy is moving at a very steady pace and it's very hard to change either its speed or its direction. We believe the ongoing underlying rate is 2% to 2.5%.

People got really excited that we were going to grow much faster this year in November and December because they saw falling gasoline prices and an improving employment situation. [People thought that] a lot of customers were going to spend more, and we were going to have a great economy and grow 3% or more.

Lo and behold, weather intervened and we had a tough first quarter, weather-wise, which really kept a lot of people out of restaurants and put them in grocery stores instead a little bit. It kept them off of a lot of services, and so the first quarter was certainly not a good one for the consumer. So, that certainly held us back, and some of the spending in the oil-related sectors has slowed down. So now, people are thinking that maybe we're not going to grow at all--or at least not very much--this year and maybe we even go into a recession. I don't think that's true either. I think you've got to take a more balanced view.

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Glaser: But a lot of that data does, at times, look pretty bad.

Johnson: Yes.

Glaser: How do you square that with the idea that the economy is still growing in that 2% to 2.5% range?

Johnson: Certainly, we've seen some bad news in retail sales and manufacturing this year--and the retail sales was a bit of surprise. I think we're going to bounce back fairly soon on that one. The manufacturing we thought would be weak for the year--and that was why we were always at 2% to 2.5% [GDP growth] instead of over 3%, where most other people were. But I think another reason I'm optimistic is housing, and I think that's going to be the key story in 2015.

Glaser: We did get some new data points on that story this week. What did we find out about builder sentiment?

Johnson: Builder sentiment was the one that was probably a little bit more mixed--until you got "below the covers," if you will. The overall index went from 56% to 54%--that's 54% of the builders were bullish. So, it was down a little bit, but it's interesting how it broke down. In terms of sales six months from now, the builder sentiment was over 60%, and actually it was up month to month. Current conditions were relatively similar. The traffic through a house has been very low this whole recovery, and it actually went down for the month of April. So, that traffic indicator was certainly what depressed the overall index from 56% to 54%.

I wonder a little bit if people instead of going out to all the houses and visiting, if they are looking a little bit more online right now. That maybe has made the traffic number generally not as robust as it's been in the past. Probably for the last couple of years that number [has been not so robust]; you look at it and say, "How can that happen?" So, that certainly held back the sentiment index. So, overall, because builders are feeling better about six months from now, I am feeling better.

Glaser: Looking at housing starts and building permits--we also saw that data this week--those jumped quite a bit. Has that surprised you?

Johnson: It's not a surprise and it is a surprise. It was really a strong number overall; we grew 20% in starts and 6% in permits, so it was a very healthy number. But one thing I would caution with the numbers is that I really like to look at the permits number because there's so much irregularity in the starts and it's very weather-dependent. We've had 13 months where we've had above a million permits and, generally, except for a few states, you need to get a permit before you can have a start.

So, we've seen the permits data over a million for the last 13 months, but we've had five months where we've been around 900,000 or 950,000--maybe an occasional 980,000. So, we've been decently below that one-million target, and eventually that gap closes when the weather improves. So, we had really crummy starts in January, February, and March; now, we've had this huge acceleration as a catch-up here in April. So, it made the numbers look kind of unusually good.

If you look back at the permits data, it's a little bit more stable. Also, we like to look at the numbers year over year instead of month to month, and there they were up 6% to 7% on both single-family and multifamily homes, which is still kind of slow. It's not wonderful. It's not boom, not bust. What's weighing on the data is the fact that homes are relatively affordable and the fact that you've got high student loans and still tight lending conditions. In fact, conditions appear to have gotten just a little bit tighter.

Glaser: So, housing will be an important driver in 2015--do signs point to that?

Johnson: I think it will absolutely be a big part of 2015, because recall that manufacturing is going the wrong way and probably will continue to. Auto sales have been relatively flat, and that drives a lot of manufacturing. Boeing is caught up a little bit in export sales. So, all of those things are going to weigh on manufacturing, but I think with housing we're going to continue with a decent growth pattern. We had a relatively poor year in 2014, and I think this year we'll begin to see that bounce back just because, on the demographic side, you've got more people in that first-time homebuyer age category. And as long as builders can begin to get more homes in that price category, I think we will have a better housing market in 2015.

Glaser: Bob, thanks for your update today.

Bob Johnson: Great to be here today.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.