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January 05, 2015 01:00 AM

Happy days here again? Labor issues

Kathy McCarron
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    Is the U.S. economy finally building momentum toward full recovery this year? Economic analysts appear to be more upbeat about the economy going into 2015 after several years of sluggish growth.

    Many are predicting a GDP growth rate of 3 percent in 2015, compared with past years that averaged in the 2-percent range since the Great Recession of 2008-09. The positive outlook is buoyed by strong job growth, low gasoline prices and a continued uptick in the housing market.

    “Our economy is in the enviable position (compared with other struggling economies in the world) as having achieved sustainable growth.... We're seeing a continuous situation of job growth, month-to-month job growth. Jobs produce income; income produces spending; and then spending produces more jobs—and that is a virtuous cycle. A virtuous cycle can go on for a long time as long as you have enough available resources and capacities to feed that process,” said Ken Mayland, president of ClearView Economics L.L.C. in Pepper Pike, Ohio.

    With Europe and Japan struggling economically, South America in a slump and China experiencing slow growth, “We're just about the best place in the world to be right now,” he told Tire Business.

    Meanwhile, economists at the Indiana University (IU) Kelley School of Business said they are more optimistic about the U.S. economy going into 2015 than they have been since the Great Recession.

    “During the past year, the United States economy has given clear signs that it is finally breaking out of the rut it had been stuck in during the first four years of the recovery,” said Bill Witte, associate professor emeritus of economics at IU. “Looking ahead, we expect the coming year to produce a continuation of these positive trends.”

    However, he warned there still seems to be a high level of uncertainty in the economic environment.

    During the first four years following the recession, output growth averaged just 2 percent, according to IU, but the economists forecast growth should average closer to 3 percent in 2015 due to a stronger housing sector and more government spending.

    “Consumption continues to parallel overall growth, with auto sales particularly strong,” Mr. Witte said.

    “The auto industry has pretty much made a full recovery,” said Mr. Mayland, noting that light vehicles sales neared 17 million units last year, similar to pre-recession levels. However, he said he believes auto sales have reached a plateau due to the size of the U.S. fleet.

    IU economists also forecast a more positive labor market in 2015 with the unemployment rate possibly falling below 5.5 percent by year-end, compared with more than 10 percent at the height of the recession.

    Inflation is expected to remain at about 2 percent due in large part to lower energy prices, while interest rates could begin to increase by the middle of the year.

    “If the Fed begins to raise interest rates as we expect, there will be the potential for significant instability in the financial sector,” Mr. Witte said.

    “We continue to look for U.S. GDP growth to average 3 percent in 2015, the fastest pace in a decade and a significant improvement on the meager 2.3-percent pace in the five-plus years since the recession ended...,” said Douglas Porter, CFA, chief economist for BMO Financial Group. “Amid this steady and broad-based improvement, we look for the Fed to finally raise interest rates by the middle of next year, the first rate change in almost seven years (i.e., since Barack Obama has been president).”

    Due to potential interest rate increases, Mr. Mayland suggested now might be a good time for tire dealers to consider securing loans for capital improvements.

    “Lending institutions are hungry right now

    to make loans. So with good prospects for demand and low interest rates, now would be a good time if you're contemplating investing in new space or even more productive equipment,” he said.

    “We shouldn't be that worried about what the Federal Reserve is going to be doing because the economy is going to be doing better, and that's why the Federal Reserve will be raising interest rates and that means the business environment should be much more promising,” said Jim Glassman, head economist for commercial banking at JPMorgan Chase & Co.

    “As the economy gets better we would expect the inflation trend to gradually turn up and that would be a good sign, that would be a sign that the economy is actually getting healthier.... Our economy has been recovering for the past five years, but frankly it's been quite slow, until recently. There is new optimism emerging about the U.S. economic outlook and I think 2015 is going to look a lot better for both the job market and business.”

    “I think it will be a pretty darn good year (for tire dealerships and auto repair shops),” Mr. Mayland said.

    He noted that with gasoline prices below $3 “that's putting extra discretionary dollars in people's pockets. So certainly one of those things they'll use it for are auto repairs. The extra dollars can be used for maintaining the cars and they will be maintained a little bit better in light of the lower gasoline prices.”

    He said low gas prices have improved consumer confidence levels.

    “That tends to make people happy. So the sentiment is better and they have a little more disposable income because of the fall in gasoline prices,” Mr. Mayland said.

    Business owners and executives are generally optimistic about the U.S. economy as well as their own business prospects, according to a survey by Chicago-based BMO Harris Bank.

    Nearly 80 percent of the 781 survey respondents said they believed the American economy will grow or stay at the same size in 2015, and 93 percent feel their businesses will either grow or will remain at the same size.

    The economic outlook this year was slightly more positive than survey results from a year ago, according to the bank.

    “The coming year is being heralded by positive momentum in consumer spending, which is music to businesses' ears,” said Michael Gregory, head of U.S. economics, BMO Capital Markets.

    “Spending is finding support from strong job growth, lower energy costs and an appreciating U.S. dollar. In reaction to continued sturdy consumer spending, we look for more businesses to expand their production, lifting both capital expenditure and hiring. This job-led, domestic demand should propel economic growth 3 percent in 2015, the best result in a decade,” he said.

    “Companies went on a hiring spree, too, expanding payrolls by nearly 3 million this year (2014), the most since 1999's tech boom. Consumers put in a workmanlike performance, buying new vehicles at the fastest rate since 2007 as auto financing accelerated.

    “Plunging gasoline prices supported spending power, while surging wealth and falling joblessness stoked consumer spirits. After weighing heavily in 2013, fiscal policy slowed growth only modestly this year, as the effects of further federal cutbacks, expired business tax credits and the end of emergency jobless benefits were partly cushioned by expansionist state and local government policies,” said Sal Guatieri, senior economist for BMO.

    “Households are expected to spend at the fastest pace (3 percent) in nine years. This will be in response to higher wages and increased borrowing, as the unemployment rate should drop to 5 percent by year-end and household debt-service costs remain at multi-decade lows.”

    About 91 percent of corporate CFOs are expecting their company's hiring to increase or remain the same in the next six months, according to a survey by Chicago-based accounting firm Grant Thornton L.L.P.

    In addition, 70 percent of the CFOs surveyed expect the average cost of an employee's salary to increase during the year.

    However, New York City-based The Conference Board Inc., a business research organization, warned that “serious labor shortages in the world's advanced economies as increasing number of Baby Boomers retire from the workforce will create unprecedented challenges for business leaders and policymakers over the next 15 years and beyond.”

    Gad Levanon, director of macro-economic research at the organization, said that “mature econ-omies are facing a historical turning point: For the first time since World War II, working-age populations are declining.”

    Mr. Levanon added that “companies in the U.S., Europe and elsewhere must begin planning now for an environment in which difficulties recruiting and retaining workers will make it significantly harder to control labor costs without losing labor quality.”

    Skilled labor occupations, such as tire and automotive technicians, are expected to suffer a rapidly shrinking supply of young people entering these fields as increasing numbers retire, according to The Conference Board.

    Mr. Mayland said he has heard from a wide range of companies reporting that it is getting harder to find qualified skilled people to fill job positions.

    “So maybe some advice is that you may have to search harder, longer and harder, to find people to fill those auto service positions.

    “Don't be surprised if you have to pay more, like a wage increase, in order to retain good people, otherwise they are subject to being poached,” he said.

    “That will be one of the major challenges for 2015 as far as human resources issues. In the scheme of things, that's a good challenge!”

    To reach this reporter: [email protected]; 330-865-6127. Twitter: @kmccarr

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