Leavens on New Economic Reality: "We'll never see $2/gal gas again"

20. April 2011 09:47

NEMA Chief Economist Don Leavens gives a nuanced perspective on the economy

Don Leavens, chief economist at the National Electrical Manufacturers Association, opened his presentation with a tongue-in-cheek recognition for those willing to undergo a discussion on economics immediately after lunch. The picture he painted of the recovery—or what he noted is now officially an expansion—was not unappetizing, but it did contain a few important footnotes.

US GDP has leveled out, but is not increasing at a rate that we are accustomed to. Compared to other recession/recovery cycles, this one is much deeper, but it also appears that it will last longer in terms of the time required to return to pre-recession levels of spending, employment, etc.

A few other unusual characteristics of this cycle: the recovery is being driven not by residential construction as in past recessions, but by manufacturing. However, with 5 million people still unemployed, it's clear that gains in the sector are coming largely from increases in productivity. Inventory restocking, typically a short-term effect at the beginning of a recovery, has been sustained.

Meanwhile, the rebound in the stock market has restored around half of the $17 trillion in household wealth that was lost.

Going forward, however, we are in for a long road to regain the ground we lost. Leavens noted construction is still languishing, and will likely continue to lag the overall economy particularly on the residential side as there are still a large number of homes in foreclosure that have yet to even be put on the market.

More recently, unrest in the Middle East has produced a prices spike in the oil market that is now forcing consumers to divert more of their retail spending to fill their gas tanks.

"Two dollars a gallon is out of the question," said Leavens. "We will never see that again."

On a brighter note for ABB, the industries the company serves are expected to grow much faster than the overall economy. The automotive sector, for example, is projected to grow by 15% in 2012. Electrical equipment like motors, drives, switchgear and transformers is also on the rise.

Leavens' biggest concern? The risk that the Federal Reserve will keep its foot on the economy's gas pedal too long and set inflationary forces in motion that once started are very difficult to stop.

 

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