A Nirvana of StabilityMarch 5, 2015
The US economy finally appears to be settling in for a long, strong run. Real GDP in the fourth quarter was revised down slightly to 2.2 percent (from 2.6 percent), but many had feared a sharper drop on a swelling trade gap. We see the slowing as a natural consequence of 5.0 percent real growth in the third quarter (after 4.6 percent in Q2), and anticipate that real growth will average near 3 percent for the remainder of the year. The first quarter may struggle a bit, but since we are dropping last year’s -2.1 percent slip in Q1, year on year growth will improve to about 3.5 percent in Q1 2015. In the revised fourth quarter data all the private sectors did well; consumer spending rose at a 4.2 percent annual rate (4.5 percent for goods and 3.8 percent for services); capital outlays for plant, equipment and software rose at a 4.8 percent annual rate; housing saw a 3.4 percent boost; and exports were up 3.2 percent. Government was weaker (-1.8 percent) due to a fourth quarter slump in military spending (-12.4 percent) after the end-of-fiscal-year surge (16.0 percent) in Q3. Nevertheless, other federal and state & local government spending reflected the 1.3 percent average for the second half of the year. Coming off growth at a 0.5 percent annualized rate in the first half of 2014, government added to real GDP growth for the first year since the Lehman crisis. US gross domestic production was tempered as stronger demand was satisfied by a wave of imports (up at a 10.1 percent annual rate in Q4) as devaluations shift US growth to the rest of the world.
Bottom line, we see no other way to interpret this than an unambiguously stronger economy. Leading indicators are clearing the path (autos and housing), coincident sectors are following along (services) and even traditional laggards (capital spending and government) are no longer a drag. Companies are hiring at better than 300,000 workers a month. They are adding to inventories at over an $80 billion a year pace. Even capital spending, which had been hit temporarily by the correction in the oil sector, is improving with a positive (+0.6 percent) gain in orders for nondefense capital goods ex aircraft in January. Corporate profits have been squeezed all through 2014 by stronger compensation, heavy transfers (for bank fines) and a rising tax burden. However, businesses have protected retained earnings and balance sheet surpluses by cutting back on dividends. Thus, the top end of the household sector has seen moderation in asset based income—but still had strong capital gains and has seen resurgence in proprietors’ income. The lower rungs of the job ladder are seeing better hours, steady wage gains relative to slowing inflation, and a rebound in home values—the key to their equity portfolios. Government deficits are fading, with surpluses appearing at the state and local level. And, though the trade deficit is wider, a steady inflow of investment funds has kept the current account steady as a share of GDP. Bottom line, the US economy is now a Nirvana of stability, with no obvious imbalances to upset the apple cart in the near term—if Congress and the Federal Reserve will let the invisible hand take it from here!
The preceding is an abridged version of a commentary for McVean Trading and Investments, LLC and has been reposted here with permission of the author.
The ideas and opinions expressed in this blog are those of the author, and they should not be perceived as investment advice or as any other kind of advice.