In the Time Magazine article titled “SURPRISE: THE ECONOMY ISN’T AS BAD AS YOU THINK” (07/28/14) by Roger Altman, Time magazine agrees with our assessment of the economy for the past year or so. Things are getting better and the momentum of improvement in the economy is accelerating. Yet the latest poll from NBC News/Wall Street Journal showed that 63% of respondents view the US economy on the wrong track.
Nevertheless, the first half of the year saw the greatest job growth in the US in fifteen years. Total household wealth and private employment finally exceeded the levels prior to the 2008 recession. Goldmann Sachs predicts for the second half of 2014 that the US economy should grow by a healthy a 3.3%. Due to the slow growth for the past seven years the US is in a healthier state to sustain continued growth through 2016.
Since 70% of the US economy is related to consumer spending and the recession of 2008 reduced household spending, this affected a majority of the economy. According to a Federal Reserve Report 13% of US household’s experienced substantial stress during the 2008 recession compared to about 1% in each of the two previous recessions. The resulting stress saw households reign in spending and reduce debt to weather the economic storm, an intelligent move. Currently the pent up demand for goods is increasing. We already see these signs with continued strength of the automobile industry for the past few years continuing into 2014. Furthermore, for the past five years employment has increased consistently and by more than 248,000 jobs in the past five months. At this rate, unemployment should drop to about 5% by sometime in 2016.
Housing is starting a sustainable come back. Both the housing stock which is falling and the creation of households which is rising are moving in the correct direction to assist the overall economy. The Case Shiller index reached its low in 2012 and has risen more than 25% since then. Single family housing starts have risen from 500,000 to 1 million during the past seven years. Prior to the recession, starts were 1.5 million housing starts. Most forecasters believe the rate shall rise to 1.2 million in 2015. Investment in private residential construction increased 27% from the lows in 2012. Harvard’s Joint Center for Housing Studies estimates that household formation should rise to 1.2 million as two trends continue. The millennial generation continues to reach the adulthood and those millennial who live at home continues to age so that eventually they too will leave home forming new households.
American manufacturing is growing as percent of the economy. In the period from 2000 to 2010 6 million jobs were lost. That trend started in the 1970s and has been growing for many years. Between improvements in technology, greater use of robotics and inflation in China the difference in cost between production in the US and China is 15%. Walmart recently announced it plans to purchase $50 billion in merchandise in the US to sell through its stores over the next ten years. The Boston Consulting Group estimates that 30% of the companies that sent their manufacturing overseas will repatriate it to the US over the next few years. Since 2010 manufacturing has added 668,000 jobs so the likelihood of that number accelerating is a sure sign of continued strength in this field.
Energy production in the US has soared due to horizontal drilling and Fracking (sending pressurized water into shale formations to free up trapped oil and natural gas deposits). Production increases of 25% are expected to bring US production up to 9.3 million barrels a day in 2015 from around 6 million barrels in 2010. At 9.3 million barrels a day the US becomes a net exporter of oil from the world’s largest importer in a mere four years. The 9.3 million barrel level of production has not been seen in the US since 1972. Daily production of natural gas has also been growing by around 5% annually. At this rate, the US is expected to be a net exporter of natural gas by 2018. At the same time the US is consuming more natural gas due to global warming and the government regulating coal out of the energy business. The value of this greater production to the US economy and household wealth is a breakthrough that rivals the effect that the internet has had on our economy.
The US environment is growing healthier, despite the political debate in Washington. Carbon production throughout the US has declined to 2005 levels. It is now looking possible that the US will cut its carbon production 17% further so that we will produce that much less carbon than the US economy did in 2005 by the 2020 deadline. The US automobile fleet is expected to reach 54.5 mpg by 2025 due to improvements in technology.
All of these factors bode well for the US stock market since each one represents positive growth in the US economy. We expect some corrections in the US equity markets as it has been too long since the last one. However, the overall trend continues to improve and we expect positive growth through 2016 and beyond.
