The latest figure for US gross domestic product (GDP) growth is a great case in point. On Friday morning, the US Commerce Department announced that the US economy grew at a better-than-expected 2 percent annualized rate, up from 1.3 percent the previous quarter. Immediately, Republican spinmeisters were out in force trying to discredit the number, just as their Democratic counterparts were pumping it up.
Ignore the white noise from biased prognosticators who are pushing their own agendas. Here’s the non-partisan reality: How stocks perform will depend on underlying businesses’ ability to execute in an environment that’s neither particularly robust nor debilitating. In other words, it’s a market of stocks, not a stock market.
Since the global economic recovery began in early 2009, the US has grown at a slow but steady pace, shaking off the “Black Swan” events of 2010, Uncle Sam’s debt ceiling crisis in 2011 and deceleration in Asia and Europe this year to keep chugging along. And this GDP growth number is just the latest indication of US resilience, as well as evidence of the headwinds the global economy still faces.
The biggest contributor to the 2 percent figure was a revival of consumer spending and confidence, which constitutes about 70 percent of economic activity. As with America’s corporations, US households have used record low interest rates the past four years not to leverage up but to pay off debt and slash costs.
Consumers’ balance sheets are actually healthier than they’ve been in years. Americans’ private debt burden has dropped roughly $1 trillion from its highs in early 2008.
Negatives during the quarter included a pullback in business spending and investing, related to a slump in overseas sales and in some cases worries about the potential for a US government “fiscal cliff” in January. Exports fell for the first time in three years, sliding 1.3 percent as Europe slipped into recession and Asian growth slowed.
The economy was also hurt during the quarter by a severe drought in the Midwest US that cut agriculture stockpiles and shaved an estimated half point off growth. That was mostly offset by a 3.7 percent jump in government spending—thanks mainly to a revival of defense orders—that added about 4 tenths of a point to growth.
The return of the consumer is indeed a long awaited bullish sign for US growth. Corporate America is even more flush with cash, a prerequisite for business investment and expansion.
Lack of debt leverage is a huge difference between the current environment and that before the 2008 crash. In fact, it’s the single most important reason why a reprise of 2008 is unlikely. Companies and consumers could simply wait out a sudden tightening of conditions until markets returned to normal.
They’ve done precisely that several times the past few years, returning to the market to borrow when rates fell again. And with so much money pouring into bond funds, managers have had little choice but to buy whatever is offered, keeping borrowing rates at very low levels.
Strong balance sheets and cash flow are also the most compelling reasons to expect faster growth in the US, because that money inevitably gets deployed. The current situation looks increasingly akin to 1992, just before the Greenspan Federal Reserve’s loose money policies finally began to fire up growth.
Then as now, the Fed was pumping up the money supply to combat the hangover from major deflationary shocks, including the 1987 stock market crash, the subsequent implosion of the savings and loan business and the temporary spike in oil prices that followed Iraq’s invasion of Kuwait in 1990. The S&L crisis wiped out some of the country’s hottest real estate markets.
Then as now, the Fed was roundly criticized for debasing the US dollar, and for “pushing on a string” when it came to spurring growth. But a year later, it was vindicated as growth began to accelerate and the 1990s became a period of robust expansion, heavy investment and low unemployment.
Uncle Sam is considerably more indebted now than in 1992, with the deficit running at more than 8 percent of GDP. On the other hand, that ratio has been declining the past four years, while the nearly 5 percent deficit-to-GDP ratio was then the highest level in five years. And the unemployment rate was much the same as it is now, averaging 7.5 percent that year. Finally, the US in some ways is in much better shape, such as in domestic energy production.
In today’s increasingly interconnected world, weakness in one country can and often does show up everywhere, even when it comes to the world’s largest economy. We clearly saw the negative impact of Europe’s recession and Asian deceleration in the disappointing third-quarter results of more than a few major US corporations with extensive overseas operations.
Foreign weakness is one reason the Fed’s expansionary policy hasn’t done more to spark up US growth, four years after the 2008 crash. And foreign weakness could keep a lid on growth here well into 2013, particularly if China hasn’t yet bottomed as appears to be the case.
But as today’s GDP number makes clear, neither is the US economy imploding. Rather, this is the still the same “two steps forward, one step backward” world we’ve been living in since the recovery began in March 2009. That means no rising tide to raise all boats, but also no perfect storm to sink them.
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