There is every indication that despite the best efforts of the federal government to stymie growth, the economy is plugging along at a decent clip. GDP for this year should come in upwards of 2% over last year. That is not stellar, but for a GDP that is north of $16 trillion, it’s not the worst of times either. Consider the rest of the world’s anemic growth rates and the U.S. is looking like a growth engine in terms of nominal GDP growth.
Europe is in recession, Japan is finally showing signs of life, and China, India and Brazil are actually contracting from their high growth levels. This points to the flow of investable funds heading to the American shores and that is good news for the markets.
Higher interest rates are coming, but will not go nearly as high as many people think. A study put out by HIMCO – a respected investment advisory, research, and investment company – reveals an interesting tidbit that most are overlooking.
Their findings show that in the decade after an economic panic, the likes of which we saw in 2007-2008, interest rates barely rise. In fact, they tend to remain at depressed levels as consumers and businesses continue to either decrease their financial leverage or, as in the case of the U.S. consumer, they don’t have the capacity to take on additional debt like they did before the crash. Ask yourself if you have the wherewithal or the burning desire to borrow like you did between 2002-2006 and you will have answered your own question.
Jobs are being created in the U.S. at a clip of around 180,000 to 200,000 per month. Not huge growth, but when you consider that the unemployment rate in Spain, Greece, and Portugal is 20% or more, the case for buying American stocks and buying into the American economy is even more compelling.
Then look at energy prices. While oil has rallied, prices for the fastest growing energy commodity, natural gas, are actually falling after peaking earlier this year. And, U.S. oil production is slated to make the biggest single year increase in history, increasing by over 1 million barrels per day in 2012-2013. 1 million barrels per day may sound like nothing, but it represents about 6% of daily energy usage. Continued increases in production thanks to shale oil recovery and the increased usage of natural gas, which is abundant in the U.S., means that energy prices will continue to remain in check, further fueling an economic recovery.
Finally, U.S. companies are lean and operating in ways that are completely opposite from a decade ago. Take the airline industry, for example. It is setting earnings records every quarter. It’s not because demand is increasing in leaps and bounds; it’s because they are running their business as a business and not as a commodity.
Airlines have adopted an “a la carte” model – charging for everything from pillows to peanuts and the growth in revenues for the airlines have seen comes as a result of their ancillary charges, not as a result of increasing numbers of fliers paying more money.
Growth in the U.S. economy will continue to drive the rally in the markets. Unemployment has not yet reached a level, sub 7%, that should concern you about interest rates rising. Inflation is here and while the official numbers are misleading, you can see it in the prices of homes, cars and at your local grocery store. But it is not at the levels that should make you cringe – gold prices are a good harbinger of future inflation as is the price of Treasury Inflation Protected Securities (TIPS), both of which are pointing to subdued inflation. And the lack of growth from overseas markets will force the hand of foreign investors to continue to pour money into U.S. Stocks. Barring a major shock, that should set the stage for more new highs in the weeks and months ahead.
