Yes, Q1 GDP growth was revised down to 1.9% from 2.2%. But look at a basic breakout:
Personal Consumption: +2.7%
Private Domestic Investment: +6.3%
(Note: the traditional GDP calculation nets these two out, which then becomes a negative. But this blog has long held that savvy investors like to see big, heavy export and import growth.)
Government -3.9%! Essentially, the US economy is thundering along like a classic Detroit muscle car, while—and supply siders and fiscal hawks alike will love this—the government contracts big time.
Most folks will look only at the top line GDP number and perceive tepidness—looking just one level further reveals a very healthy US economic picture.
A significant deceleration in the annualized GDP growth rate of the US or global GDP does not necessarily imply a recession. More often than not, decelerations prove to be temporary slowdowns within an expansion.
Remember, stock investors should care greatly about the overall direction of the economy. But economic growth as measured by GDP is different than investing in the future profits of a company.
- S&P 500 Showing Record Sales Clashes With Slower Growth Rate
- Capital Spending Nears 2008 Level as U.S. Skates New Recession
This blog has made this point often, but it can’t be repeated enough.
One of the great lessons of investing is that earnings matter. Banal? Trite? Tautological, even? Sure. But it’s amazing how folks lose sight of such a simple thing in times like these.
Open any financial periodical, on any given day this year, and you’ll read about how this “recovery” is a weak one relative to history (even though GDP is at new all-time highs). And in those same publications you’ll find stories buried in the back pages about earnings that continue to beat expectations.
So, there’s a disconnect for many in terms of understanding why or how the market has been so strong the last couple years. Many have gotten into the modus of believing economic metrics like unemployment, durable goods orders, services indexes, sentiment indexes, even GDP itself, are proxies for how stocks will do. They are not—economic indicators are not earnings. Econ metrics, of course, are relevant in understanding how earnings will come in (and because I work for a top down money manager, I tend to believe that stuff matters more than many), but they are not a straight proxy for earnings.
Simply, this is a time where earnings are zooming globally (and continue to—so far 2Q reports have trounced expectations), but other parts of the economy are not (like employment). This is actually pretty typical as new bull markets and early to mid cycle economic recoveries go—corporations get leaner and more efficient faster than the broader economy, with their prosperity rising before it’s reflected in the aggregate economists’ numbers. This is particularly true right now as governments (federal all the way on down to municipal) are still contracting and laying folks off. The private sector has fared better lately. The net result is mushy, and masks booming earnings growth.
The lesson: don’t ignore macro economic news, but don’t take your eye off the earnings of publically traded firms, which continue to be robust globally—those are telling a much different tale than today’s “slow recovery” gurus realize.
Think for a moment about the perversity of this headline:
It’s perverse because it’s misinformation. The recovery is over. US GDP is at nominal and real all-time highs. There’s, of course, nothing wrong with musing about somewhat slower-than-expected growth so far this year, or pondering why unemployment remains stubbornly high; but the simple reality is the recovery ended some time ago to make way for a new expansion.
Increasingly, I hear the tide of bears arguing that persistent consumer deleveraging is “chronic” and will hinder consumption—and therefore the economy—from here forward.
This demand-side theory sets aside the inconvenient truth that deleveraging has been going on in the US more or less for the last 2 years as GDP hits new all-time highs and personal spending is well up from recession lows. In truth, today’s Deleveragists are by and large the same bears that said consumer over-indebtedness would be the death of us all too through the bulk of last decade.
Which is it? Or, better, what’s the magic leverage number that will make everyone comfortable and happy?
My sense is that no such number exists. Household debt levels can and will be used as a rhetorical device to prove whichever case is convenient for the arguer. A plain accounting of such things relative to GDP and capital markets performance over history tells us otherwise.