After today’s stock market rally, does anyone even remember that just two days ago we received data that showed that the consumer confidence sunk to the lowest level since Mar 2009, a two year low? The CCI came in at 39.8 which was lower than most pessimistic forecast, according to the Bloomberg survey. So it is quite confounding that today’s GDP data shows a healthy economic growth of 2.5% in Q3, spurred on by consumers and business spending.
Even if the headlines scream of a consumer led recovery, I have to conclude that business spending and investments were much more of a factor in the solid Q3 economic growth. It is the supply side rearing its head again. Fundamentally I have no reservations in accepting that businesses are now embarking on a growth cycle. Business profits have been coming in strong, and companies have been stock piling cash which has to be put to use somewhere. If the companies are not too keen on hiring (recession has a consequence of letting businesses realize that they can do more with less workers), than they will look to invest in other assets such as equipment, construction, upgrades or software. Recently writing for Business Insider I pointed out that the Baltic Dry Index, a measure of shipping activity for commodities and raw materials, has picked up in August, and which can only mean that businesses are more confident looking at the future and have begun to prepare for an uptick in production. BDI is one of the few indices that measure pure demand and supply and is not influenced by geo-political issues and is a reliable leading indicator of future economic activity.
Can The US Economic Growth be Sustained?
I think it is not only sustainable but it is likely to accelerate. New business investments will start a cycle, perhaps a bit slowly in the beginning, but as surely, of new hiring. Some of the new hiring will be indirect and likely be in the service sector. Some will be direct and will be in manufacturing. This will lead to a steady improvement in consumer confidence, greater spending and more demand. Adding to this cycle is the fact that most businesses cut down on their inventory levels drastically during the recession and there now exists a tremendous pent up demand just to catch up with normalized inventory levels at higher production rates.
An election year also is a tremendous boost to the business activity, more so this year. Call me a cynic, but a general slow down in Congressional activity means that businesses are not going to be much worried about new regulations down the pipe and they can be more confident of pursuing growth policies. Couple this with the fact that EU is finally coming together and taking action on the sovereign debt issues on the continent thereby lifting a shadow on the markets, and we have a powerful recipe for the beginnings of a recovery, and by extension, a solid bull market.
But What About the Debt Burden?
There is no doubt that the debt levels that the US carries is not sustainable. However, it is heartening to see that structural reform is finally on agenda and up for public discussion. Whether it is a 9-9-9 plan or a flat tax or no doubt something else that will emerge by the time Presidential elections are here, it appears that we will have some discussion and perhaps a reform of the financial system that the government operates under. There are also indications that some of the burdensome regulations might be eased. Regardless how far we progress towards a political solution, any growth in industry and tax base is going to help with the debt situation. If this occurs at the same productivity levels that are currently enjoyed by the businesses, than that should also help offset some of the inflation fears brought about by the unprecedented growth in the money supply.
Economic growth tends to solve problems or make them appear smaller. At some point these issues will need to be addressed and a growing economy gives much more flexibility in addressing them.
You heard it here first folks, we are sitting at the base of a new bull market. The only question is are you buying stocks to take advantage of this, or not!
Update: Glen Hall, Editor in Chief at TheStreet.com pointed me towards this article that concludes that the US industrial sector is now rebounding. Thanks Glen! This lends further support to my conclusion.