In Freshman economics you learn the concept of aggregate demand, which is an approximation for Gross Domestic Product or GDP. The components are Consumption by consumers (C), Investment in Capital Goods (I), Government Spending (G) excluding transfer payments (entitlements) or interest, Exports (X) and Imports (I), a reduction item. This is the Keynesian approach to economics.
The revised 2nd quarter 2016 GDP was released on Friday. It was 1.1%, a paltry amount. In fact, if you look at historical rates of GDP growth in the US, as per the Federal Reserve Bank of St Louis, despite pouring trillions of dollars into the economy, that is the G factor, GDP growth has been lackluster after the economic recovery began in 2009. Of course most of the G spending took place in 2009 and 2010. Thereafter, it has taken the form of entitlements, which might be politically expedient but barely moves the needle on GDP. Thus, since 2010, we have had to rely on the American consumer to hold the economy up. Capital spending, despite low interest rates is rather low. There are two reasons for that. Banks don’t want to lend money at low interest rates, they would rather (and do) invest in low risk Treasury securities. Furthermore, capital investment is being pushed outside the US into foreign nations. As for exports, we continue to operate at balance of trade deficits.
As a result of the failure of Keynesian fiscal policy to ignite the economy to normal levels of growth, the burden has been shifted to the Federal Reserve to become the economic Atlas in order to get growth on the move. Of course, the Federal reserve has a dual mandate – growth and price stability. As the markets continue to obsess with the potential for a FOMC rate hike, the risk has shifted, in observers’ eyes, from growth to price stability. I think that is a mistake, as growth not inflation is the main risk to the economy.
On Friday, Janet Yellen gave us a mouthful of wishy washy expectations for a rate hike. It may or may not occur in September, or the rest of 2016 for that matter. The markets initially rose on her comments, then sold off and finished the session rallying back to close slightly in the red, except for the NASDAQ which was slightly in the green.
If inflation is picking up, then we should expect the FOMC to raise rates. However, there is mixed evidence as to whether that is occurring. There is strong evidence that the economy continues to plod along at low levels of growth. Even if the FOMC bumps up interest rates, I expect it will only be once this year. I also believe that is priced into the market.
While that is taking place, the US stock market continues to see investors willing to pay higher prices for stocks. The reason is two-fold. First, the risk / reward trade off favors stocks. Second, there is evidence that the global markets, long in recession and slow growth mode may be signally a global recovery. A little bit could go a long way, reducing risk to US GDP growth.
This week should be another sleepy week as we approach the long Labor Day weekend. However, before we hit the roads for the last official weekend of the summer, August non-farm payrolls will be released at 8:30 AM on Friday. An increase of 180,000 jobs is expected.
Even if the economy produces above average jobs for the third straight month, it will be for naught if it does not translate into more robust GDP growth.
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC was long TQQQ and QLD — although positions can change at any time.
Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, a registered investment advisor specializing in high net worth private wealth management. For more information on investing with LakeView Asset Management, LLC call us at 888-9LAKEVIEW or request more information by clicking on the contact button on the top right hand corner of the website. LakeView Management, LLC is a Nevada LLC, with its principal office located in Henderson, NV and branch office located in Millburn, NJ
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