Since the Great Recession officially ended in 2009, the U.S. economy has stumbled through five years of subpar growth, confounding economists, politicians, and most importantly, those looking for work. Only last month did the number of people employed in the U.S. economy finally exceed the level prior to the downturn – and that ignores the 15 million people that have reached working age in the interim. Despite unprecedented efforts by the Federal Reserve, quarterly GDP growth has averaged a paltry 2.4% after the Great Recession, versus about 3.0% in the five year period leading up to it.
For the past five years, many economists had forecasted a pickup in growth to occur as the year progressed, but in every case, the economy failed to deliver. For one reason or another (higher taxes, political dysfunction, European economic crises, etc.), a sustained acceleration in growth never happened. Despite a few strong quarters of 4.0% growth, the economy quickly settled back into its sluggish 2.0% zone.
Like past years, hopes for a reacceleration were high as 2014 began, but the exceptionally difficult winter in the East resulted in real GDP actually declining in the first quarter, with further negative revisions expected. Despite the poor start, economists are bravely raising their estimates for the remainder of the year. Is this another case of wishful thinking, or is the U.S. economy finally ready to lift off?
Although calendar year real GDP will probably struggle to reach 2.5% in 2014, we believe the prospects for several quarters of 3.0%+ growth ahead are quite high. The severe winter weather deferred a significant amount of economic activity, which is now showing up in the second quarter data. Job growth has noticeably accelerated, and is now averaging more than 200,000 new jobs per month. After a long period of reducing debt levels, consumers are once again borrowing and spending. The cumulative effects of the rebound in housing prices and the strong stock market have propelled household net worth to a record $82.6 trillion – allowing consumers to feel a little more flush. With capacity utilization rates approaching normal levels, businesses may have to increase investment in order to boost production. Lastly, the lingering restraints of higher taxes and reduced government spending enacted in 2013 are diminishing in potency.
As we see it, the confluence of these factors increases the odds for a period of sustained higher growth, and supports our optimistic stance on common stocks. Despite relatively high valuations, we believe the combination of faster growth and low interest rates is the ideal recipe for higher stock prices. Of course, there are always unpredictable events that could change our outlook (such as the recent flare-up of ethnic tensions in Iraq, and the potential disruption to global oil supplies as a result), but for now, we view the glass as decidedly half-full.
Have a great week.
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