- Consumers are in the best financial shape in decades
- Keynes’ “Animal Spirits” need to be released
- Better growth appears to be sustainable
Economic growth in the first quarter was relatively slow, with GDP expected to advance just 1.0%, well below the 2.1% annual rate averaged since the conclusion of the recession. Interestingly, in each full calendar year since the recession ended, first-quarter growth has averaged 1.0%.
Although some believe this streak of weak first-quarter growth was caused by bad weather, economists generally believe it is due to faulty seasonal adjustments in the data. The important point is that, in every year, economic growth has bounced back in the second and third quarters.
It looks like the rebound will happen again this year and may do so in spades. First off, the underlying fundamentals of the economy are strong, with robust job growth. Secondly, consumer and business sentiment has moved upward to expansion highs. Sentiment is a leading indicator, but, because reality does not always cooperate, sentiment is considered “soft data.” The economic expansion needs improvement in “hard data” such as higher wages, greater manufacturing output, or a jump in consumption.
The economy also needs what the great British economist John Maynard Keynes called “Animal Spirits” – the collective confidence and optimism of consumers, investors, and businesspeople that the future will be much better. Some observers believe individual and corporate tax cuts would unleash “Animal Spirits.” Others believe the economy will simply continue to grind ahead.
Moderate growth is expected to be sustainable for some time due to the strength of household balance sheets after years of massive deleveraging. The ratio of debt to disposable income is back at levels not seen since the early 2000s, giving households the ability to increase consumption (70% of GDP) and boost growth.
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