A few clients have approached me recently with some ‘worrisome’ U.S. government agency data. From the Energy Information Administration to the Department of Agriculture to the Department of Labor to the Department of Commerce, there appears to be a confluence of weak data that – according to a few sources – signals the U.S. could be headed for a recession. The most common question that follows is: should I be raising cash in this environment?
Unless you have cash flow needs or there is some fundamental change to your investment objective, I do not think now is the time to raise cash or alter your asset allocation. In my view, the U.S. is not heading for a recession in the next 6 – 12 months. Not even close.
Economic Fundamentals Point to More Expansion Ahead
I could provide you pages and pages of evidence the U.S. economy is in fine shape. But just a few key points should suffice to offset the ‘weaknesses’ in government agency data, which I’ll detail further below.
- Personal consumption expenditures are on track to grow at a very healthy 3.5% pace in the third quarter (following what we estimate to be upward revised growth of 3.4% in the second quarter).
- Given the recent strength in housing starts, we now look for growth of residential investment in the third quarter of roughly 10%.
- Q2 GDP growth was revised up from 2.3% to 3.7%, as expected, but was boosted 1% by the unwinding of effects related to heavy snowfall and residual seasonality. Zacks Investment Management’s forecast for second-half growth remains unchanged at 2.5%.
- Growth of final sales will average a solid 3% during the second-half. The actual GDP growth rate in the third quarter will look weak at only 1.5%, but that statistical result is due to the swing in inventories, not final demand.
- Earnings are strong, not weak! It is true that aggregate S&P 500 earnings have been negative for two quarters, which many worriers will cite to provoke concern. But, it’s really the Energy sector that’s weighing down an otherwise healthy picture. If you take away Energy, total earnings for the S&P 500 would have been up +5.2% in Q2 on +1.3% revenues. I think the same effect will apply to Q3: take away Energy, and total earnings for the index could be +1.7% on +0.7% higher revenues.
Agency Data Gives You Data Points, Not Trend-Lines
Below, I’ll take a look at some of the U.S. government agency data that has some folks concerned and offer you quick insights that will likely allay your fears.
The U.S. Energy Information Administration – reports show that from August to September, U.S. crude oil production declined by 120,000 barrels per day. As long as oil prices remain low, it could lead to further reduction in spending on projects, even putting some companies out of business. As the third largest industry in the U.S., that could affect a significant number of jobs.
- I agree that we are in an Energy recession. But that doesn’t mean an economic recession will follow. In fact, the opposite could be true. Consumer spending is expected to see a boost from the pass-through of real income growth that follows declines in energy prices. What’s more, lower oil prices feed into raw-material costs across virtually every industry, reducing cost of production and in many cases boosting margins.
The U.S. Department of Agriculture (USDA) – According to the USDA’s Economic Research Service, U.S. wheat exports have fallen to their lowest level in 44 years. The report cites that the dollar’s 20% surge since July 2014 is mostly to blame.
- Though the U.S. is consistently one of the world’s largest wheat exporters, the total value of exports for 2014 was only $7.8 billion. That’s about half of what Apple Inc. makes in profit…each quarter! It’s tiny, and relative to the U.S. economy it is virtually non-existent.
U.S. Department of Labor – weak jobs reports over the last few months have some thinking that U.S. companies of all sizes are scaling way back on their hiring. The theory goes that as global demand wanes with a stronger dollar (U.S. goods become pricier), companies are left with growing inventories and can put growth plans on hold.
- At the end of the day, more jobs are still being added to the U.S. economy each quarter on a net basis, and the unemployment rate is falling. Some note that these are only part-time jobs and not real jobs, but part-time jobs are still jobs. There’s more personal income being added to the economy which funnels into more consumption. Indeed, employment, personal income and manufacturing and trade sales have all been rising, helping to offset the weakness in industrial production in recent months.
U.S. Department of Commerce – in the retail world, September sales were only half of what economists were expecting, and August gains were neutralized by revisions.
- Solid employment gains and gradual, if uneven, firming in the growth of labor compensation imply solid growth of real labor income. Real house prices have continued to show modest gains and equities, though in the midst of a sharp pull back, support the improving trend in household balance sheets. Confidence remains elevated despite some recent backtracking, supported by the pace of recent job gains, the lowest unemployment rate of the expansion, and recent improvements in real incomes.
Bottom Line for Investors
I’ve said this many times before, but with investing it is ever-important to focus on the trend-lines, not the headlines. It’s tempting to get caught up in weak data points and want to extrapolate them into bearish analysis. After all, investors fear losses about twice as much as they enjoy gains, so instinct usually has us looking over our shoulder for the straw that can break the camel’s back. But, in today’s economy, I think the trend-lines tell us that there is more expansion ahead, and that the U.S. can grow well into next year and perhaps beyond. If that’s the case, equities should have plenty of room to expand with it.