So How Do We Interpret the Slow First Quarter GDP Results?

Hello Everybody.

As a securities analyst, I’ve always coughed at pundits ability to not be able to predict the stock market correctly, but then jump to the front to shout out reasons it performed the way it did…in hindsight.  In other words, to give reasons even when there are no reasons.  With that, I aver that this quarter’s low 0.7% GDP growth was a surprise to me. Let’s examine the factors leading to it.

Unemployment.

Unemployment is low, at 4.5%.  Without getting into numbers, it’s very low, around 4%.  And since GDP is driven to a good extent by the movement of goods and consumer spending, the combination of greater corporate activity plus higher consumer spending should be good.

Consumer Sentiment

Consumer sentiment is good too.  After all, if it weren’t good we wouldn’t be spending, and that would account for low growth.  But in fact sentiment is robust.

Consumer Spending

Consumer spending has been robust, about 5% growth.  No problems here (sort of, as we’ll see below).

What the Expert Say

The experts point to intricacies, such as: higher unit prices rather than unit volume in consumer spending.  Slowing Auto sales. But let’s stop here because my experience suggests this is what the experts do, they dig until they find something to support the facts.

What Michael Emerald Says (that’s me, BTW)

This quarter was an aberration.  Do I expect 5% growth as Donald Trump suggests?  No.  For one, we have a lot of overburden right now, primarily the government debt, weighing on the economy.  Second, courtesy of Dr. Rathnam, GDP growth has been slowing since WWII so growth in that range isn’t to be expected anymore.  But I do expect a return to 2%-3% growth in the coming quarters.

Michael Emerald, CFA

Owner and Wall Street Analyst, Performance Business Design

Will the Economy Continue to Improve?

First, I’m not an economist.  Rather, I collaborate with smaller businesses to help make them perform as well as the corporations I meet with weekly.  Which means I need to be in tune with the economy.  We’ve witnessed an improvement in the economy, in the stock market, and in the job market for some time now.  I’ll leave to the side for now the not-so-incidental factors that the growth has been languid and that unemployment figures are probably not accurate.  The question I’m asking is will the economy continue to improve?  I feel that the answer is yes, because the items which are causing them to improve are increasing.  What are those factors? They are an increase in corporate productivity, a decrease in costs, and affordable financing.

But when we examine the underlying factors we find a few disturbing elements.  For one, the increase in corporate productivity is occurring due to fewer employees working harder and longer, and, second, automation.  The results of the first is a decrease in quality of life, and ultimately a decrease in lifespan, caused by increased stress and inadequate recovery.  So this becomes an example of growth being bad.

Second, automation is removing jobs.  And the result has been an increase in suicides, drug abuse and civil hostility caused by a disruption of the workforce.  This is the same type of disruption we’ve witnessed in other industrial revolutions.  So, this too becomes an example of growth being bad.

Finally, the increase in productivity and GDP growth is accruing to the wealthy more than profits have accrued in the past.  Why? Because fewer employees mean fewer stakeholders.  Moreover, almost unrelated, we’ve seen an increase in privately held companies, thus reducing further the number of stakeholders.  So the wealthy grow wealthier but the general population stays the same or grows poorer.  So, this too becomes an example of growth being bad.

Overall, then, the economy should continue to improve.  But the elements fueling that growth are bad for most of us.

Michael Emerald, CFA

Wall Street Security Analyst and Owner, Performance Business Design

 

Getting Manufacturing Companies Back in the US is a Good Thing

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Articles appear in every major business and economics periodical opining on the loss of free trade being heralded by Trump’s criticism of US trade contracts; China’s requirement to source a minimum percentage of domestic raw goods; and Brexit (Britain’s exit from the European Union).  While experts far knowledgeable about the subject than yours truly opine that any loss of free trade is a bad thing, I myself abide by two tenets:

Don’t Shoot Yourself In The Foot, and Use Common Sense.

While my first principle doesn’t apply here, the second one does.  Specifically, we’ve witnessed the manufacture of US goods get outsourced to the extent that, as Donald Trump stated, paraphrased “When I bought TVs for my hotels I was forced to buy Samsung because the US doesn’t make TV sets anymore.”  Or, pick up any good and ask yourself where was it made.  Or, witness that there are websites, albeit few of them, which sell only US made goods.

And so, I ask, “What is the result from having absolutely everything produced overseas?”  The result is not good, since without plants and factories we lose the bedrock of the country, and more generally the bedrock of any company.  As Harvard Business Review in its December issue showed, a company without assets, i.e. a technology company, doesn’t remain a leader for very long.

And so Common Sense suggests that we need companies here producing things.  To what extent?  Rarely are things black and white and I feel that we need sufficient companies to regain competitiveness globally and to increase manufacturing employment to a level which economists agree is fundamental to the long term.

Michael Emerald, CFA

Consultant, Wall Street Securities Analyst.

I think the Fed would have done better to raise rates

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We posed the question to our readers, “Do you think the Fed should raise rates this year?”

67% said “Yes, raise rates slightly”.

Why do you think the majority would feel this way?

An economist, which I’m not, might share several reasons.  For me, my answer would be this.  The Federal Reserve Board uses interest rates as its most important tool to steer the economy.  When the economy is doing badly, they lower rates.  When the economy recovers, they raise rates, so to keep inflation from over-heating.  Here, we saw the Fed drop rates to close to 0% around 2008, at the time of the last recession.

Like a Mustang GT headed towards a tree

The recession technically ended 2010, but yet the Fed hasn’t raised rates.  Understandably they don’t see a solid economy and they don’t want to risk plunging it into a recession.  However, I look at it this way: the economy was like a car going downhill in a snowstorm, headed hard left towards a tree (If you drove my Mustang GT in the winter, you would know this feeling well).  To counter that, you steer the car hard right.  However, what if the car doesn’t correct itself?  Do you keep the wheel pegged hard left?

A good driver knows that in order to completely lose control, you steer the car slightly left.

What I’m suggesting here is that by keeping rates pegged towards zero, the Fed has completely lost its ability to steer the economy if and when another recession surfaces.  You can’t go below 0% (or, more accurately, much below 0%).  Better would have been to ease rates upward at the sign of recovery, and let the economy adopt to the new norm of positive interest rates.

What does keeping rates low portend for the future?

The future?  Rarely do I forecast the economy but here I forecast a problem once another recession occurs, and they always do.  The Fed will have lost its ability to lower rates, causing the recession to possibly be a bad one.

What do you think?  Do you agree with me?  Disagree?

Take Care!

Michael Emerald, CFA

I think the Fed would do well to raise rates

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My simple reason is either simple and simple, or simple but profound, and you can decide for yourself which it is.

My reason is that the most effective tool the Federal Reserve Board has for steering the economy are interest rates.  But when interest rates are near zero, it’s like a steering wheel that is turned all the way to the left.  And you won’t do much steering with the wheel all the way to the left.

So time to return the wheel towards center.

When we consider what things were like when the Fed reduced rates to zero, they were pretty bad.  They were very bad.  Since then, we’ve seen the economy recover, the stock market rebound, retract, and then go up again.  This suggests two things.  One is that the economy isn’t bad anymore.  Indeed our published Economic Performance Index shows it north of a normalized 50%, suggesting expansion.  Second, it suggests that the economy isn’t responding to Fed rates.

So raise them some.

How much?  Hey! That’s what they’re paid for, not me.  They can decide what’s appropriate.

For business owners, now is the time to expand or get ready to expand

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Why?

Our normalized Economic Performance Index is running north of 50%, at 68%.  A lot of good things are happening right now, and economic statistics show it.  We have a lot of clients who have been doing what they should be doing, but waiting for the time to expand.  Now is the time to do it.  Financing isn’t as tight, either.  Why?  Because the market gave us a scare, but seems to be holding steady, if not recovering.  This tends to make lenders be at ease again and I’d feel comfortable presenting an Investor Presentation right now.

Take-aways:

  • If you’re business has it’s ducks in a row, which means we would give it a Business Performance Rating north of 60%, then consider expanding.
  • If you’re business is in the 40%-60% range for performance, consider making an effort to get it north of 60%.  Then, if the economy is still strong, consider expanding.
  • If you don’t know what your Business Performance Score is, contact us and request that a free analysis be done for you.  Results will be posted and sent to you, and we’ll send you information in the mail about how to get your score to where you’d like it.

Michael Emerald, CFA

Business Strategy Consultant