The Independent Market Observer

8/1/13 – Some Pushback on Growth and Thoughts About the Blues Brothers

Posted by Brad McMillan, CFA, CAIA, MAI

Find me on:

This entry was posted on Aug 1, 2013 9:22:30 AM

and tagged Market Updates

Leave a comment

After I wrote yesterday’s post, I was discussing the results with a colleague who was much more downbeat than I had been. “Only 1.7 percent!” he pointed out, maintaining that this is quite a low growth rate, well below those in previous recoveries, and nothing to get excited about.

You know what? In absolute terms, he’s right. The 1.7-percent growth rate is disappointing based on history, is not a level that will make us all rich, and certainly needs to increase. But to me, that’s not the point.

More than anything else, economics is about thinking of things at the margins. To get mathematical for a second, we should be looking not at where we are but at the rate of change. Or, one step deeper, the rate of change of the rate of change.

When you’re driving, this is called speed and acceleration. Think about Jake and Elwood in The Blue Brothers, one of my favorite movies. To pull off the jump over the drawbridge, Elwood had to go from a full stop to a speed that would let him clear the gap. At a full stop, no way could he make that jump. He had to have enough speed, and, to get to that speed, he had to accelerate. A prerequisite for the jump was acceleration to a higher speed.

The economy was pretty much at a full stop at the end of last year. For a recovery to happen, we had to see the speed rise, and to get that, we had to accelerate. Just to make things more difficult, in the first quarter of this year, we dropped a 500-pound boulder in the trunk with the tax increases, and then another one with the sequester spending cuts. Despite that added drag, the economy still managed to accelerate over the first two quarters of the year, and there are signs the acceleration is increasing. Today’s initial unemployment claim number, for example, is at the lowest level since October 2007—before the financial crisis.

I’m not saying we’re at jump speed yet; we clearly are not. Still, the idea that we managed to accelerate at all with the load in the trunk is impressive. It speaks to an underlying strength in the recovery that I don’t think is fully appreciated.

If, like good economists, we think about how growth has changed at the margins, we realize that the speed of the economy is increasing. Digging deeper, we realize that, over the past three quarters, the acceleration has also been increasing. While we’re not yet at jump speed, this is what has to happen if we’re going to get there.

Looking ahead, we’re seeing the boulders in the trunk start to fall out. As consumers adjust to the higher tax rates, and as the sequester spending cuts roll off, those drags should dissipate. Economic momentum also has a tendency to feed on itself through the medium of consumer confidence, which is at multiyear highs.

Let’s be clear about where I stand on this. My colleague, and many commentators, are correct: The current level of growth is nothing to get too excited about. What’s at least worth getting interested in—if not excited about—is the rate of change of growth and the environment in which that change has happened. If we look at those, we find that jump speed is getting closer rather than farther away.

Subscribe via E-mail

Crash-Test Investing
Commonwealth Independent Advisor

Hot Topics

Have a Question?

New Call-to-action

Conversations

Archives

see all

Subscribe

Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly into an index.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.  

Third party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®