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11/26/13 – It’s All Good: Things to Be Thankful For

Written by Brad McMillan, CFA®, CFP® | Nov 26, 2013 2:38:51 PM

I spend quite a bit of my professional life looking for things to worry about, to the extent that I’ve been referred to as “Eeyore.” There’s certainly some justice to this, but I do recognize good things when they happen. For example, I turned bullish on the U.S. economy about two years ago, well ahead of the crowd. That has played out well.

While I do have a bit of bias to the downside, in the spirit of the season (and because I haven’t done it in a while), let’s look at some of the many things we have to be thankful for.

The U.S. economic recovery rolls on.

Despite fears that the government shutdown would derail the recovery, most indicators have continued to perform strongly. Third-quarter GDP came in much more robust than expected, as did business confidence indices, and employment recovered well after a short-term hit from the shutdown. Personal income and consumption has started to rise faster, and consumer borrowing has also ticked up.

Overall, we are seeing accelerating growth despite the Washington, DC, theatrics and fiscal drag. The fact that this is translating to increased hiring, business investment, and consumer spending suggests that the recovery is really starting to gear up. The wide range of support for continued growth indicates that we’ll be looking at a much lower unemployment rate next year—an unalloyed good thing.

The leadership transition at the Federal Reserve, which could have led to uncertainty and market disruptions, seems to be proceeding as well as can be expected. The smooth transition, combined with the improving data, may allow the Fed to continue to act as the guarantor of the recovery.

The world economic recovery continues.

At the very least, Europe has stopped digging its hole for the moment, and some areas, such as Germany, are actually doing quite well. Ireland and Spain are exiting the EU financial support programs, and even Greece has made real progress. Rather than acting as a significant drag and generator of uncertainty, Europe (at least for now) has moved into the positive column.

China has done the same. With better-than-expected economic indicators, as well as a major government conference that outlined the expected transition to consumption-led growth, China has set the stage for a healthier, more sustainable future. Rather than a hard landing, the more likely course now seems to be somewhat slower, but much more sustainable, growth.

Geopolitical tensions have decreased.

The U.S./Iran deal, although still in the preliminary stages, has the potential to significantly cut U.S. military requirements and expenditures in the Middle East. Along with the final pullback from Afghanistan, that means the role of the U.S. military could be much less in the next year or so, easing the burden on the troops and their families. Japan’s growing willingness to step up in its own defense is also a plus for reducing U.S. military requirements.

The increasing production of oil and gas in the U.S. has also reframed our need to engage overseas. We’ll still need a presence, but, as our exposure to foreign energy decreases, the more we’ll be able to choose our battles.

The structure of the U.S. economy continues to improve.

Energy production shows up here as well, with cheap energy driving relocation of foreign manufacturing plants to the U.S. Lower energy costs and increasing domestic production have also significantly improved the U.S. trade balance. Finally, with natural gas now outpacing coal as the major fuel for power generation, a significant reduction in pollution, costs, and carbon emissions may benefit the economy and country as a whole.

Cheap energy isn’t the only driver of increased U.S. manufacturing. Rising wage rates in China and heightened productivity in the U.S. have also brought manufacturing jobs back here; the U.S. is now very competitive on a productivity-adjusted cost basis for labor. I talked quite a bit a couple of years ago about the U.S. manufacturing renaissance, and it continues to roll ahead. Increases in employment and production have benefited the economy through higher wages and an improved trade balance.

There’s a lot to be grateful for.

All of the points above are real, sustainable, and significant. There are certainly concerns and worries, potentially big ones, but right now we’re actually in a very good place with respect to the real economy. The base case is for continued expansion, and the upside in many respects looks a lot more likely than the downside.

We can all go to our Thanksgiving dinners much happier, and more confident, than we did only a year ago. Then, if you remember, the fiscal cliff was in the headlines, and the recovery wasn’t nearly as solidly established. Enjoy the holiday, and be grateful for the progress we’ve made.