The Independent Market Observer

Economic Recovery: All Smoke and Mirrors?

Posted by Brad McMillan, CFA®, CFP®

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This entry was posted on Jan 10, 2017 6:20:06 PM

and tagged Politics and the Economy

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recoveryRecently, several readers have written in questioning the current optimism about the economy. Is it sustainable, and is it realistic to expect faster growth?

Some of these questions are couched in politics and some in economics, but either way, there is skepticism over whether we’re kidding ourselves. Is this really a smoke and mirrors recovery, and are recent upticks just more of the same?

Gap between confidence and actual spending may be closing

It’s a reasonable question, particularly in light of the disconnect between confidence, both consumer and business, and actual spending. Consumer spending growth has been anemic and savings rates have remained high, while business investment continues to disappoint. Is anything really different now?

Not yet, is the honest answer. Still, there are signs that, this time, the breakout may be for real.

Consumer confidence. Confidence has moved to the highest levels since the crisis—and in one survey, to the highest level since 2001. Over the past several years, confidence has repeatedly recovered and then dropped again, notably last year. The latest recovery, to new post-crisis highs, suggests that the upward trend continues, despite recent hits. We’re getting back to levels that, historically, have been very positive for growth.

Erratic as it has been, this growth has been based in solid fundamental improvements, with job creation at levels last seen in the late 1990s. That improvement notwithstanding, however, confidence has been stuck. Now, we seem to be breaking out of that range, which could well mean further improvements.

The return of faster wage growth makes this even more likely. Last month, wage growth moved to a post-crisis high. And given low levels of unemployment and available workers, it is likely to accelerate even further. Bigger raises mean more confidence and more spending. Wage growth has been a major missing piece over the past several years, and the fact that it is finally showing up can only help.

Business investment. Business has had the same problem—recovering confidence broken by periods of significant declines, with last year as a conspicuous example. Low oil prices and a surge in the dollar have hammered confidence and spending over the past several years. This year, in addition to recovering consumer confidence, we have a stabilizing oil price, a dollar that is appreciating much less than it was last year, and economies around the world turning up in a synchronized way for the first time since the crisis. There are signs that business confidence is responding to this positive news and that, eventually, business investment will as well.

Finally, looking at corporate earnings, we now see positive growth after several quarters of decline. This is expected to continue and may even accelerate. Faster earnings growth is a real engine for corporate confidence, just as wage growth is for consumers. Here again, we see a fundamental improvement.

Sound fundamentals suggest real change afoot

Even the Fed is now recognizing the improvements. By basically declaring victory on employment and getting very close on inflation—and by starting to raise rates again—the Fed is doing its bit to ensure that confidence continues to rise and that the facts on the ground follow it.

Much of the narrative around the recent improvements centers on the election, and the connection is real. The election, however, is not the foundation of the improvements; the fundamentals are. Unlike past false dawns, this time it looks like we have a much more solid fundamental economic base.

Although politics may have helped move the change forward, it is not the reason for the change. The reason is that things really have gotten better and will likely continue to do so.  

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