US GDP and it’s impact on Stock Markets
Stock-Markets / US Stock Markets Jul 05, 2009 - 02:57 PM GMTBy: Prasoon_Gopal
One of the most important contributors to GDP as a whole is consumer spending. Consumer Spending constitutes over 70% of the GDP. (http://www.hoover.org/research/factsonpolicy/facts/4931661.html). Which means, the more you and me consume, the more money revolves in the country and eventually ticks up the GDP.
Consumer spending is directly related to earnings, obviously. The more you earn, the more you have the ability to spend. However, 2008 crash has changed American Consumer forever. Why and How?
Prior to 2008, American consumer used to be "Debt-laden", meaning, buy everything on credit cards and barely have any savings. Before Savings rate rose to about 7% in 2009, Savings rate in the US was actually negative. Meaning, in "real terms too", an average consumer spent more than they earned. Average American Credit card debt was more than $8000 in 2006-07.
Cut to 2008, things changed forever and for good. American consumer realized that debt can only take you thus far. In the end, you have to pay off the debt, one day. With credit markets thawed, businesses and consumers found it extremely difficult to borrow more on credit cards and loans. This made them realize the importance of REAL Cash. And you see the turnaround in the form of savings rate zooming in just an year to almost 7%, nationally. This rate has not been seen in over 2 decades.
So what does all this mean to an investor or even a trader?
First of all, if 7% of the money in circulation does NOT make it's way through in some form or the other back into the economy, then that money causes deflationary effects. When savings rate was 0%, people used to invest in stock markets, real estate, buy expensive electronic gadgets. None of this is happening now. This in turn means less demand which means lesser inventory reduction. Which eventually leads to excess supply and lower manufacturing and hence even further deflationary tendencies.
But what i wanted to highlight here is the REAL Savings rate and it's impact on the overall GDP. I am not quite sure of the exact implications of 7% savings rate versus 0% on the economy. But let us assume that saving 7% money will reduce the current GDP by say 7%. So does that mean this is the real truth? NO WAY. Let me explain.
Per (http://stats.bls.gov/news.release/empsit.t01.htm), Total population is around 235,655 (thousands). Employed population is only 140,196, or about 60%. However, the reported savings rate of 7% takes into account the entire population when nearly 40%+ of them do NOT earn at all. Which means to get to national 7% savings rate, the remaining earning population (60%) must save over 12% which i believe is over 15% in real terms as GDP and savings rate are lagging indicators and lag by about 3-6 months. So, currently IMHO, over 15%-20% savings is taking place from the employed population. Which in turn means this will take GDP down by 2-3 times as is currently being published.
Lower GDP means lower production and which in turn means lower business and hence lower earnings. Which eventually means that stock market has to reflect reality at some point and match up to the expected earnings, which will be lower owing to just above discussion.
Just wanted to throw this popular statement (out of context above).
Media : There are trillions of Dollars on the sidelines ready to be invested in the stock market.
Reality : Investments are ALWAYS a ZERO sum game. If there are trillions of dollars ready to buy stocks, then there MUST be someone to sell it. So, stock market in reality is a zero sum game. The equilibrium can NEVER be changed. So, forget this myth and understand the real story behind the statements.
By Prasoon Gopal
For further reading, you can track me @ http://www.stocksbuddy.com/blogs/?author=36
I have been trading for over 15 years and have been mostly involved with Technical Analysis. I love to dig into Macro-Micro economics as it gives us a heads-up of where the market is headed for. Some of my work and articles have been published on various websites and magazines over the past decade. I love to write articles before something happens rather than after the fact.
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