Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19
Gold Price Gann Angle Update - 10th July 19
Crude Oil Prices and the 2019 Hurricane Season - 10th July 19
Can Gold Recover from Friday’s Strong Payrolls Hit? - 10th July 19
Netflix’s Worst Nightmare Has Come True - 10th July 19
LIMITLESS - Improving Cognitive Function and Fighting Brain Ageing Right Now! - 10th July 19
US Dollar Strength Will Drive Markets Higher - 10th July 19
Government-Pumped Student Loan Bubble Sets Up Next Financial Crisis - 10th July 19
Stock Market SPX 3000 Dream is Pushed Away: Pullback of 5-10% is Coming - 10th July 19
July 2019 GBPUSD Market Update and Outlook - 10th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

U.S. Anemic GDP Growth Rate Not Good Enough

Economics / US Economy May 06, 2010 - 06:54 PM GMT

By: Hans_Wagner

Economics

Best Financial Markets Analysis ArticleIn normal times, a 3.2 percent GDP growth rate for the United States is good. In the 1980’s the U.S. suffered another severe recession. During that recovery, GDP grew at a 7 to a 9 percent rate for more than one year. A 3.2 percent GDP annual growth rate barely creates enough jobs to keep up with the expanding population. It does nothing for all those who lost their jobs and are looking for work. The U.S. unemployment rate is 9.7 percent and the underemployment rate, a more accurate measure of the true unemployment situation is running at the 16.5% level.


What can we learn from the Bureau of Economic Analysis (BEA) report on the GDP growth rate that might be helpful to investors?

Jobless growth

“Okun’s rule of thumb” points toward an economy that must grow at the 3.0 – 3.5 percent level to maintain current employment levels. If the U.S. economy was operating at full employment status, a 3.0-3.5 percent growth rate works just fine. The problem is the U.S. has 9.7% unemployment and 16.5% underemployment. We will get another look at the employment situation when the Bureau of Labor statistics (BLS) releases the number for April on May 7, 2010.

The chart below from the BLS report for March 2010 shows that the total employment for the U.S. is back where it was at the end of the recession that ended in January 2003. If the U.S. GDP only achieves growth at 3.0 to 3.5 percent growth rate, the level of employment will only cover the expansion of the population, leaving 7.5 million still unemployed. This does not count those that are working part time or in jobs that pay less than their skills, the underemployed.

Source: Bureau of Labor Statistics, Employment in total non farm

All sectors of the economy are experiencing negative growth or slight up ticks. However, employment in the federal government continues to expand as shown in the chart below. Expansion of the federal government contributes to the growth in the deficit. One of the problems with government employment is it is very difficult to scale it back once the positions are in place. Just look at the trouble state and local governments are having as they try to balance their budgets by cutting people.

Source: Bureau of Labor Statistics, Federal employment

A Jobless Growth GDP

A jobless growth economy will be constrained in its ability to expand. Personal consumption increased at a pace of 3.6 percent. However, almost that entire growth came from savings not from higher incomes. As many people become more confident in their job situation, they are willing to spend more. Since personal disposable income barely rose, a drop in the saving rate can explain the strength of household spending almost entirely. Unless income grows more strongly, we should expect slowing spending trends over the next few quarters as government stimulus payments to the private sector taper off.

The companies increased the value of goods on their warehouse and store shelves by $31 billion in the quarter, contributing 1.6 percentage points to growth due to higher inventories.  Should consumer spending slow as expected this is likely to produce only small gains during the rest of the year. Without an expansion in consumer income to fuel growth in spending, consumers will dip into savings. Without growth in spending, inventories will reverse course cutting the GDP growth rate further. Without expansion of inventories, the country’s GDP looses an important growth driver.

Exports and imports climbed in the first quarter, as global trade continues to bounce back from its lows during the financial crisis. However, imports rose faster.  As a result, net exports withdrew about 0.6 percentage point from the GDP growth rate. The problems in Europe will restrict expansion of exports from the U.S. due to the rise in the price of the dollar and the slow growth Europe will experience in 2010 and 2011. Expansion of exports is one of the growth engines for the economy. Lower sales to Europe will limit the ability of the U.S. to grow more rapidly.

Helping to counter part of this export question is the expansion of the emerging markets. Industries and sectors that benefit from the rapid growth of countries like China, India, Brazil and Indonesia, will experience success. Mining and commodity processing equipment is one sector that is thriving. Technology, especially mobile communications and the wireless internet is another where U.S. companies can leverage their expertise and skills of their engineers.

Residential investment fell 10.9 percent as the housing sector continues to suffer despite the first-time homebuyer credits that ended on April 30, 2010. This raises the question whether housing can recover sufficiently to add to the growth of the economy.

Equipment and software jumped about 13 percent though this was down from Q4's 19 percent consistent with what we have seen in orders/shipments for capital goods, especially primary metals, over the last six months.

Federal spending over the short run as countercyclical fiscal stimulus is welcome. Since this is the second year of the President’s stimulus package, it will be difficult to justify more, especially to an electorate tired of handouts to everyone but themselves. The large deficits and how to pay for them will be an election issue. Many people are upset that we are leaving our children saddled with an enormous debt that will reduce their living standards as they struggle to pay for our excesses. We will see rates climb, as investors grow leery of the never-ending deficits that are limiting private investment. Hopefully we won’t see riots in the street.

The Bottom Line

The anemic GDP growth rate will force investors to pick their opportunities carefully as a jobless growth economy will limit the opportunities. In this case, the tide has risen and it can no longer float all boats. While the tide might not be going out, it will not carry investors forward. This means stock pickers and well founded sector rotation strategies will carry the day.

By Hans Wagner
tradingonlinemarkets.com

My Name is Hans Wagner and as a long time investor, I was fortunate to retire at 55. I believe you can employ simple investment principles to find and evaluate companies before committing one's hard earned money. Recently, after my children and their friends graduated from college, I found my self helping them to learn about the stock market and investing in stocks. As a result I created a website that provides a growing set of information on many investing topics along with sample portfolios that consistently beat the market at http://www.tradingonlinemarkets.com/

Copyright © 2010 Hans Wagner

If you wish to learn more on evaluating the market cycles, I suggest you read:

Ahead of the Curve: A Commonsense Guide to Forecasting Business and Market Cycles by Joe Ellis is an excellent book on how to predict macro moves of the market.

Unexpected Returns: Understanding Secular Stock Market Cycles by Ed Easterling.  One of the best, easy-to-read, study of stock market cycles of which I know.

The Disciplined Trader: Developing Winning Attitudes by Mark Douglas.  Controlling ones attitudes and emotions are crucial if you are to be a successful trader.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules