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Politicians keep cooking up plans to boost the economy’s growth rate. But what’s so bad about 2% growth? According to my work, “Nothing!”
We just got the second-quarter GDP report, and it showed 2.6% growth. The first-quarter figure was revised lower to 1.2%. So that means we’ve seen the economy grow at an average rate of 1.9% so far this year. That may not be exactly what we’ve gotten used to historically, but that isn’t necessarily a bad thing.
Here’s why: We’ve had two major cycles since the mid-1990s that were fraught with animal spirits — excessive confidence, spending exuberance, massive borrowing, etc. Those twin cycles (fueled first by the dot-com bubble, and next by the housing bubble) were accompanied by very strong growth … but it was artificial growth. It was higher than the economy could sustain. Our nation was living beyond its means.
Now, with a 2017 growth rate of just 1.9% so far, no one is getting too excited or exuberant … and that’s a good thing. You don’t have your landscaper passing along stock tips, and you don’t have a state of euphoria that leads to blow-off highs. Instead, we’re just contending with the usual bull versus bear arguments all the time.
Frankly, I’m still in the bull camp because you just can’t ignore the positives. Earnings growth has been robust – around 11% this quarter, with 60% of companies already reporting. Interest rates and inflation are historically low, making capital cheap. And the opportunity cost of not owning stocks is very high.
What’s more, the lower growth rate is helping fuel a longer, more sustainable expansion. We’re in the midst of an eight-year expansion, the third-longest on record going back to 1873, as you can see here:
If I were seeing signs the economy was running out of gas, I’d be concerned. But our proprietary recession indicator model suggests just a 15% chance of an economic slump in the coming four quarters.
Moreover, wages are growing, but at a balanced pace. Corporate profits aren’t getting hurt, nor is consumer confidence or spending. The latter rose 2.8% in Q2, up from 1.9% in Q1. Businesses are doing even better. Nonresidential fixed investment climbed 5.2%, while equipment investment jumped 8.2%.
So the next time someone on TV slams 2% growth, remember that it’s really not all that bad. We’re still on solid footing economically, and while that doesn’t mean we won’t see market volatility every now and then, it does explain why pull backs have been consistently bought.
Best,
Mandeep
Small Cap Edition, By Mandeep Rai, Senior Analyst Mandeep Rai has more than 15 years of investing experience, working as both a stock and credit analyst. At Weiss Ratings, he researches and evaluates financial and economic themes, and makes decisions on when to buy or sell specific shares for the Top Stocks Under $10 portfolio. |
