Permanent Value

Week in Review (4/10/14)

Bruce Doole
April 10th, 2014

U.S. Economic Outlook Lifted by Favorable Tailwinds

Economist Darrell Spence discusses his expectations for accelerating growth in the U.S.

Despite recent signs of a slowdown in activity, the U.S. economy remains in expansion mode and growth is likely to accelerate in the months ahead, says Capital Group economist Darrell Spence. Severe weather has clearly had an impact in recent months. However, taking a step back and looking at the big picture, the U.S. economic recovery remains on track, thanks to pent-up housing demand, accommodative monetary policy, improving fiscal conditions at state and local governments, a significant federal budget compromise, and the end of a long-running recession in Europe that had dented U.S. exports.

Disappearing Drags on Economic Growth

Normally, when the U.S. economy is coming out of recession, gross domestic product growth tends to be in the area of 3% to 3.5%, and even as high as 4% at times. That has not been the case so far in the current expansion. Rather, the U.S. has experienced fairly lackluster GDP growth of 2% to 2.5%, largely because of various setbacks, including government fiscal restraint and a European recession that has weighed on global economic growth. As we look into 2014, these drags on the U.S. economy are disappearing and many earlier developments that have been positive for the U.S. remain in place. As a result, 2014 is increasingly looking like the year that U.S. economic growth will finally break into the range of 3% to 3.5%. Faster GDP growth has historically led to stronger earnings growth, which would be good news for the U.S. stock market.

Government Finances Looking Brighter

Fiscal restraint at all levels of government has undoubtedly had a negative impact on the U.S. economy, but it appears to be moderating. Employment growth at state and local governments has turned positive for the first time in five years. This should be followed by an increase in capital projects at the state and local level, which is where more than 90% of government construction activity occurs. The federal government’s drag on the economy is also declining. The federal deficit has improved markedly over the past few years, the result of a combination of budget cuts and tax increases that have bolstered government coffers, as well as overall improvements in economic activity. As a result of this improvement, the recently approved two-year federal budget agreement calls for less fiscal restraint than previously imposed. As long as the deficit continues to improve, particularly as a percentage of GDP, the incentive for policymakers to undertake further fiscal restraint in coming years should be greatly reduced.

This Week’s Economic Data:

-PMI Manufacturing Index final for March was 55.5 – lower than February’s 57.1, but still very solid led by new orders at 58.1.

-ISM Manufacturing Index rebounded from a soft February, but remained below expectations at 53.7. The Econoday consensus estimate was 54.0.

-International trade deficit increased to $42.3 billion in February from $39.3 billion in January. Expectations were for a $38.8 billion deficit. Exports declined 1.1% while imports rose 0.4%.

-Jobless claims moved up 16,000 in the March 29 week to 326,000 or 6,000 over consensus.

-Employment situation seems optimistic as nonfarm payroll jobs rose 192,000 in March. The unemployment rate held steady at 6.7%.

Sources: Capital Group/ Ivy Funds