Hard data, soft data, there has been so much conversation recently about the U.S. economy and how perhaps the markets are ignoring data showing anemic economic growth. But the truth may be the opposite: it isn't that investors are ignoring the data, but instead they are looking beyond the data.
For the most part, data on the U.S. economy is backward looking, or historical, while the markets are forward looking. We can start with the most basic of data and get real complex if we'd like.
A Look at GDP Growth
Let's start with the past.
On an annual basis, the U.S. economy has failed to grow by 3% or more since 2005 and in 2016 growth slowed sharply.
When you look at GDP on a quarterly basis, it doesn't look all that much better, but a bit better.
Many economists were surprised when the economy grew at a 0.7% annualized rate in the first quarter of 2017, seeming to support many experts' argument that the economy can only expand at a rate of around 2% annually. (See also: Start your Engines: Why GDP Will Fire Up in the 2Q.)
All this is the past though. When we look forward, Treasury Secretary Steven Mnuchin argued this month that the U.S. can grow by 3% annually. And the Atlanta Fed GDP now is forecasting, as of May 16th, 4.1% GDP growth in the second quarter.
(Atlanta Federal Reserve)
Then, of course, there are measures of inflation investors seem to worry about, but that is likely to calm as well once the effects of oil prices flattening out begin to take effect.
When you look at core inflation or CPI Ex-Food & Energy, again, year-over-year inflation is not a major concern at this point.
Some investors and economists also say that employment levels don't have much room for further growth.
Unemployment is likely to fall further, when you count marginally employed workers and part-time workers.
There are nearly 150 million people in the workforce today, yet the U.S. has only been creating jobs in the 2 to 3 million per year range. It tells us that we produce fewer jobs per year as a percent of the workforce than in the past. This suggests there is room for further improvement in employment, due to a combination of slack and growth in the labor force.
In fact, all of the past data suggests that the economy has been underperforming and has room for growth. In fact, a key statistic - real potential GDP - confirms that the U.S. economy is underperforming as measured by an output gap of about $200 billion. Real potential GDP is the estimate of the output the economy would produce with a high rate of use of its capital and labor resources, removing the effects of inflation.
Earnings Reflect a Robust Economy
One of the key data points supporting the potential of 3% GDP growth is U.S. corporate earnings, especially earning expectations going forward, which are improving. These estimates support the argument that there is room for the U.S. economy to grow.
So the economic data that suggests softness in the economy is probably missing what actually will happen.
As a result, faster economic growth may be within reach. U.S. GDP, for example, is currently around $17 trillion, and adding one percentage point of growth would be $170 billion worth of output. So while many argue that the U.S. is a 2% GDP growth economy, the economy needs add only $170 billion to reach 3%.
How much was the output gap I told you about? About $200 billion. Who said it can't be done! Good luck.
Michael Kramer and the clients of Mott Capital Management, LLC own shares of UL and VOD.
Michael Kramer is the Founder and Portfolio Manager of Mott Capital Management, LLC, a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendation made during the past twelve months. Past performance is not indicative of future performance