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Market Commentary for March 1, 2016

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Some good news! Sort of…

Written by: Benjamin Bimson CIMA® / BCJ Financial Group

First the good news: Real GDP numbers were revised up from previously reported 0.7% in the 4th quarter of 2015 to 1%.1

This pushes the total year over year change up to 1.9% from the previous 1.8% reported. This is still a bit lower than a historical average expansion phase. Historically we would expect about a 3.2% average annual GPD growth rate coming out of recession. This expansion has only been an average of 2.1%. Another piece of good news: personal income and consumer confidence have gained some ground back (improved slightly but still a bit benign). 1

 

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Now the information that really gets to the meat of the issue for the GDP numbers. Bear with me as this is a fair bit of data (I bet if you have insomnia this next part will really help!).

The biggest portion of the GDP revision is really due to some inventory revisions that showed $13.1 billion more in inventory valuation than previously reported. It had an impact of adding nearly 0.31 points to the revision. 1

The next most important change in the number was due to imports being revised down to -0.6% from 1.1% in the first reading. Exports were revised down by less to a -2.7% annual rate from the -2.5% previously. 1

The net difference in import/export numbers added another 0.2% to the GDP number. PCE (personal consumption expenditures) were revised down and contributed less to growth than originally thought for a net -0.08%.1

Government spending was also revised down to net -0.8% on lower infrastructure spending than previously thought. 1

Nonresidential fixed investment was revised down and contributed -0.1% to the revised numbers. 1

Residential investment was also revised down for a net of 0.1%.1

There were some other minor adjustments as well to get from 0.7% advanced reading on GDP to the revised reading of 1.0%.1

Need coffee yet?

Lots of mixed messages there, but one thing that worries us is that we could have actually lower numbers coming in for the first quarter 2016 than we had in quarter 4 of 2015 as companies continue to work through more inventory than we previously thought was out there. This puts pressure on the manufacturing.

What we really need to see is evidence that we have enough momentum in the marketplace or ability to create velocity to get us to move upward and forward with some real gusto!

The consumer is in fairly good shape because jobs and wages are recovering, energy costs are down and wages are inching forward. The only thing is that consumers have been carrying the load for the entire recovery, and honestly, there has been little to indicate that they can keep going forever when you consider the rock and hard place the government is in.

High debt ratios put a strain on governments and in turn eventually affect policy and consumers. With the prolonged injection of cash through every conceivable and in many cases inconceivable manner, the government has added unprecedented amounts of debt to the system since 2008.

Real household income has grown and energy relief has helped keep spending going for a bit, but median income has only increased by about 6.82% in seven years. On a real (adjusting for inflation) basis, the middle class actually lost purchasing power over that time.

Here is a chart that shows how much income versus debt versus government spending there has been to show the scale.

 

Chart Source: No Recession, but… Where Is the Upside Escape Velocity Coming From? Ned’s Insights – Ned Davis Research. Ned Davis. February 26, 2016. [3/1/2016]

Chart Source: No Recession, but… Where Is the Upside Escape Velocity Coming From? Ned’s Insights – Ned Davis Research. Ned Davis. February 26, 2016. [3/1/2016]

It wasn’t only the Fed that helped increase the debt though. Due to worse pain in Japan, China and OPEC nations there have been some serious purchases over the years by foreign governments as US debt has helped the printing press. Here is the increase in foreign holders of treasuries over the past 15 years.

Notice that the rate of purchasing has slowed down and even dropped in the past few years? This is not just happening in bonds, but also in stocks. Makes for a tough economic environment when the consumer starts to pull back due to Fed tightening, foreign investors back off and manufacturing slows down (due to unforeseen buildup of inventories – what happens when GDP is revised up due to higher than anticipated inventory values). Couple that with some serious dollar valuation increases relative to foreign dollars, and that is some pressure that is tough for markets to digest.

We need to see evidence that we can get enough momentum built up to really see the markets grow. We need evidence that we have some strength left somewhere and that the economy is not going into a stall, like a stunt plane hanging in the air, watching the oil pressure mount up and eventually needing to plunge back towards earth to (hopefully) recover in time for the next trick.

I really do not envy the decisions the Fed has to make going forward. What a tough spot and one that we really need to see political movement to create that bandwidth to grow! Companies are looking for some indication that they can grow. People want to feel confident that tomorrow will be better than today so that they can keep investing and working and consuming goods and services.

I’m having a very hard time seeing where some of the high economic forecasts are coming from. Some are as high as 3% although many economists are starting to back off expectations if you look at the major news outlets.

Some of the data is improving though so, perhaps we are going to meet Goldilocks and not her evil twin sister (would her name be Coaldilocks?)! We are cautiously hopeful but not holding our breath. We believe volatility is going to stick around for a while and that is never a fun environment.

 

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Citation

1-Gross Domestic Product: Fourth Quarter 2015 (Second Estimate). Bureau of Economic Analysis U.S. Department of Commerce. Lisa Mataloni and Jeannine Aversa. February 26, 2016. [2/29/2016]

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