Copyright 2012 Tom Madell, PhD, Publisher
Forecasts of Gross Domestic product (GDP) growth by leading economists are critical inputs for the macro-economic investor. The current forecasts raise some key concerns that all investors should consider. In early June, 72 economists in a Bloomberg survey estimated median real gross domestic product of 2.1% growth this year, 2.2% in 2013 and 2.9% in 2014. Following the disappointing retail sales report for June issued in mid-July, economists at Goldman-Sachs and Merrill-Lynch each lowered their projections for second quarter growth (Q2) to 1.1%, while Macroeconomic Advisors lowered its Q2 growth projection to 1.0%. Subsequently, these leading financial institutions together with economists at Wells Fargo and JPMorgan Chase suggested that full year growth for 2012 would be approximately 1.5%.
Assuming growth slows to the diminished level now predicted by these leading economists, there are likely to be negative consequences in their wake. Following these diminished projections, the Wall Street Journal bluntly reported, “Those numbers (i.e. growth in the 1% to 1.5% range) are far too slow to keep unemployment from rising and generate the job gains needed to fuel the economy.” Bill Gross, the often reported chief of PIMCO investments has predicted GDP growth of 1.5% going forward over the next decade and that the unemployment rate will be higher in a year from now. Looking back, Alan Greenspan, when he was Chairman of the Federal Reserve, repeatedly said that GDP growth of less than 2% would not be self-sustaining. He suggested a healthy economy required growth of at least 2.5% to 3%. What is most disturbing is that this far after the financial crash in 2007, we are still experiencing such below par growth, especially in light of the extraordinary monetary and fiscal steps which have been taken.
As bleak at these projections are, there is reason to approach them with caution. As Fed Chairman Ben Bernanke indicated in recent testimony before the Congress, the current economy has both good news and bad news. Clear upward and long-term momentum in housing and auto sales are good news which should propel the economy higher. At the same time, a slowdown is taking place in manufacturing as exports sales to both Europe and the developing world decline. Further, predictions of the GDP are often volatile, changing significantly as key inputs into macro-economic models such as retail sales, employment growth and factory orders are reported each month. The Marketwatch.com survey of economists completed after the disappointing retail sales data predicts 1.3% for second-quarter GDP growth, down from 1.5% the prior week, 2% a month ago, and as high as 2.6% six months ago. If key data surprises on the positive side this trend would be reversed. ((Editor's note: The actual figure came in at 1.5%.)
If the economy continues to perform below 3% GDP growth, the Federal Reserve is highly likely to initiate a new round of quantitative easing in an effort to propel the economy into a self-sustaining mode – commonly referred to as “economic lift-off.”
For the macro-economic investor, there are a couple of conclusions from this growth data: (1) there is no reason to take flight from investments in bonds as rates may be driven lower and are unlikely to ratchet up anytime soon; (2) investments in growth stocks should be made cautiously until a clearer growth trend is established.
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