Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
WAYS TO SECURE YOUR FINANCIAL FUTURE - 20th Aug 19
Holiday Nightmares - Your Caravan is Missing! - 20th Aug 19
UK House Building and House Prices Trend Forecast - 20th Aug 19
The Next Stock Market Breakdown And The Setup - 20th Aug 19
5 Ways to Save by Using a Mortgage Broker - 20th Aug 19
Is This Time Different? Predictive Power of the Yield Curve and Gold - 19th Aug 19
New Dawn for the iGaming Industry in the United States - 19th Aug 19
Gold Set to Correct but Internals Remain Bullish - 19th Aug 19
Stock Market Correction Continues - 19th Aug 19
The Number One Gold Stock Of 2019 - 19th Aug 19
The State of the Financial Union - 18th Aug 19
The Nuts and Bolts: Yield Inversion Says Recession is Coming But it May take 24 months - 18th Aug 19
Markets August 19 Turn Date is Tomorrow – Are You Ready? - 18th Aug 19
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
GOLD BULL RUN TREND ANALYSIS - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19
Central Banks Move To Keep The Global Markets Party Rolling – Part III - 14th Aug 19
You Have to Buy Bonds Even When Interest Rates Are Low - 14th Aug 19
Gold Near Term Risk is Increasing - 14th Aug 19
Installment Loans vs Personal Bank Loans - 14th Aug 19
ROCHE - RHHBY Life Extension Pharma Stocks Investing - 14th Aug 19
Gold Bulls Must Love the Hong Kong Protests - 14th Aug 19
Gold, Markets and Invasive Species - 14th Aug 19
Cannabis Stocks With Millennial Appeal - 14th Aug 19
August 19 (Crazy Ivan) Stock Market Event Only A Few Days Away - 13th Aug 19
This is the real move in gold and silver… it’s going to be multiyear - 13th Aug 19
Global Central Banks Kick Can Down The Road Again - 13th Aug 19
US Dollar Finally the Achillles Heel - 13th Aug 19
Financial Success Formula Failure - 13th Aug 19
How to Test Your Car Alternator with a Multimeter - 13th Aug 19
London Under Attack! Victoria Embankment Gardens Statues and Monuments - 13th Aug 19
More Stock Market Weakness Ahead - 12th Aug 19
Global Central Banks Move To Keep The Party Rolling Onward - 12th Aug 19
All Eyes On Copper - 12th Aug 19
History of Yield Curve Inversions and Gold - 12th Aug 19
Precious Metals Soar on Falling Yields, Currency Turmoil - 12th Aug 19
Why GraphQL? The Benefits Explained - 12th Aug 19

Market Oracle FREE Newsletter

The No 1 Gold Stock for 2019

U.S. Anemic GDP Growth Rate Not Good Enough

Economics / US Economy May 06, 2010 - 06:54 PM GMT

By: Hans_Wagner

Economics

Best Financial Markets Analysis ArticleIn normal times, a 3.2 percent GDP growth rate for the United States is good. In the 1980’s the U.S. suffered another severe recession. During that recovery, GDP grew at a 7 to a 9 percent rate for more than one year. A 3.2 percent GDP annual growth rate barely creates enough jobs to keep up with the expanding population. It does nothing for all those who lost their jobs and are looking for work. The U.S. unemployment rate is 9.7 percent and the underemployment rate, a more accurate measure of the true unemployment situation is running at the 16.5% level.


What can we learn from the Bureau of Economic Analysis (BEA) report on the GDP growth rate that might be helpful to investors?

Jobless growth

“Okun’s rule of thumb” points toward an economy that must grow at the 3.0 – 3.5 percent level to maintain current employment levels. If the U.S. economy was operating at full employment status, a 3.0-3.5 percent growth rate works just fine. The problem is the U.S. has 9.7% unemployment and 16.5% underemployment. We will get another look at the employment situation when the Bureau of Labor statistics (BLS) releases the number for April on May 7, 2010.

The chart below from the BLS report for March 2010 shows that the total employment for the U.S. is back where it was at the end of the recession that ended in January 2003. If the U.S. GDP only achieves growth at 3.0 to 3.5 percent growth rate, the level of employment will only cover the expansion of the population, leaving 7.5 million still unemployed. This does not count those that are working part time or in jobs that pay less than their skills, the underemployed.

Source: Bureau of Labor Statistics, Employment in total non farm

All sectors of the economy are experiencing negative growth or slight up ticks. However, employment in the federal government continues to expand as shown in the chart below. Expansion of the federal government contributes to the growth in the deficit. One of the problems with government employment is it is very difficult to scale it back once the positions are in place. Just look at the trouble state and local governments are having as they try to balance their budgets by cutting people.

Source: Bureau of Labor Statistics, Federal employment

A Jobless Growth GDP

A jobless growth economy will be constrained in its ability to expand. Personal consumption increased at a pace of 3.6 percent. However, almost that entire growth came from savings not from higher incomes. As many people become more confident in their job situation, they are willing to spend more. Since personal disposable income barely rose, a drop in the saving rate can explain the strength of household spending almost entirely. Unless income grows more strongly, we should expect slowing spending trends over the next few quarters as government stimulus payments to the private sector taper off.

The companies increased the value of goods on their warehouse and store shelves by $31 billion in the quarter, contributing 1.6 percentage points to growth due to higher inventories.  Should consumer spending slow as expected this is likely to produce only small gains during the rest of the year. Without an expansion in consumer income to fuel growth in spending, consumers will dip into savings. Without growth in spending, inventories will reverse course cutting the GDP growth rate further. Without expansion of inventories, the country’s GDP looses an important growth driver.

Exports and imports climbed in the first quarter, as global trade continues to bounce back from its lows during the financial crisis. However, imports rose faster.  As a result, net exports withdrew about 0.6 percentage point from the GDP growth rate. The problems in Europe will restrict expansion of exports from the U.S. due to the rise in the price of the dollar and the slow growth Europe will experience in 2010 and 2011. Expansion of exports is one of the growth engines for the economy. Lower sales to Europe will limit the ability of the U.S. to grow more rapidly.

Helping to counter part of this export question is the expansion of the emerging markets. Industries and sectors that benefit from the rapid growth of countries like China, India, Brazil and Indonesia, will experience success. Mining and commodity processing equipment is one sector that is thriving. Technology, especially mobile communications and the wireless internet is another where U.S. companies can leverage their expertise and skills of their engineers.

Residential investment fell 10.9 percent as the housing sector continues to suffer despite the first-time homebuyer credits that ended on April 30, 2010. This raises the question whether housing can recover sufficiently to add to the growth of the economy.

Equipment and software jumped about 13 percent though this was down from Q4's 19 percent consistent with what we have seen in orders/shipments for capital goods, especially primary metals, over the last six months.

Federal spending over the short run as countercyclical fiscal stimulus is welcome. Since this is the second year of the President’s stimulus package, it will be difficult to justify more, especially to an electorate tired of handouts to everyone but themselves. The large deficits and how to pay for them will be an election issue. Many people are upset that we are leaving our children saddled with an enormous debt that will reduce their living standards as they struggle to pay for our excesses. We will see rates climb, as investors grow leery of the never-ending deficits that are limiting private investment. Hopefully we won’t see riots in the street.

The Bottom Line

The anemic GDP growth rate will force investors to pick their opportunities carefully as a jobless growth economy will limit the opportunities. In this case, the tide has risen and it can no longer float all boats. While the tide might not be going out, it will not carry investors forward. This means stock pickers and well founded sector rotation strategies will carry the day.

By Hans Wagner
tradingonlinemarkets.com

My Name is Hans Wagner and as a long time investor, I was fortunate to retire at 55. I believe you can employ simple investment principles to find and evaluate companies before committing one's hard earned money. Recently, after my children and their friends graduated from college, I found my self helping them to learn about the stock market and investing in stocks. As a result I created a website that provides a growing set of information on many investing topics along with sample portfolios that consistently beat the market at http://www.tradingonlinemarkets.com/

Copyright © 2010 Hans Wagner

If you wish to learn more on evaluating the market cycles, I suggest you read:

Ahead of the Curve: A Commonsense Guide to Forecasting Business and Market Cycles by Joe Ellis is an excellent book on how to predict macro moves of the market.

Unexpected Returns: Understanding Secular Stock Market Cycles by Ed Easterling.  One of the best, easy-to-read, study of stock market cycles of which I know.

The Disciplined Trader: Developing Winning Attitudes by Mark Douglas.  Controlling ones attitudes and emotions are crucial if you are to be a successful trader.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules