The surprising return of American prosperity and what it means for your portfolio

 

The past few weeks have been, quite literally, among the most disastrous in American history. Within that span, Americans were beset by the wrath of three powerful hurricanes: Harvey, Irma, and Maria, all three of which were devastating. As if unconcerned by natural disasters, we also continue, hell-bent, to create them ourselves. In DC, the government has ascended to a new plateau of gridlock in which neither party can present a coherent plan, much less negotiate with the other side of the aisle, much much less actually get anything passed. Finally, there was the October 1 mass shooting in Las Vegas to turn our consternation to horror.

An argument could be made that the wheels are coming off the world, but any such argument would be unsound. From time to time, the US Bureau of Economic Analysis releases or revises its reports on US Gross Domestic Product. This is a measure of total economic activity, and as such, might be considered one of the main ways in which the world communicates to us the condition of its wheels. On September 30, the BEA revised its estimate of US Second quarter GDP growth up to 3.1%. Translation: ain’t nothing wrong with these wheels—in fact, they’re turning at a rate Americans haven’t seen in nearly a generation.

If this rate can be maintained, it will mean the return of real prosperity, but can it?

Read on.

Sustainability

The number is far higher than the 1.2% seen in the first quarter, and some warn that the bump will be only short-term, pointing out that the disasters of the past few weeks won’t be reflected in the GDP until the third quarter, but they have that backwards—it’s the effect of disasters on the GDP that are only short-term. The current wave of economic growth has been slowly building for a long time—since 2009, in fact, when the wheels really did come off the world, economically speaking.

The financial crisis left America with a stubborn debt crisis. For the nation, and for many individuals, there was no choice but to crawl out of debt slowly and painfully. Many people had to scale back spending to do so, which made the crawl even slower and more painful. Then, sometime towards the end of 2015, we began to feel, en masse, that we had crawled far enough. Consumer spending increased, and companies, seizing the opportunity, began to expand. That meant hiring more workers, and here we come to another can of worms.

I’m always up for hearing about worms. Read on.

FRED Debt

Data from  https://fred.stlouisfed.org

The worm

After the financial crisis, the unemployment rate skyrocketed. It was a big, ugly bruise on the American apple. The bruise soon began to heal, however, as bruises tend to do, creating optimism that prosperity would soon return. Not so fast, cautioned economists. The bruise may be healing, but the crisis left the American apple with a nasty, hungry worm in its core. That worm was the Civilian Labor Force Participation Rate, which went into steep decline following the financial crisis and which, unlike the unemployment rate, continued to decline for years after. The gruesome reality is, of course, that when both rates are falling, it means that the falling unemployment rate is due not to people finding jobs, but to people giving up and dropping out of the workforce altogether.

But wait. All is not lost, for the labor participation rate appears to have bottomed out. When? Sometime towards the end of 2015. Now as mentioned previously, this was around the time when rising consumer spending was causing American businesses to expand and hire. Hiring had been going on for some time at a slower rate, but starting in late 2015, it began to have the long hoped for result of pulling Americans back into the labor pool? Why? What was the link? When you understand that, you’ll understand what prosperity is.

OK, I’ll bite. What’s the link? Read on.

FRED Labor Participation - For real

Data from  https://fred.stlouisfed.org

Wages

Most of those who dropped out of the US labor pool did not do so because they were unable to work. They did so because after considering the wages being offered and the sort of work being offered, they determined that working wasn’t worth it. One is tempted to conclude that the issue here is laziness, but whether one thinks it angrily or sympathetically, it’s usually the wrong conclusion. Many of those who bowed out of the workforce were right to do so, even from a financial perspective. In many families, multiple family members supporting a single earner can allow that earner to become even more highly compensated, and the gap between highly compensated and very highly compensated is so great as exceed what is lost in low-end wages—perhaps many times over.

Ah, but that has now changed. The desire to expand has caused a bit of competition for workers. It’s subtle, as of yet, but it is building, and the result can be seen in real weekly wages which finally surpassed their 2009 rate, you guessed it, in late 2015.

Higher paying, and just as importantly better jobs are now on offer, and for many Americans, it’s back to work. The rest is common knowledge, as well as common sense: more workers means less slack in the economy, more people spending, and greater rewards for producers. It also means fewer people dependent on the government, which allows for lower taxes. And so, for all these entirely non-controversial reasons, higher wages are the key to economic prosperity. Here endeth the non-controversial portion of this article.

Super. The non-controversial stuff was boring anyway. Read on.

FRED Wages

Data from  https://fred.stlouisfed.org

Capital and automation

We are in an era of easy capital and advanced automation, both of which increase the speed at which producers can expand their capacity. Taken together, the effect is synergistic, and as a result, current production doubling time in the US is lower than that it has been at any previous point in history. So how fast can a company grow if it knows it will sell everything it produces? This is true of very few companies, but one such is Tesla (TSLA). No doubt, it helps to have a bold CEO, but consider that Tesla’s production doubling time has been in the fourteen to sixteen month range since the day it made its first car.

So is there any reason to think the rest of American industry could grow at such a rate if there were sufficient demand? The answer is a qualified yes, which is to say the answer isn’t always yes, and it can’t stay yes forever, but yes, at the moment, the answer is yes. Since 2009, wage stagnation, the depression of demand, has been the primary depressor of supply, and that has created a buffer of supply capacity that companies can be sure of achieving before they hit any real strain.

As a result, even small changes in wages, such as we have seen over the last twelve months, will have an extraordinary if slightly delayed effect on the overall economy, such as we are seeing now. And now we must emerge from the tempting light of theory and return to the relative darkness of fact. Here’s the fact that counts: the US economy grew at 3.1% in the second quarter.

What to do about it? Read on

What to do about it

In simplest terms, all an investor need do about a good economy is stay the course. Since most earnings forecasts rely on at least a somewhat improving economy, the real question would be what to do about it if the economy were not improving, and that one would be extremely difficult to answer. One thing a good economy implies, however, is the necessity of strong and growing old economy industries, which will come to be more valuable as more companies add production capacity.

One sector in particular will benefit considerably if many companies begin adding production capacity at the same time, as the bottleneck will move down the chain from production to materials. More production will mean scarcity, scarcity will elevate prices, and profits will rise across the materials sector. The great thing is, you don’t have to believe any my own theories for this to be true. The materials sector would be poised for just as much growth if the current economic upturn were entirely due to anticipation of a corporate tax cut, though no one has yet explained to me how a tax cut helps a corporation that already has so much more profit than it can spend that it uses half or more of that profit to buy back shares of its own stock, as is the case, on average, for the entire S&P 500.

Unlimited Stock Score Reports

Stock Score Report

As little as $9 /month

  • Unlimited Stock Score Reports
  • Save personalized watch lists
  • Top 5 Overall Stocks
  • Top 5 Gainers
  • Top 5 After Earnings
  • Top 5 After Most Searched Stocks

You May Also Like