US Economy Shines Brightly Upon Global Shadows
If there was one concept to explain the unique dominance of the US economic performance over the rest of the world we would point to Quantitative Easing (QE). QE is essentially a 2008 invention to prevent the global panic that was evolving from the bursting of the US mortgage bubble using central bank sequestering (buying) of Government backed Treasury and Mortgage securities. This mechanism allows Governments to borrow Trillions from themselves instead of from tax payers and private markets, printing money to guarantee all bets , reducing interest rates and boosting risk taking investment decisions.
Europe initially followed the US reflation effort to encourage risk taking in 2009 – 2011. However, while the US escalated their stimulus the past 2 years, Europe worried about future inflation and reversed course in 2012 removing cash reserves from their banks with a priority on budget balancing and austerity (next 2 charts).
One consequence is that the US has produced more jobs than the rest of the world combined in recent years.
The US economic and jobs advantage vs the world can also be viewed in the following 4 charts. US manufacturing surged in 2014 well above the expansion line of 50, while European and Chinese austerity efforts allowed for only a subdued bounce that has since rolled over into stagnation.
China’s continued efforts to quell non-banking or shadow banking property financing has helped foster an economic malaise as seen here with the proxy measure of property and producer price “deflation”. Lack of QE has hurt growth.
While the merits of printing money with Bernanke and Paulsen’s creation of QE has long term negative repercussions that we will not be understood until the next global economic contraction, nonetheless QE stimulus has provided an enormous tailwind since 2009 to adopters such as the US, UK and Japan. While economic performance has been below normal, it has witnessed faster economic and job growth, innovation and wealth creation than those countries that failed to stimulate. A comparison of the 2014 stock markets (below) by the “haves and have nots” helps illustrate the benefits of QE.
In each country we can see how monetary stimulus changed investor behavior and altered business and consumer perceptions of risk. QE may very well end up a massive failure when viewed 10 years from now, however, it has prevented global panics and supported one of the longest economic and stock market expansions in history with more to come. Due to the skepticism that has been maintained during the first 6 years of this recovery cycle there remains tremendous excess liquidity and pent up demand to be tapped prior to a major economic reversal.
While the US economy has grown modestly for 6 years and the stock market has TRIPLED, small businesses have have stayed cautious and refrained from capacity expansion having been burned during the 2008 meltdown. Faster job creation in low wage sectors such as leisure and very strong manufacturing growth portends Business optimism should finally breakout of the mild recession mentality into the normal zone of confidence during 2015.
Having paralleled the moribund Business confidence trends (above chart), consumer sentiment (below) is finally surging to normal economic recovery levels after almost 6 years on the recession fence.
Why are consumers looking up? Jobs of course! It always comes down to the pocket book. Despite strong job creation, this 6 year recovery has had below normal wage gains and job creation primarily in the low end. It’s quite understandable the movement from the political left who can’t fathom how corporate profits can keep hitting new highs, jobs are now expanding near record rates, yet the low income segments are still in a recession atmosphere. Low end jobs are growing faster than high end jobs, thus wages are skewed lower. The fact is high skilled jobs until now have not returned and too many are underemployed or out of the normal workforce as business has ample factory capacity to handle demand. QE has provided a steady risk taking incentive with low rates and guaranteed debt to encourage borrowing and lending which may boost capacity utilization next year.
The recent surge seen here in Job Openings is exceptional and forecasts an acceleration in job creation in 2015. With the new hires will come a growing confidence in job mobility and increasing Quit rates as workers trade up to higher paying jobs. Current trends give us great confidence that the growing concern over low wages will be alleviated in 2015 as better paying skilled jobs shoot higher. Assuming Europe joins the party at some point we could have more growth than we bargained for and faster interest rate hikes than currently expected.
While new home construction remains low, consumers are spending up for perishables. Organic Foods are boosting staples and pent up demand for cars are boosting autos. Despite low paying jobs, higher bank credit requirements for loans and below normal optimism, car and truck sales have been driving steadily back to normal if not record levels of production and sales. Imagine what will happen if the US job growth jumps, if wages finally catch up and if the Global recovery kicks into 2nd gear?
We have painted a positive and possibly explosive economic picture for 2015. The caveat short term is extreme weather as in early 2014 or a failure of Europe to stimulate which will only boost ensuing stimulus and growth rates later. The greater concerns are further down the road from excessive stock valuations and even too rapid a growth rate that shocks the markets with interest rates rising too far too fast. For now the economic and jobs picture remains even more optimistic than a year ago. With US interest rate spreads likely to widen further over Europe we suspect the Dollar has further to run higher and the global recovery will need several years to become overbought (2017 – 2019). The economic cycle proxy we continue to favor for this secular Bull market is the 1990’s. The first 5 years were quite sluggish full of pessimism similar to 2009-2014, but the 2nd half of that 9 year expansion was wildly euphoric. This cycle has finally balanced the massive deflationary debts with massive inflationary stimulus and is currently supported by real earnings. It will be interesting to see if euphoria returns in the next few years.
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