Contrary Opinion: The Bullish Case For The US Economy

As I have pointed out often over the last month or so, US economic data so far this year has been decidedly disappointing overall. There was good news on the jobs front and the unemployment rate fell to the lowest level since 2008, but that was about the only bright spot. As a result, most forecasters are paring back their estimates for 1Q GDP from 2.0%-2.5% to 1.0%-1.5%.

Yet despite the disappointing 1Q, there are always optimists out there who make a case that the economy is going to get a lot better just ahead. While I’m not ready to buy into the optimists’ arguments, I will summarize the bullish case for the US economy below, just to be fair.

Perhaps the biggest surprise over the last several months was the fact that US consumers, for the most part, decided to save their gasoline price windfall rather than spend it – which confused most analysts. The US savings rate jumped sharply to 5.5% in February from 4.5% at the end of last summer.

The fact that consumer spending didn’t jump as expected merely compounded the weaker than expected economic data in the 1Q. Yet the optimists argue that consumers are always hesitant to spend unexpected extra cash because they don’t know if it will continue, so they decide to save most of it and/or paid down some debt.

On the subject of debt, the optimists also point out that consumers are paying just 9.9% of their income on servicing debt, the lowest on record since 1980. Some people are constrained by debt, but most aren’t. This, they argue, means that households are in good shape to spend more money just ahead.

blog150402aMany of the optimists contend that it takes about six months or so for consumers to be confident enough to spend some of the unexpected cash windfall from lower gas prices.

Since crude oil prices started plunging last July and bottomed(?) recently, the optimists are betting that consumers will start to spend more just ahead.

With consumer spending accounting for 70% of GDP, the optimists are confident that this will goose GDP in the months just ahead. We’ll see.

The optimists admit that the stronger US dollar is hurting large businesses, especially those that export their goods abroad, but they argue that small businesses are less exposed to currency issues and are poised to do significantly better this year.

Next, the optimists support their argument by pointing out that we had yet another severe winter for the second year in a row, which stunted economic growth in the 1Q. In 2014, the negative 1Q GDP growth was followed by a strong rebound in the 2Q and 3Q. Apparently, the optimists expect a repeat in 2015.

They say small businesses are hiring more and are investing in technology, capital equipment and buildings. This, the optimists contend, means that small businesses are ready to take the baton from the large businesses that have been thriving until recently. Small business optimism is at the highest level since 2007.

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Next, much of the decline in capital spending by large businesses is directly due to the collapse in oil prices. Oil companies are turning off the drills and shutting down production in fields where it’s expensive to extract oil.

Yet the optimists argue that most of the contraction in the oil patch will be over in a few more months, and the drag on GDP from falling capital investment will end by this summer at the latest. Of course, that assumes that crude prices are not headed to $35 a barrel or even lower as some analysts predict.

Finally, the optimists believe that the surge in the US dollar – the second fastest in the last 40 years – is overdone, and that the greenback could reverse course just ahead. While I would agree that the dollar may have been overvalued earlier this year, it experienced a significant downward correction in March. No one knows where it goes from here, but currency trends can last a lot longer than conventional wisdom expects.

At the end of the day, I hope the optimists are right. Maybe US consumers are about to open up their pocketbooks and start spending more. Likewise, I hope that small businesses are healthy enough to offset losses being felt by US multinational corporations that are being squeezed by the strong dollar.

In the meantime, global risks have increased significantly as I have emphasized recently, and I would not want to have the bulk of my portfolio invested in a buy-and-hold strategy, with no risk management, that will be crushed if we experience another market meltdown.

If you are concerned about rising financial risks, the time to take action is now.

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