Global Economic Boom Helps US Avoid Recession
FORECASTS & TRENDS E-LETTER
IN THIS ISSUE:
1. The Latest Pulse Of The US Economy
2. Fed Softens Its Monetary Policy Position
3. Global Economic Boom Helps The US
4. Outsourcing, Insourcing – What Does It All Mean?
5. Foreign Direct Investment In The US Soars
6. But We’re Going Into A Recession, Right?
7. Editor’s Note: Am I A Cheerleader, Or Just Right?
The US economy has held up considerably better than many forecasters have predicted over the last year, despite the housing slump. Widespread predictions of a recession have been off the mark. The US economy grew by 2.5% in the 4Q of 2006 based on the Commerce Department’s final estimate of GDP. While not eye-popping, 2.5% GDP growth is quite solid. I have consistently argued that a recession was not likely this year.
Of course, the biggest reason the US economy has held relatively firm is that consumer confidence has gone up over the last year, and consumer spending – which accounts for almost 70% of GDP – has increased more than expected in light of the housing slump. Another positive influence is the fact that there is a global economic boom going on in many other parts of the world, as I will discuss in detail below.
Another positive factor is the continued low interest rate environment we enjoy. Along this line, there is no reason to believe the Fed is going to raise interest rates anytime soon, as evidenced by the FOMC’s latest policy statement that I will share with you as we go along.
Based on the three latest Index of Leading Economic Indicators reports, the economy probably grew at a rate closer to 2% in the 1Q. The first estimate of 1Q GDP will be released on Friday. Most of the forecasters I respect, including The Bank Credit Analyst, believe the US economy will continue to grow at a 2-2½% pace for the balance of this year, with a gradual pickup in 2008. Fears of a recession are waning, except of course among the gloom-and-doomers.
This week, I will also discuss the issue of “outsourcing” American jobs overseas, but I will also write about the level of “insourcing” jobs – those new jobs created by foreign companies opening new plants and outlets in the US. Hint: insourcing far outpaces outsourcing – surprise, surprise. Likewise, foreign investment in the US is soaring, which is just another big reason why a recession is not the most likely scenario just ahead.
We conclude this week with a commentary from me on the subject of whether I am a “cheerleader” and a “perma-bull” on the US economy and the US equity markets, or if I am a credible analyst who happens to have gotten it right over the last couple of decades. My comments may surprise you. So, I invite you to read on to the end.
The Latest Pulse Of The US Economy
In its final report, the Commerce Department concluded that GDP rose 2.5% in the 4Q, up from 2.2% in its earlier estimate. For all of 2006, the economy grew by 3.2% largely as a result of the stronger than expected 1Q growth of 5.6%. In the following three quarters, GDP rose by only 2.6%, 2.0% and 2.5% respectively.
Consumer spending was higher than expected in the 4Q, with Personal Consumption Expenditures (PCE) rising 4.4% as compared to only 2.2% in the 3Q. In retrospect, the strong PCE in the 4Q was consistent with the rise in consumer confidence during that same period, which continued to rise in January and February. Retail sales rose 0.5% and 0.7% respectively in February and March.
News on the manufacturing side has not been so positive. The ISM manufacturing index fell from 52.3 in February to 50.9 in March. Industrial production fell by 0.2% in March. The factory operating rate (capacity utilization) eased slightly again in March, coming in at 81.4% versus 81.6% in February.
Yet despite the slowdown in manufacturing and the continued housing slump, the US unemployment rate dipped to 4.4% in March, the lowest level since April 2001. The strong jobs market is another reason that consumers continue to spend.
In March, however, the Consumer Confidence Index fell from 111.2 to 107.2, in large part due to surging oil and gasoline prices and the recent sell-off in the equity markets. The University of Michigan’s consumer sentiment index (preliminary) indicates that confidence has continued to decline in early April.
On the housing front, the latest reports were mixed. Housing starts and building permits actually rose incrementally in March from February levels. New home sales were down modestly in February, while existing home sales rose modestly. The latest homes sales data for March is due to be released tomorrow (Wed.). The inventory of unsold homes remains above a six-month supply, which will continue to influence home prices lower in most markets.
The troubles in the sub-prime mortgage market continue and are far from over. However, as I suggested in my March 6 E-Letter, it still does not appear that the sub-prime problems will materially spill over into the primary mortgage market. As a result, the sub-prime woes have moved off of the front pages for the most part.
Most analysts agree that the housing slump is the single greatest risk to the US economy this year. Opinions differ widely as to whether the housing slump is just a “correction” in what was admittedly an overblown, speculative market, or whether the recent slump is just the beginning. Here is how our good friends at Stratfor.com recently described the housing slump:
Overall, the housing market has a few characteristics that support its long-term strength: a large cadre of baby boomers who are not yet ready to move into smaller post-retirement domiciles, a large and growing supply of immigrants who want homes for themselves, and the very fact that people need to live somewhere. So, sure, the housing market is hitting a soft patch, but it is hardly on the verge of collapse.
The Fed Softens Its Monetary Policy Statement
At the latest Open Market Committee meeting on March 20/21, the Fed once again chose to leave the Fed Funds rate unchanged at 5¼%, which was not a surprise. However, Fed watchers did notice a small, but perhaps important change in the Fed’s policy statement. For months, the Fed’s policy statement has indicated a continued concern about the level of inflation. And for months, the policy statement has included the following sentence: “The extent and timing of any additional firming that may be needed to address these risks will depend on…”
In their latest policy statement released on March 21, the Fed seemed to back off just a little. Specifically, they dropped the reference to “additional firming” (ie – a rate hike). The latest statement reads as follows in that regard: “Future policy adjustments will depend on…” The elimination of the reference to ‘additional firming’ and the replacement with the words ‘policy adjustments’ was seen by many Fed watchers as a sign that the Fed is now more concerned about the slumping housing market than it is about inflation, so no rate hike, at least for now.
On the inflation front, the closely watched Consumer Price Index rose 0.6 percent in March, the biggest increase since a similar rise in April of last year. Energy prices surged by 5.9% last month, the largest one-month increase since September 2005 when Hurricane Katrina shut down Gulf Coast refineries.
The “core” CPI (minus food and energy) rose only 0.1% in March. Over the last 12 months, the core rate is up 2.5%, which is still a bit higher than the Fed would like to see. Over the last three months, the core rate was up only 2.3% (annual rate), which may be another reason the Fed decided to soften its policy statement.
The big question is whether the Fed will see fit to lower rates anytime soon. The futures markets are anticipating a 25-point rate cut sometime over the next 3-6 months, and cuts equaling 75 basis points over the next 12 months. That may prove to be too optimistic, especially if the economy continues to grow at a rate of 2% or better. The fact that the FOMC members have voted unanimously to leave the rate unchanged the last several times is an indication that the FOMC members are comfortable doing nothing. So it may be a while before they cut the Fed Funds rate.
Global Economic Boom Helps The US
We all remember the old Beatles tune, “I get by with a little help from my friends.” Currently, the US economy is reaping benefits from the surging economies around the world. We’ve all heard clichés such as, The US carries the global economy on its back, or If the US sneezes, the rest of the world gets the flu. None of that is true in the current environment. Much of the rest of the world is enjoying an economic boom, while the US is in slowdown mode.
Last week, the International Monetary Fund (IMF) released its latest forecasts for global economic growth for 2007 and 2008, as well as individual forecasts for the larger countries and various regions. In its latest World Economic Outlook, the IMF reported that world economic growth (GDP) rose by 5.4% in 2006 and is projected to rise by 4.9% percent this year and again in 2008. All of this despite the slowdown in the US.
Here are some of the highlights from the IMF’s latest report. China’s economy surged by 10% in GDP in 2006 and is forecast to expand 10.5% in 2007 and 9.5% in 2008. All of Asia is booming. Countries that make up “Developing Asia” saw their average GDP surge by 9.4% in 2006, with forecasts of 8.8% this year and 8.4% in 2008, according to the IMF.
India’s economy soared 9.2% in 2006 and is projected to grow by 8.4% this year and 7.8% in 2008. Russia’s economy is also booming, up 6.7% in 2006 and projected to expand 6.4% in 2007 and 5.9% in 2008. The “Middle East” saw its GDP rise by 5.7% in 2006 and is forecast to grow by 5.5% in 2007 and 2008. “Central & Eastern Europe” grew by 6.0% in 2006 and is forecast to rise 5.5% in 2007 and 5.3% in 2008.
Even Africa is surging on balance, with GDP growth of 5.5% in 2006 and projections of 6.2% this year and 5.8% in 2008. Central and South America are also solid on balance. Mexico had growth of 4.8% in 2006, despite the US slowdown, and is forecast to grow by 3.4% in 2007 and 3.5% in 2008. Brazil grew by 3.7% last year and is forecast to expand by 4.4% this year.
You can read the full IMF report, entitled World Economic Outlook, by clicking on the first link below in SPECIAL ARTICLES. Highly recommended for gloom-and-doomers.
The point is, there is an economic boom going on in most parts of the world, and this will help to support the US economy, directly and indirectly.
The burgeoning economies around the world mean more demand for US products and services. Demand from foreigners is offsetting some of the weaker demand at home. US exports were up 12.3% for the 12 months ended January. This helps both our trade deficit and current account deficit. Our trade deficit peaked last August and should continue to decline this year and perhaps in 2008 as well.
Most economists and forecasters agree that there is enormous pent-up demand for US and Western goods and services throughout the developing world. Further, that the increase in demand we’ve seen over the last few years is likely only the tip of the iceberg.
The increase in foreign demand for US products and services is yet another reason why the current mild slowdown in our economy is not likely to devolve into a recession, as I have maintained for the last year. Despite the housing slump, which has further to run, the US economy should remain in positive territory for at least a couple more years.
Outsourcing, Insourcing – What Does It All Mean?
In recent years, numerous political campaigns (Democrats, that is) have focused on the issue of American jobs being exported to foreign countries, and what a bad thing this is. The issue of “outsourcing” US jobs to foreign countries such as India and others was a centerpiece of John Kerry’s presidential bid in 2004. But interestingly enough, the issue of US companies outsourcing jobs to lower cost foreign countries has fallen off the front pages of late. As usual, there is a reason for this.
The numbers on how many US jobs have been exported to foreign countries are sketchy. I spent several hours searching for credible estimates on just how many US jobs have actually been lost to outsourcing. While the estimates vary, and current data is hard to find, most analysts agree that only 1 million or fewer US jobs have been exported to foreign countries in recent years, accounting for less than 1% of the huge domestic job market.
Now let’s compare that to what is called “insourcing” – the number of US workers who are employed by foreign companies operating in the US. The Organization For International Investment (www.ofii.org) estimates that in 2005 there were 5.1 million American workers who were employed by foreign companies operating in the US, or apprx. 4.5% of the total workforce. The Heritage Foundation puts the number at 6.4 million based on 2004 data, and the number is clearly higher than both of those estimates today.
While the Democrats like to whine about outsourcing, foreign companies like Toyota, Nissan, Shell, British Petroleum, Sony, Bayer and countless others continue to build factories and outlets in the US, thus providing hundreds of thousands of additional jobs for Americans.
Just last week, Toyota announced the groundbreaking for a new auto production plant in Blue Springs, Mississippi – its 8th production plant in the US – which will cost $1.3 billion US dollars to construct, and will employ over 2,000 US workers. Overall, Toyota alone will employ over 10,000 American workers when its new plant is open early next year.
At the end of the day, the outsourcing of American jobs is indeed a legitimate issue, but we need to keep it in context within the broader perspective of free market economics – including both outsourcing and insourcing. Likewise, we should keep in mind that outsourcing is nothing new; it has been going on for years; and it is not a phenomenon that first occurred only after President Bush took office. Maybe this explains why the Dems aren’t talking about it so much anymore!
Foreign Direct Investment In The US Soars
On March 14, the Commerce Department reported that foreign direct investment in the US soared to $183.6 billion in 2006, a rise of 67% over the $109.8 billion invested in 2005. “Foreign direct investment” is defined as US investments by foreign companies in lasting enterprises, such as plants and equipment. The big jump in 2006 was the largest since 2001.
Foreign investment in the US dropped off significantly following the terrorist attacks of 9/11, falling to only $84.4 billion and $65.0 billion in 2002 and 2003 respectively. But as noted above, foreign direct investment in the US has soared in the last three years, thus providing tens of thousands of new jobs for American workers.
Liberals would, of course, have us believe that foreign investment in the US is a bad thing. I can remember back in the 1980s when people feared that Japan was going to own everything, but we all know how that turned out. The typical liberal knock on foreign investment is that these offshore companies do business in the US but take all their profits back home.
Not so. Reinvested earnings (money that existing foreign companies plow back into the US economy) made up the largest portion of foreign direct investment in 2006, jumping by 36% between 2005 and 2006, from $58.9 billion to $80.3 billion, according to the US Bureau of Economic Analysis. “Money that insourcing companies earned here stayed here – reinvesting their profits in [the] United States,” said Todd Malan, president & CEO of the Organization For International Investment (OFII).
Moreover, these foreign employers supported a payroll of $324.5 billion in 2006, up from $254.5 billion five years ago. Interestingly, non-US companies tend to pay better than their domestic counterparts, the OFII reports. Average compensation per worker at foreign companies operating in the US was $63,428, some 32% higher than the average at all domestic companies, according to OFII, and often with better benefits.
Here’s another point that flies in the face of liberal arguments against foreign investment. OFII reports that foreign companies’ operations in the US are heavily concentrated in manufacturing, which accounts for roughly one-third of all insourced jobs. Yet the media tell us that it is precisely manufacturing jobs that are being hit hardest by outsourcing.
But We’re Going Into A Recession, Right?
You might be wondering why I would choose to focus our attention on the level of foreign investment in the US. There are a couple of reasons, actually. Obviously, if foreign companies employ apprx. 5% of the American workforce, then it’s important to take note of the trend in foreign direct investment which, as noted above, exploded in 2006.
But more importantly, these large foreign companies would not be investing over a hundred billion dollars a year if they thought the US economy is headed for a serious recession, or worse, as the doom-and-gloom crowd would have us believe.
The world economy is booming, and the US is in a temporary slump (assuming we call +2.5% GDP a slump). The Toyotas of the world don’t buy into the argument that the US economy is headed for a recession, as espoused by the doomsayers and others, and very likely view the current slowdown in US economic activity as a buying opportunity.
Editor’s Note: Am I A Cheerleader, Or Just Right?
Some of my detractors claim that I am too optimistic, that I am basically a cheerleader for the US economy, and a “perma-bull” when it comes to the equity markets. To them, I’m not credible because I have only a one-way view of the economy and the markets. But let’s look at the facts.
As for the economy, we have not had a negative quarter of US economic growth since the 3Q of 2001, which is when I began writing this E-Letter. Moreover, my very best source for economic analysis and forecasts – The Bank Credit Analyst – has maintained over the same period that the US economy was in a technology-led “multi-year upwave” that still persists today, in its opinion. Cheerleader, or just right?
As for the stock markets, the S&P 500 Index has gained a cumulative 68.6% since the low in 2002, or an average annual return of better than 12% over the same period. Some market indexes have done even better. In my March 6 E-Letter, just a few weeks ago when the equity markets had plunged, I concluded: “So I would consider this pullback to be a buying opportunity.” Excuse me, but the Dow Jones soared to a new all-time high last week. The S&P is not far behind. Cheerleader, or just right?
What I have done for many years is emphasize that my many clients and readers not get caught-up in the hype of the doom-and-gloom crowd, which so permeates our mailboxes and computer inboxes. The gloom-and-doom crowd spews negativism, always predicts a recession or crisis just around the corner, and for the most part, despises the conventional investment markets. I, on the other hand, have routinely dismissed the G&D crowd and recommended that you stay fully invested. Cheerleader, or just right?
Believe it or not, the day is coming when I will not be bullish on the economy or the equity markets. While I think we have another few years of a good economy and generally rising equity prices, barring any major negative surprises, there are definitely storm clouds on the US horizon. The Baby Boomers start to retire next year, and the numbers accelerate each year thereafter. There is an entitlements “crisis” (yes, I said it) in our not-too-distant future. And our massive annual deficits cannot continue indefinitely. There will be a heavy price to be paid.
But we’re not there yet, in my opinion. When we get there, rest assured, I can be just as negative as the next person. Long-time clients can recall my bearish views back in the late 1970s, the early 1980s and occasionally since then.
Finally, I am sometimes criticized for promoting my own investment products in this E-Letter. For that, I offer no apologies. Many years ago, I found out that there were professional money managers that were better than me. I swallowed my ego and began a new career: instead of managing money myself, I decided to be a manager of managers (“MOM”).
As one who is averse to incurring large losses, I seek out professional managers who, for the most part, use “active management” strategies that have the flexibility to exit the market or “hedge” long positions if we hit a bear market or extended down period.
Wall Street and the big mutual fund families tell you that active management strategies don’t work, and that they’re too expensive. For the most part, they are correct. Most active managers aren’t successful, nor are they worth their fees. However, if you have the resources I do, you can find some real diamonds in the field of active management.
My belief is that if you can find a money manager that delivers market rates of return, but only loses about half what the market indexes do in the down times, you hire him or her. No brainer!
The equity managers I recommend have historically fit that profile. They have delivered impressive returns with losses far less than the market indexes in down periods. Past results are no guarantee of future results.
Frankly, I have been quite surprised over the years that more readers of this E-Letter have not invested with some or all of the money managers I recommend. One reason, no doubt, is that many investors prefer to deal with someone who is in their local area. Too bad – my clients are all over the country in all 50 states, and I have never met most of them in person, although they can speak to me personally whenever they want.
Another reason, we’re sure, is the management fees that professional money managers charge. Wall Street and the big mutual fund families have preached for years that you should buy-and-hold low-cost “index” funds. That strategy works, but it also means that you lost over 40% in 2000-2002 and have yet to get back to breakeven if you are/were in one of the popular S&P index funds, and you lost much, much more (75%) if you were in a Nasdaq-based index fund.
I want most of my money managed by professionals that have the ability to get out of the way in a bear market. And some of my money is with managers who will actually “short” the market, with the potential to make money in a bear market. Again, past results are no guarantee of future results.
A final reason is that many investors prefer to manage their own money and pick their own stocks and/or mutual funds. For those of you do-it-yourselfers, your portfolios should be hitting new highs as you read this. If not, maybe you should take a look at the professional money managers I recommend. Go to www.halbertwealth.com and check them out.
Also be sure to check out our “Absolute Return Portfolios.” These are carefully selected groups of equity mutual funds that have a history of delivering positive returns in both up and down markets. As always, past results are no guarantee of future results.
Several of the professional money managers I recommend can be accessed for as little as $50,000. You can invest in our Absolute Return Portfolios for as little as $15,000. You can call us at 800-348-3601 to discuss your particular situation. My Investment Consultants are not on commission, and there’s never any pressure to invest – although I hope you do!
Lastly, you should know that I have my own money invested with every money manager I recommend, and every investment program we offer. And if you become a client, you can talk to me personally. I greatly enjoy talking to my clients!
Again, no apologies.
Wishing you profits,
Gary D. Halbert
IMF’s Global Economic Forecasts
A dangerous game of ‘chicken’ for Democrats
The Shadow Candidates – Thompson & Gore (a good read).
Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.