31 Oct 2003 “Trick or Treat?”
The economy grew 7.2% from July through September. That’s the fastest growth rate since 1984 and more than twice that of the second quarter. For the first time in history, the economy exceeded $11 trillion, before adjustments for inflation, according to Bloomberg. Consumers spent at the fastest pace in six years and businesses showed strong increases in fixed investments. Numerous retailing managers have said their businesses improved noticeably after President Bush signed the tax-cut bill into law in July. Non-retailers are also joining the recovery. Profits of 375 members of the S&P 500 companies are up an average 22%.
Even jobs are improving. First-time jobless claims declined by 5,000 workers last week to 386,000, suggesting a reversal in trends of the past three years. IBM CEO Sam Palmisano said that his company plans to hire an additional 10,000 workers next year because information technology spending is improving and in IBM’s view, the economy has “stabilized.”
Major economic confidence votes were cast with billions or shareholder dollars this week. Bank of America’s $47 billion purchase of Fleet Boston, creating the nation’s second largest bank, and RJ Reynolds’ announced acquisition of British American’s Brown & Williamson for $3 billion both suggest managers see enough strength and stability in the economy to move forward with major bets.
Will the improvements in the economy continue or will they reverse when the inducements of tax and interest-rate cuts subside? Joseph LaVorgna of Deutsche Bank Securities says that every time since 1947 that the economy reached a growth rate of 7.8%, growth in the following quarter declined by an average of 20%. If that trend holds true, the fourth quarter’s growth may reach 5.7%. But economists in general are not so optimistic. The latest Bloomberg survey of 74 economists indicates their collective average belief that the economy will grow by 3.8%.
The more cautious view seems to be the norm among companies discussing next quarter’s and next year’s earnings prospects. For example, discount air carrier JetBlue announced a double in earnings for the third quarter, but shares declined 18% in the following days as management cautioned that growth might slow. Investors had expected the company to beat analysts’ forecasts by more than the company did, but they neglected the fact that those forecasts had risen 25% during the quarter.
As you review the chart above notice that it is mostly green, indicating positive news. The week started with news that the housing market continues to be strong. Durable Goods Orders rose in September for the fourth month in five and Consumer Confidence as measured by the New York Conference Board rose better than expected. The Fed left interest rates at current 45-year low levels saying that spending is firming, and the labor market appears to be stabilizing.” They said further that “the risk of inflation becoming undesirably low remains the predominant concern for the foreseeable future.” Interest rates will likely remain low for months to come if not all of 2004.
Today the University of Michigan announced its consumer confidence indicator increased rather dramatically indicating consumers are more likely than in the recent past to continue spending. These recent findings provide some comfort in the face of the Personal Spending number released today showing a larger-than-expected decline in September. Rising stock markets, improvement on the job front, and evidence of economic growth have increased the consumer’s confidence substantially in the past few weeks.
We think this recent spate of good news suggests fundamental improvement in the economy, not just a short-lived reaction to the admittedly significant economic stimuli. But those government stimuli were made politically possible largely because of the unprecedented jolts this economy suffered during the past three years. Each recovery attempt was stopped short by another world-class ill-event.
But this time the ELEVEN TRILLION DOLLAR juggernaut US economy is gaining real momentum. Its growth is more balanced and sustainable than past recoveries as October’s earnings reports demonstrate. If demand grows or simply remains constant, business inventories will necessarily be replaced faster. Job growth will almost certainly improve as the inventory rebuild occurs. We believe this economy is in for more treats than tricks in the coming months.