By: Russ Colbert
Spring 2019 (Vol. 37, No. 1)
The U.S. economy has performed very well the first quarter with a GDP number coming in at 3.2%. We feel the U.S. economy is continuing to accelerate due to the deregulation and the tax cuts. Faster economic growth, not more government redistribution, is the only way to permanently lift living standards for people. We remain convinced that real GDP will grow at a pace of around 3% for this year. What makes the first quarter more impressive is that it is usually the weakest quarter of the year. This quarter also had a government shutdown to contend with. Previous first quarter GDP’s, starting from 2010 came in under 2% on average. So you can see we are off to a good start for the year.
The China negotiations have been going on, back and forth, for some time. The odds of a full blown trade war with China are diminishing and neither country wants to see that happen. China stands to lose a lot more than the U.S. since we buy much more from them than they buy from us. We can find other sellers and vendors to purchase goods from much easier than they can find buyers. The U.S. has been working hard setting up replacement business relationships with other countries like India, Indonesia, Vietnam, Malaysia,, Singapore, to name a few. China does not want to lose our business and we feel things will work out over time. We have to do something to curtail or stop their continued cyber and intellectual property theft. If we can’t do it now, it will be much harder and probably impossible in the future as they grow larger and more powerful.
Monetary policy is not tight, and companies are still adjusting to lower tax rates, and deregulation. Deregulation is having a positive effect on companies investing capital back into their businesses and other companies. We do see a problem in the unwillingness to tackle the long term spending path the Federal Government is on. The Trump Administration should work to cut government spending that has grown so large, and is crowding out some private sector growth. We do not see that it will be taking down the economy in the near or medium term ahead. We have time to address this problem before it causes a negative impact on economic growth in the future.
Over the past year and a half we have been experiencing rapid job creation. The unemployment rate has dropped to 3.6%. We haven’t seen these low levels since 1969. The labor force is up 1.4 million from a year ago. Wages have also accelerated, with average hourly earnings up 3.2% from a year ago versus 2.8% a year earlier. These gains are not all for the high income earners. Full time worker age 25 years and over weekly earnings are up 3.5% for those in the middle income spectrum. The wage data is showing that lower income earning Americans are seeing faster wage growth than the overall average. Wages are up 4.9% for workers at the bottom 10% of earners, while up 1.7% for those at the top 10% of income earners. Meanwhile, part-time jobs are down since the expansion started, meaning full-time jobs account for all job creation during the expansion. We feel the overall economy looks good. Corrections will happen, but looking ahead at the level of corporate profits and outlook for economic growth, it is more likely that the stock market will rise in the year ahead.
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Senior Portfolio Manager
Advisory services offered through Royal Palm Investment Advisors, Inc., a Registered Investment Advisor.