What's Driving The Growth?

2/27/2017


The Blue Chip Economic Indicators projection for inflation-adjusted economic growth in 2017 has hovered between 2.2% and 2.3% since April, while the economists expect 2.4% growth in 2018. Not bad, considering that in the 30 quarters since the middle of 2009, annualized GDP growth has averaged 2.1%.

But growth targets are only as good as the forces driving them. Blue Chip expects consumer spending, which accounts for more than two-thirds of U.S. economic activity, to rise at a faster pace than the overall economy this year but slow in 2018. Those numbers imply that consumers, who have powered the recovery ever since it began in the second half of 2009, won't remain at the wheel indefinitely.

The current economic recovery has inspired a lot of headlines for its consistency and moderation. Such consistency isn't unusual. The economy has grown in 28 of the last 30 quarters, a feat it managed in 40% of 30-month periods dating back to 1960. However, the pace of the recovery stands out for at least three reasons.

1) On an inflation-adjusted basis, Blue Chip's target for 2017 consumer spending rose to 2.7% in February, its highest point in 14 months. However, the euphoria of falling unemployment rates and cheap borrowing costs, which helped boost consumers' ability and willingness to spend, is fading. Factor in rising interest rates, and some deceleration in spending makes sense.

2) Nonresidential fixed investment, a proxy for business spending on property and equipment, fell 0.4% last year. Blue Chip sees a jump to 3.0% growth this year and 3.9% in 2018. Given a rise in business confidence, improvement in the energy sector, and the potential for business-friendly tax and infrastructure-investment policies at the federal level, the pickup in growth also makes sense.

3) Since 1960, there have been 91 rolling 30-quarter periods that feature 28 quarters of expansion. How does the 2.1% average growth from the last 30 quarters stack up versus the other 90 periods? It comes in dead last, and we can blame sluggish business spending for much of that weakness.

Conclusion

Investors shouldn't read too much into raw GDP numbers. Sure, high growth is better than low growth, but stocks can do just fine with economic expansion in the 2% to 3% range. Of more import is the outlook for business.

Now, the targets mentioned above are just that — targets yet to be hit. But in an environment of accelerating growth in corporate profits and bullish moves in broad market indexes, we're comfortable holding more than 96% of our recommended lists in stocks.


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