Lost Momentum

The U.S. Government recently released results of economic growth for the first quarter. The report indicated that the economy shrank by 1%. While the expectation had been for slow growth, this significant negative reversal signaled a loss of momentum from the fourth quarter of 2013. The impact is visible in the housing industry, where both existing home and new home sales slowed. One would think that this information would result in a negative stock market reaction, but the S&P 500 soared to a new high. At the same time, the slowing economy has resulted in the 10-year Treasury Bond dropping in yield, from about 3% to 2.44%, with an increase in the value of underlying bonds. This change in the Treasury values has also impacted high quality bonds, with yields decreasing and values rising. Taken to another level, this lowering of interest rates has pushed the mortgage interest rates back down, making it less expensive to buy a home. The slowing momentum of the first quarter would appear to have a very positive impact on the second quarter. We are beginning to see home sales, consumer spending and manufacturing increase. For these reasons, stocks have climbed. Clearly, the loss of momentum from the first quarter, due primarily to bad weather, has turned around. We will now have to wait and see if momentum can be regained.

Ed Mallon 

Demographics

The current economic picture is one of slow growth. The economy is moving in fits and starts but lacks momentum. The S&P 500 closed yesterday at 1885. At the end of 2013, the S&P 500 closed at 1848, meaning it has risen about 2% for the year to date. This certainly is not the robust market of 2013. Many reasons might account for slowing the growth in stocks, but overall, I’d say the stock market got ahead of itself.

When we came out of the 1982 recession, the growth in GDP was 7.5%, with the next two recessions recovering at a more modest 5.6% and 5.2%. Nominal GDP growth is just 3.7% during the current expansion. This slow growth is not just in the U.S. but is occurring in Europe, Japan and China, to name a few.

Perhaps something else is at work that is being overlooked. From 1968 to 1985, the population growth in the U.S. was 2% annually. During this same period, the growth in GDP was 4%. From 1985 until 2000, the population grew 1% and the GDP grew 3%. Since 2000, the approximate population growth is 0.6% and the growth of GDP, overall, is just above 2%.

I believe there is a correlation between population growth, the aging of the population and the growth of GDP. The United States has benefited over the years from the constant influx of immigrants into the U.S. This influx brought young people who had families, and brought down the average age in the U.S. as the balance of the population aged. This has not been the case in Russia, where the birth rate has been low and the mortality rate is high. Europe also suffers from this problem, except for Germany, which took in the East German population. Japan and China both have aging populations.

In the 1980s and 1990s, the U.S. had wide swings in economic growth. With our aging population, we are now experiencing a period of fewer swings and longer-term growth prospects. While the current growth is not up to previous levels, it will possibly last for a much longer time, say the next 5 to 8 years. The U.S. is part of an international community now, so the growth possibilities of the U.S. will be moderated by the lack of growth in some developed and developing countries. This period will not show spectacular growth, but it should be good for the U.S. economy. I’ll talk more about the impact of demographics at another time.

Ed Mallon