By John E. Silvia
A Question on Prosperity
Several years ago, a TV commercial ended with the comment that “luck is for rabbits.” So it is for investing. Over the past five years, we have witnessed incredible gains in household wealth, reflecting the improvement in housing prices and equity returns. From our view, there is no doubt prosperity has increased, and it hasn’t been the result of luck.
Why do we think this? It’s not just about asset prices. In the U.S., we have witnessed years of solid employment growth and lower unemployment rates, resulting in real income growth. Real income growth has given rise to solid consumer spending and has provided a basis for the overall pace of economic growth. In recent years, lower tax rates have also boosted the disposable income of households as well as businesses and have thereby helped consumer and business spending, respectively.
Modest inflation has been a second element supporting prosperity. One pleasant surprise over the last five years has been the modest pace of inflation given the decline in the unemployment rate. Despite the application of the “Phillips Curve” model by some, which dictates higher inflation as the unemployment rate declines, this result has not emerged.
Lower than expected inflation has allowed the Federal Reserve to maintain an easing bias to its policy and kept interest rates lower than what many commentators had expected. Finally, the relative strength of the U.S. economy has prompted financial capital to enter U.S. markets to seek better returns than available abroad.
What could signal an end to such prosperity? First, the job market, which supports consumer spending, could turn weaker. For this, we watch the jobless claims numbers released each Thursday morning. For growth in the business sector, we watch the ISM surveys and the capital goods orders (non-defense, ex-aircraft), which provide a signal of weakness in capital spending. For inflation, we watch the core personal consumption deflator, which could indicate higher inflation. This could lead into an increase in interest rates each month.
On the financial side, we monitor the value of the dollar but also the spread between corporate and U.S. Treasury yields; a wider spread raises the alert flag for possible economic weakness.
Each month, we monitor economic and financial signals in order to make informed, evidence-based decisions. We look to data and facts and leave the luck to the rabbits.
John E. Silvia is the Director of Economics for Carolinas Investment Consulting LLC. Click here to learn more about John.
Carolinas Investment Consulting is not affiliated with any of the websites linked in this commentary. Nothing contained herein constitutes financial, legal, tax, or other advice. The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of Carolinas Investment Consulting. The information published herein is provided for informational purposes only, and does not constitute an offer, solicitation or recommendation to sell or an offer to buy securities, investment products or investment advisory services. All information, views, opinions and estimates are subject to change or correction without notice. The appropriateness of an investment or strategy will depend on an investor’s circumstances and objectives. These opinions may not fit to your financial status, risk and return preferences. Past performance is not indicative of future returns.