Why the U.S. Economy Will Strengthen
We’ve been arguing that the U.S. economy will strengthen, and in the past week we got more indicators suggesting why this will happen.
We’ve Been Bullish On U.S. Stocks
As readers know, it is our view that we are at the stage of the economic cycle where capital spending and industrial expansion rise. This rise leads to more employment and faster economic growth. In spite of the panicky behavior exhibited by the financial media about the government shutdown in October, the U.S. economy is strengthening.
Last Friday’s October non-farm payroll report came in stronger than the pundits had projected. The current growth of employment is being seen in construction and manufacturing, two areas which pay well and which many economists have been worried were too weak.
We remain more bullish on economic growth than most, and believe that it is just the beginning as the multiplier and accelerator effect will now begin to be felt this will cause the velocity of money to rise. Currently, M2 velocity is the lowest ever — well below the bottom in 2008–09 and in 1932–33. Today, GDP growth is exceeding debt growth even before our expected upward growth path for productivity and the velocity of money.
The rise in the velocity of money will occur as the massive liquidity sitting in banks begins to be lent out — stimulating expansion in new economic sectors. Currently, most bank lending has been for mortgages. This lending will continue, but it will be joined by increased borrowing to expand the capital goods sector of the economy. When more money is borrowed from banks to build plants, to buy equipment, and to inventory new manufactured goods, the economy accelerates.
In our opinion, this demand for capital will lead to demand for employees to work in the new plants that are being created. The sum total of the effect will be to create higher GDP growth and higher employment in the fourth quarter and in 2014. We expect U.S. GDP in 2014 to be over 3.6 percent after inflation (real GDP). This compares with 1.7 percent in the third quarter of 2013.
This is good news for stocks. Higher GDP growth means higher interest rates and higher risk for bond holders. It also indicates that we should change our views on the beginning of the taper of QE (quantitative easing). We now believe that the taper will begin in early 2014 — possibly January or February.
