Economics at Work

Economics at Work

Supply & DemandMy forecast first: the sky is not falling and we will carry on. Regular economic principles will trump fear and behavioral financial principles, and the stock market will continue its bullish trend during the fourth quarter. I did not want you to have to sit with bated breath until the column end. If there is one thing I detest, it is bated breath.

What follows is my reasoning and quips concerning parts of the whole picture. First, the fundamental indicators of economic health continue to flash green. After disappointment with GDP and spending in the first quarter—yes, apparently excessive cold and snow does affect shopping and hours worked (who’d have thunk?)—the second quarter rebounded and the third quarter was just slightly less robust. More on the third quarter in a moment.

One of my favorite economists, Brian Wesbury of First Trust, predicts 2.5 to 3 percent real GDP growth in the next four quarters. That would be an improvement over the past five years’ pace of 2.2 average. Wesbury opines that the private sector is improving primarily because the government spending is still falling as a percentage of the whole. It fell to 20.3 percent in the fiscal year ended September 30 and that is down from 24.4 percent for 2009. The government spending sequester (read decrease) that was supposed to kill off economic growth has produced the opposite result.

In spite of our local layoffs from Sprint and ATK (Lake City Ammunitions), official unemployment has fallen now to 5.9 percent and initial benefit claims have fallen to 264,000 nationally, the lowest rate since 2000. What is fascinating to me is that a huge portion of the public thinks the country is still in recession now, five years after national production began to increase again. But when no one on the street even knows the name of our Vice President, what can you expect about economic knowledge?

Why will our growth continue, and the stock market with it? As an aside, I wish I had a dollar for every person I have ever heard say that the price of gas at the pump is set by a secret lever located somewhere in a Houston oil company office. When our local prices drop like this, consumers will be saving more and spending more, especially on Christmas gifts.

This especially helps out the airlines and other transportation companies. The money saved drops right to the bottom line of profit. It hurts oil and energy companies in the short run. The October drop in energy company stock prices would lead one to believe gas will soon be free, but that will not happen. With the shale oil and related technology driven energy revolution continuing, our balance of international trade is improving with less imported oil to pay for.   Secondly, the deadlock between Congress and the President will continue after the election. So no great public spending boom will result. The government will continue to decrease its crowding out effect upon private business growth and money for private investment. This is a good thing.

Ebola may have caused the worst of the volatility in the past thirty days, but I do not see it becoming a pandemic that will kill most of us worldwide. If it does happen to develop that way, buy stock of undertakers and casket makers. Someone’s business is always thriving.

 

(Past performance is no guarantee of future results. Advice is intended to be general in nature. See www.ftportfolios.com/economicsblog/ for Wesbury’s writing.)