Elliot H. Kallen

Financial Planner, Wealth Manager, Registered Principal
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Horse Sense Economics as Stocks Break Another All time High

According to the Federal Reserve Bank’s latest Beige Book, modest to moderate gains in the U.S. economy are just ahead. “Consumer spending appears to be rising across a majority of Districts, led by increases in non-auto retail sales and tourism,” said the U.S. central bank’s report.

Published every six weeks, the Beige Book summarizes economic data collected by the 12 Federal Reserve Districts. In the 32-page mid-July report, many Districts noted softer consumer spending, particularly in auto sales, which declined in six Districts.

But it’s likely auto sales were merely reverting to their long-term mean rate, after surging way above their long-term norm in the long comeback from The Great Recession. Here’s the evidence.

The proof is in June’s report showing total retail sales, which, compared to a year earlier, grew by 3.2%.  =That’s stronger than the 3.1% peak achieved during the last economic expansion! While auto sales can be volatile, total retail sales are nonetheless doing just fine.

Meanwhile, Fed Chair Janet Yellen, in Congressional testimony, reiterated that she expects to continue the gradual upward course of rates in the face of growing economic strength —even as inflation declined sharply in recent months.

The so-called “headline” inflation rate that is almost always cited in the financial media, the Consumer Price Index, started a nosedive in February, and on June 30th was at just 1.6% —plunging from 2.8%.

Ms. Yellen has been quoted in the press saying wage-inflation is on the way and, as a labor economist, she should know. Wage inflation is evident in the Core CPI, which indexes the monthly expenses consumers pay but excludes food and gasoline. Lower gas expenses have masked wage inflation evident in the Core CPI rate. A strong labor market and rising imports are likely to make the disinflation temporary.

Consumers are not overly optimistic. When consumers become giddy, it could be a signal of trouble ahead for the stock market. Optimism is not approaching the peaks of the tech-stock bubble. For a bull market to continue, optimism can’t be so widespread. You always need skeptical bears on the sidelines that may eventually capitulate, change their minds and purchase stocks.

In early July, 63 economists gave The Wall Street Journal their forecasts for five quarters, and the consensus prediction was that the U.S. would grow an average of 2.5% quarterly. The 2.5% quarterly forecast is a small revision downward; it stemmed from a reduction in the forecast for the quarter that just ended on June 30th.

A handful of economists, politicians and pundits say a 2.5% growth rate is not that good and that 3% growth, or more, is possible. But the math driving America’s economy makes growth higher than 2% unsustainable. Demographics and productivity — the key factors — cannot reasonably be expected to make a 3% growth rate sustainable.And don’t turn your nose up at a 2.5% growth rate.

Economic horse sense tells us 2.5% is pretty darn good growth! In fact, it would significantly outpace the non-partisan Congressional Budget Office’s 10-year projection of less than 2%.

The key growth engine in a diversified portfolio, the Standard & Poor’s 500 index, has been hitting new all-time highs repeatedly for months. Unexpected bad news could plunge stock prices by 10% or 15% at any time, but the outlook for economic fundamentals that drive stocks prices remains bright.

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Market DataBank: 1Q 2019

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