Any Need To Change My Forecast For Economic Growth?

Includes: DIA, IWM, QQQ, SPY, TLT
by: John M. Mason


Durable orders seemed to come in strong for April.

Other economic data are still not so positive.

Economic growth will still continue to be tepid with some good news and some not-so-good news along the way.

The state of the United States economy does not appear any different to me now than it did before I spent several weeks in the environment of the potentially deflationary space of Europe.

A couple of stock price indices have established new record highs…but, in the short-run this doesn't necessarily mean much.

Other measures of economic health continue to show a mixed picture with respect to where the economy now resides.

Orders to factories for durable goods seemed to show a good performance for April in the data released yesterday. Headlines signaled that "Orders for Durable Goods Climbed 0.8% Last Month" and this was taken as a positive sign for the stock market, which rose on Tuesday.

Year-over-year, orders for durable goods rose at a 7.1 percent annual rate in April, and this was up from the average year-over-year growth rate for the first quarter of 2014, which was 4.2 percent, but was down from a 7.9 percent annual rate in the second quarter of 2013.

Furthermore, a good portion of the increase came from a "big surge" in demand for military aircraft. On the other hand, another category of orders for businesses signaled "business investment plans fell by the largest amount in three months." This was cited in the New York Times article linked above.

Others indicators continued along a relatively tepid path. Industrial production in April came in at only 3.5 percent above its level a year ago. This is up modestly from the first quarter year-over-year average of 3.4 percent and the fourth quarter of 2013 average of 3.5 percent.

This does not present a picture of the acceleration many analysts expected in the spring after the weather-restricted growth in the first quarter.

Furthermore, the capacity utilization rate in manufacturing seems to have reached a near-term peak at around 79 percent of capacity.

This peak, reached in each period of cyclical recovery since the series began, has declined constantly over the past fifty years or so. When the series started in 1967, capacity utilization stood at around 90 percent of capacity. During the next cyclical recovery of the economy, the peak hit only 89 percent of capacity. In the 1977-1979 period, the peak was around 87 percent; and the 1987-1988 and the 1994-1997 peaks were around 85 percent.

The 2005-2008 peak only reached 81 percent of capacity.

It just seems that the United States economy is at or near a cyclical high in terms of the amount of the manufacturing capacity that is being used.

And, the labor force participation rate seems stuck around 63 percent.

There is just not much new news that points to any stronger economic growth. The first quarter growth of real Gross Domestic Product was only 2.3 percent, on a year-over-year basis, down from 2.6 percent in the fourth quarter of 2013, but up from the 1.3 percent year-over-year gain in the first quarter of 2013,

A market change that did surprise me on my return from Italy was the drop in the yield on the 10-year Treasury Inflation Protected Securities (TIPS). Before I left on my trip, the trading range seemed to be in the 0.425 percent to 0.450 percent space.

On return, the yield was down around 0.350 percent…a substantial drop.

The inflationary expectations built into the nominal 10-year Treasury yield remained roughly constant from the during this time period somewhere around the 2.2 percent level.

As of this time, I have found nothing else to explain the drop off of the "real" yield on Treasury securities, so it appears to me that the market may dropping its expectation for the future growth rate of the economy. This is because the "real" yield on Treasury securities is a rough proxy for market expectations for real economic growth in the economy.

This raises the question to me…are market participants adjusting downwards their expectations for future economic growth?

This would explain the decline in longer-term interest rates over the past month. Market participants, therefore, seem to be expecting that future long-term interest rates will be lower than we thought that they would be earlier this month.

This could be a reason why the stock market has risen. Market participants have lowered, slightly, the discount rate that they apply to future corporate cash flows and this has resulted in higher stock market prices.

But, now let's get back to my forecast for real GDP growth in 2014. Up to this point, I have stuck by my forecast that real GDP will grow by 3.0 percent in 2014.

For the time being, I am going to stay with that forecast. I have observed that many other analysts have lowered their forecasts for the year as new information has become available. I admit, I may be on the high side with my 3.0 percent forecast, but I am going to keep the forecast there for the time being.

A 3.0 percent rate of growth is not a real good performance. It is not a rate of growth that will start the labor participation rate rising again. It is not a rate of growth that will increase capacity utilization by any degree. About all that can be said about it is that it is better than what has been achieved since this recovery started in the summer of 2009.

As I have written many times before, many of the problems that American economy faces today are structural in nature. These problems are not going to be resolved in a cyclical business recovery. These problems can only be solved over the longer run with real leadership…something that has been absent in the US government for some time now.

So, I am looking for the economic growth rate for the US to be around 3.0 percent this year. And, the data that will be released over the next seven or eight months will continue to be inconclusive…some of the data will be hopeful…and, some of the data will be negative. That, unfortunately, is the world that we live in.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.