As Growth Rates Moderate, Equity Markets Are Pushed Up

I've been clamoring for some time that the U.S. economy is far better than most have been giving it credit. As it turns out, the numbers we've been seeing are making this a reality.

From my view in the stands, I look at two things to start all of my economic interpretations: Personal Income and Real Personal Consumptions Expenditures. There's a funny thing about Americans.... we don't save any money at all. So, by looking at the rate of growth in incomes, I can get a pretty good idea as to how the economy is going to play out. As the rate of growth in incomes increases, so does the rate of growth of consumption.

To illustrate, the red is income and the blue is consumption:

We've had a lot of "opportunity" here in the United States to really get the economy up and running. Let's face it, with interest rates sitting at 1%, how much more could the Fed have done to get this economy rolling. Then we got the Bush Tax cuts. Mild as they were, couple them with the ultra-stimulative interest rate environment, and the recipe for large chunks of growth is in the oven.

But... we got nothing.

We got an economy that moved forward, and that's about all. We should have gotten an economy that was lighting up the board. In fact, both personal income and consumptions are moderating.

I've been asked whether or not I felt the next cycle lower would be contained. I put together another piece that showed how our recessions and our growth cycles have been contained lately, and that huge swings in the economy appear to be a thing of the past. Well, to answer that question, as long as incomes remain in this tight range, then yes, I see our economy cycling lower, but remaining moderate.

Going forward, I see our economy moderating. We'll see growth, but not stellar growth. I know... Not exactly a sexy outlook. And to think I just put up fluff on this site for fluff's sake.

That being said, we seem to be in an environment where it is very conducive for appreciation of assets. That whole "tons of money on the sidelines" thing that has pushed the equities markets up further and further, I can see this continuing. I also am not too concerned about interest rates one way or another, either. I think our growth cycle will moderate, and resource utilization will be moderate as well. Again... sorry to not dispel any hyper-phenomenal occurrences within the economy, but I don't write just to get headlines. I tell it like I see it.

Until incomes pick up, expect the current market cycle to continue plodding along. Also, continue to see this plod along as well:

No reason to see any interest rate increases going forward. With that kind of environment, equities will do just fine.