This is the fourth time since the credit crunch began that the popular press have been trumpeting 'escape velocity for the U.S. economy'.
Here is the FT reporting Larry Summers in April 2010
Here is the FT article by Gavin Davies in December 2010
Here are comments by Barry Knapp in April 2011
These articles highlight that, at the dates given, the discussion was that the economy was about to reach escape velocity. Now we are starting to get mention again that, with the improvement in the data out of the U.S., we are once again close to escape velocity. Steve Liesman on CNBC has started to debate this topic. I feel that this will be the fourth false dawn. The following graphs highlight why: (Click graphic to enlarge)
Consumer net worth is falling again, U.S. consumers are getting poorer. Spending is almost 70% of the U.S. economy. (Click graphic to enlarge)
Real income is also falling. The consumer is not going to be able to sustain higher spending for long. There may be spurts, but not a sustained trend. Meanwhile: (Click graphic to enlarge)
The percentage of spending that the government must borrow is stabilizing at above 35%. I cannot see fiscal stimulus with the borrowed percentage so high. The latest GOP back off, allowing the extension of payroll tax reduction and unemployment benefits is purely a political maneuver to get the debt ceiling to be breached in September of this year, rather than January of 2013. They have decided that it will be good for their chances if the debt ceiling debate happens just as the presidential elections are hitting their peak campaigning time. I do not see any further politicking from here; they have achieved their objective.
Last but not least, monetary policy: (Click graphic to enlarge)
It doesn't matter how much liquidity there is in the system: If it all stays parked at the Fed and the ECB, the velocity of money looks like the graph above.
Two last points:
50% of the improvement is U.S. growth since 2009 has been the improvement in exports. If China and Europe are slowing, export growth must surely slow from the U.S.
The U.S. dollar has started to appreciate against the yen and the euro, making export growth to these two areas more difficult. It's great to be optimistic but I can't see where the escape velocity is going to come from, as the long term position has not changed materially. The consumer is under pressure and the government is constrained by its debt. The natural flow of any economy means that there are faster and slower periods in growth. For the underlying trend to change, the fundamentals have to change for the better. It does not appear that they have.
Investment implications
If the economy does not reach escape velocity (again), markets will need to see an expansion in P/E multiples if they are to continue to rise throughout the year, as sales growth and profit margins are likely to be muted. Some analysts are calling for this- I have my doubts, however! When markets are on a tear (as they are now), it is difficult to remain objective, but it is often the best policy in the long run.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Long RWM
Disclaimer: This article is not intended as investment advice. Before taking any action, please do your own research. Do not rely on any opinions or facts included in this article for decision making.
