The Economy Seems To Be Picking Up Steam

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

I am not on the overly bullish side of the spectrum…yet. But, it seems to me that the economy is beginning to show a little more activity.

First off, the December number for Industrial Production indicated that this measure of economic activity rose by 3.7 percent, year-over-year. This tied for the fastest rate of increase in Industrial Production for 2013. The other month that Industrial Production rose by 3.7 percent was in October.

If we take quarterly averages, we find that the fourth quarter registered a 3.6 percent, year-over-year rise from the fourth quarter of 2012. The year-over-year rise for the fourth quarter of 2012 was 2.7 percent.

The rate of increase in Industrial Production dropped in the first two quarters of 2013. It was 2.5 percent in the first quarter and 2.0 percent in the second quarter.

It rose again in the third quarter, rising to 2.5 percent, before hitting the 3.6 percent in the third quarter.

This was not unlike the growth rates for real GDP. The year-over-year rate of growth of real GDP was 1.3 percent in the first quarter and 1.6 percent in the second quarter. In the third quarter the number came in at 2.0 percent.

If the real GDP number tracks the performance of Industrial Production we should expect that real GDP should grow around 2.7 percent, year-over-year, in the fourth quarter of 2013. This would be a nice pick up given the performance of this measure over the past several years.

Taking a longer-run view by tracking the behavior of the economy back to 2010 we see that fourth quarter growth of Industrial Production was 6.2 percent in 2010; 3.3 percent in 2011; 2.8 percent in 2012; and 3.6 percent in 2013.

The fourth quarter real GDP numbers mirror this performance. The 2010 number was 2.8 percent and the numbers for 2011 and 2012 were 2.0 percent each year. A 2.7 percent increase in the fourth quarter of 2013 does not seem to be outlandish.

The capital utilization numbers seem to re-enforce this argument. In the first quarter, capacity utilization was at 78.0 percent. The number dropped in the second quarter to 77.9 percent, reflecting the slowdown in industrial production and the languid economy.

In the third quarter of 2013, capacity utilization returned to the first quarter number. In the fourth quarter, however, capacity utilization jumped to 78.9 percent, a pretty significant jump.

Looking at the rise in capacity utilization as the economic recovery continued we see this measure increasing from 76.2 in December 2011; it jumped to 77.3 in December 2012; and it modestly rose to 77.8 percent in December 2012. The increase through 2013 was significant as December 2013 was at 79.2 percent indicating a relatively strong pick up in manufacturing activity.

The basic conclusion from these data is that the United States economy does seem to be improving. While the improvement does not seem to be exceptionally strong, it is an step up from the very tepid pace that the economy had been growing over the past two years.

This improvement should help to spur on more capital investment and maybe…just maybe…we might see a start to more robust activity in the area of mergers and acquisitions.

In my mind, many large corporations have just been waiting for the time when they can go out and expand their business by bringing an established business or technology under their wing. Myself, and a lot of other people, have been expecting an M&A splurge for the past three or more years. Companies that are in good shape financially have built up their cash balances in anticipation of such a move.

Quite a few analysts have picked up on the little flurry of M&A business over the past few weeks and are claiming that the "boom" in acquisitions has begun. We still need more evidence that this is true, but the atmosphere seems a little different than before. We'll see.

And, if the economy does show more strength it would be good for corporate profits. Again, myself, and several other people, have been writing that the profit outlook for the corporate world had to improve to justify some of the height of the stock market. I am still not predicting a lot of buoyancy in corporate profits given that economic growth will still remain modest, but increasing M&A business, an rise in capital expenditures, and a modest improvement in the profit picture should help to raise confidence…and, that would be a good thing.

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.

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