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U.S. Macro Views

Bernanke & Co. evidently has now come to the realization that the recovery may be losing momentum and that the risks for a double dip are increasing. This realization comes at an interesting fork in the road as QE2 is about to expire and there is no sign of any renewed efforts to offer support. The fragility of markets and the economy may actually argue that The Fed may have to, at some point, step up to the plate once again and as Bill Gross recently has suggested engage in QE.
Are people really surprised about where we are in the cycle? Consider a very simple yet elegant decomposition of GDP where GDP = C + I + G + Ex – Im. Let me briefly review the status and underlying “winds” for each.
Consumption (NYSE:C) – Faces continued headwinds from high levels of unemployment, a persistent housing depression, stagnant if not contracting real wages and recent high energy costs causing dents in personal balance sheets and spending. The few tailwinds continue to be sustained government transfers for the unemployed and those in lower income brackets (which may start receding I might add given budget initiatives). Consumer sentiment has been on the mend up until very recently. All-in-all, expect subpar contribution from this significant segment to overall GDP with growth expected in the low single digits for the second quarter.
Business Investment (NYSE:I) – Depending on industry, excess capacity is still an important headwind that may hold back certain Capex spending. In addition, some stimulus efforts late last year to help spur Capex through accelerated depreciation incentives may have actually front loaded demand robbing demand from the future as is most often the case with these types of stimulus programs. Capex spending may be more oriented towards equipment and service providers that can continue to enhance productivity and aid in the profit margin expansion trend we have seen as of late. The global economy is expanding and this may offer support towards business investments. Residential construction will likely continue to see subpar performance given inventory glut and a lackluster first-time home buying landscape. All-in-all, expect low to mid single digit annualized growth in second quarter.
Government (NYSE:G) – Austerity is not just a European term anymore. As Congress and the White House debates the budget odds are that something has to give. To balance a budget there are three possible routes: (1) you can cut spending, (2) raise taxes or (3) do a combination of both. All of which at this juncture could spark another economic downturn given the fragility of the broader economy and the multiplier effect Government spending has across the broader economy. Therefore, expect much “politicking” as we head to yet another election cycle with no consensus on any meaningful budget plan or debt ceiling (as of this writing). Stimulus efforts and the spending on War may have been the only contributors to overall GDP in the last several quarters but once again these may start to be pared back. All-in-all, expect little to negative GDP contribution from the Government for the second quarter.
Exports (Ex) – As the global economy has continued on an expansionary trajectory U.S. exports have shown resilience and have been aided by a weaker U.S. dollar compared to trade partners. Differentiation and global brands continue to be positive drivers helping the export sector. However, foreign competition and protectionist measures could spell trouble down the road. All-in-all, exports should continue to have a positive contribution to overall GDP. With that said, as the global growth engine shows signs of some moderation, the rate of export growth may start losing some momentum.
Imports (Im) – Imports are a drag on overall GDP as they subtract from domestic production. Consumer demand has maintained a healthy pace of imports. High energy prices, given the U.S. trade deficit with regard to energy consumption, have only exacerbated the drag that imports have on overall GDP. Due to recent price drops in energy throughout the second quarter we could actually see a contribution to overall GDP further aided by a moderating consumer. All-in-all, the second quarter could see flat to slightly positive contribution from exports.
When you sum things up according to each segment’s weighting overall GDP will likely continue to show subpar growth and may be in a 1% to 2% range on an annualized basis for the second quarter. This may be somewhat below consensus. The main discrepancy may have to do with rosy residential construction, government and business spending by “the street.” I would expect the consensus to slowly meander downwards which could have implications for various asset classes.