US Economy Not So Fragile After All

Economists' near-universal error over the last two years was the expectation that the US economy was fragile, says Morningstar's Bob Johnson

Robert Johnson, CFA 21 January, 2013 | 11:13AM
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The economic news last week was shockingly good—almost too good to be true. Just as the economic indicators in August and October were just too bad to possibly reflect reality, December numbers, while excellent, probably include some statistical tailwinds.

Housing starts hit a recovery high, housing prices jumped more than 7% in 2012, inflation remained tame and official retail sales refuted previous rumours of a disastrous holiday season. Manufacturing even looked better as industrial production had its second large improvement in as many months. (However, year-over-year data seems to be forming a rut at about 3% manufacturing growth.)

Initial unemployment claims hit a new recovery low but massive seasonal factors provided a bit of a tailwind. And while difficult conditions in Europe remain (Germany's fourth-quarter GDP was very disappointing), China looks to be accelerating off its bottom with a fourth-quarter GDP estimate (year-over-year growth of 7.8%) higher than third-quarter (7.3%) growth.

Earnings data so far has been mixed with great news out of General Electric (GE), mediocre data for banks and disappointing news out of tech bellwether Intel (INTC). It still looks like earnings growth in the fourth quarter will handily beat the zero growth rate of the third quarter.

Even Congress seemed to be more willing to cooperate on debt ceiling issues, giving the market another reason to cheer on Thursday and Friday. About the only thing to rain on last week's parade of economic news was more Dreamliner problems at Boeing (BA). Boeing isn't turning off production just yet, so I am not panicking. However, Boeing is at least a portion of the optimism on US manufacturing and export sectors, as it has been over the past year.

I am still exceptionally bullish on the US economy but I still don't think we are going to rocket up at a much higher rate, either. Low inflation, a rapidly improving housing market and now recovery in China are reasons for my short- and medium-term optimism.

Unfortunately, I have to post GDP forecasts by quarter, and the news here is still a little rough. After growing 3.1% in the third quarter, fourth-quarter growth could come in at about 1.5% with the prospects for the first quarter being about the same. The fourth-quarter "slowdown" is related to ups and downs in government defence spending, soybean shipments and auto industry seasonal shifts. Hurricane Sandy isn't helping matters, either. Core economic fundamentals remain the same with employment growth rates nearly identical in the third and fourth quarters. The first quarter is likely to see at least a small impact from the return of a higher payroll tax rate as well as delayed tax refunds. Despite these near-term stumbles, I am not in any way reducing my economic forecast for the entirety of 2013, as I published in my quarterly Economic Outlook.

Although most economists got at least some things right about the US economy over the past two years, the one nearly universal error was the expectation that the economy was fragile. The US economy has proven to be anything but fragile.

I believe this to be the single biggest error that economists have made over the last two years. During that time, the US has survived the fallout from a major debt crisis in Europe, a divisive election, temporarily going over the fiscal cliff, gasoline prices that have been on a yo-yo, a tsunami in Japan and Hurricane Sandy, which shut down New York and even the stock exchanges for a couple of days. These are not signs of a fragile economy.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Boeing Co176.30 USD0.75Rating
General Electric Co165.00 USD0.02Rating

About Author

Robert Johnson, CFA  is director of economic analysis with Morningstar.

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