This note was originally published at 8am on June 04, 2013 for Hedgeye subscribers.
“All growth depends upon activity. There is not development physically or intellectually without effort, and effort means work.”
Former United States President Calvin Coolidge knew a thing or two about growth. From a personal perspective, his life embodied steady growth of achievement. His first foray into politics began in the Massachusetts House of Representatives in 1907. He followed this up as Mayor of Northhampton, then became a member of the Massachusetts Senate, and after a couple of more stops became Governor of Massachusetts.
“Silent Cal”, as he was called due to his quiet demeanor, was then added to the Republican ticket as Vice President in 1920 and he and his running mate, Senator Harding of Ohio, went on to win in a landslide. On August 2nd, 1923, President Harding died while on a speaking tour and Coolidge became President. Coolidge then stood for election as President in 1924 and won his first official term as President.
From an economic perspective, largely based on a series of broad tax cuts, Coolidge oversaw a very economically prosperous time in U.S. economic history known as the “roaring 20s”. Interestingly, as well, as the top tax rates were cut from 58% in 1922 to 25% in 1929, the economy grew and the share of the tax burden of the wealthiest Americans, those making more than $100,000 per year, also grew from 35% to 63%.
In addition to the economic growth he oversaw, Coolidge also eventually outgrew his introverted personality. In one his most outspoken moments, he said of his eventual successor Herbert Hoover, "for six years that man has given me unsolicited advice—all of it bad.” Needless to say, the United States was not as economically fortunate under the stewardship of his successor President Hoover.
Back to the global macro grind . . .
Yesterday was a classic one for the ongoing debate over whether economic growth in the U.S. is accelerating or stagnating. The Purchasing Managers Index (PMI) reading from Institute for Supply Chain Management (ISM) came in at a contraction indicating 49.0. The internals of the report were negative across the board, as well, with new orders coming in at 48.8 and production coming in at 48.6. The employment component of the index was still in expansion mode, albeit only marginally at 50.1.
The key read through from this reading is that as it relates to growth in the industrial sector in the U.S., headwinds remain. On a relative basis, the United States is still faring better than the Eurozone where a 48.3 was reported in its latest PMI report, the latest in almost two straight years of factory output contraction in Europe. The Chinese economy is also struggling on the industrial front as the HSBC PMI came in at 49.2 most recently.
Another data point that came out yesterday that supported the slowing growth case was government spending on construction. Public construction spending dropped 1.2% in April to the lowest level since 2006 and down 5.7% from October. This decline is obviously due to sequestration that is being implemented at the federal level. In the short term, this may be an economic headwind, though the offset is that the deficit is declining much faster than expected. In its most recent update the non-partisan Congressional Budget Office (CBO) projected that the deficit for fiscal year 2013 will fall to $624 billion, or about 4% of GDP, and almost $200 billion less than the CBOs estimate from three months before.
Our view of economic growth in the U.S. continues to be underscored by the consumer side of the economy. On this front, the economic data released yesterday was positive as auto sales for May came in at an annualized rate of 15.3 million. This was the fourth straight month of sales over 15.0 million and continues to show strong growth over the 14.5 million in auto sales from last year. Certainly, auto sales are being driven by compelling financing programs, but as a proxy for consumer demand, they remain a positive indicator.
A key emerging American growth industry that will be a key tailwind for strong car production numbers is the U.S. energy industry. In the Chart of the Day, we highlight this in a chart of U.S. oil production going back twenty years. As the chart shows, largely thanks to technology advances, U.S. daily oil production is hitting 20-year highs. This of course follows decades of production declines starting in the 1970s.
The International Energy Administration recently published a report that projected the North American oil supplies will grow by 3.9 million barrels by 2018. This is almost 2/3rds of the non-OPEC production growth projected over that period. If accurate, this will also reduce American imports by almost 40% over that period. If the IEA is correct and this growth in production leads to a global “supply shock”, in coming years, the upside to global growth may be dramatic with declining oil prices.
Turning back to the shorter term and the U.S. stock market, another key positive we see relating to growth is expectations. Currently, consensus aggregate SP500 revenue growth for the next three quarters is 0.5%, 3.4% and 2.3% respectively. This is an expected revenue growth rate of just over 2.0% in the projected period and less than half the average reported year-over-year growth rate of north of 4% in the prior three quarters. For U.S. stock market bulls, these low expectations are very supportive. For U.S. stock market bears, these expectations may well be, as Shakespeare said, “the root of all heart ache.”
Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1351-1424, $100.27-103.29, $82.48-83.74, 99.98-103.24, 2.07-2.23%, 14.63-16.59, and 1630-1651, respectively.
Daryl G. Jones
Director of Research