The Stats: Better Times Ahead
We are heading for an economic boom like we haven’t seen in decades. All of the charts and statistics I study show we are moving in the right direction. And that is good news for investors.
Many of the negative statistics from the last several years seem to be approaching bottom and making a turn for the better. Numbers such as high unemployment and personal debt peaked and appear to be reversing.
Here are a few data points that lead me to believe that better times are ahead.
Unemployment is trending down. Although unemployment isn’t down to a reasonable level, as people regain jobs, their spending increases proportionately.
Corporations free up the cash hoard
Corporate balance sheets as a whole look solid, and many are flush with cash waiting for the government to make some firm commitments. Once they feel confident, companies can quickly put their cash to work buying new equipment and hiring employees.
Consumers as well as businesses are unsure of the economy and its long-term stability. People are forestalling big purchases for things like automobiles until they feel sure that they can afford to keep it. There is tremendous pent-up demand for these durable goods. Once they regain confidence, spending accelerate. You can see it in the auto industry and in housing.
Consumers are feeling better about the economy. That, along with low interest rates, should release some of the pent-up demand.
Personal debt peaked and it’s headed back to more sustainable levels. We have a long way to go, but consumers are paying off their debt, and restructuring previously unaffordable mortgages.
Source: Federal Reserve and Bureau of Economic Analysis
Tax revenues increase with growth
Aside from the recent expiration of a few tax breaks, tax revenues are certain to increase as unemployment falls. When people don’t work, they don’t pay as much in taxes. This gives state and federal governments less money when they need it most to support the unemployed. More government revenue is good for the economy as it reduces the federal deficit and avoids a future economic disaster.
Efficiency and competition stem medical cost increases
Regardless of what you think about Obamacare, many of its features are programmed to slow down healthcare inflation. Research says that it is working. The Henry J. Kaiser Foundation’s research group, Health Research & Educational Trust (HRET), found that premiums for employer-sponsored health coverage rose only 4% during 2012. While this rate is still well above overall inflation, this is a historically low growth rate.
College cost increases can slow
Aside from healthcare, the price of university tuition reliably takes a bigger bit out of our paychecks every year. I predict that tuition and fees may soon outpace the students and their parents’ ability to pay for a degree. Simple economics (supply and demand) indicate that this cannot continue. The National Association of Independent Colleges and Universities found that private colleges and universities increased tuition 3.9% this fall. This is the first time tuition rose by less than 4% since 1972.
Consolidation of retail
Remember all of the electronic stores we had 10 years ago? Now it seems we just have Best Buy and Apple stores, but these days we can purchase these items online. The competition and efficiency in the online marketplace keeps productivity up and prices low.
Alternative energy and oil inventories
Oil inventories are the highest in decades, and more alternative sources of energy are coming online. The price of energy should remain relatively stable for the foreseeable future.
The lack of adequate regulation of mortgages and on Wall Street in the previous decade led to people buying and losing homes they couldn’t afford and a financial crash from which we are still recovering. Regulation can be a burden to small business, destroy initiative and hold businesses back from reaching their true potential.
But much of the proposed regulation benefits the consumer and provides some protection against another near collapse. Slower and more cautious economic growth leads to more careful, solid and sustainable growth.
Entitlement issues can be resolved
This is one of the more difficult issues to get resolved, but I’m confident that the short-term problems with Medicare can be resolved in the next couple of years. The likely solution is to push the problems out another generation or two, but it might provide the time necessary for a more permanent solution.
Right now, there is a glut of housing left over from the boom, but housing starts are nowhere near the projected demand. A housing shortage is likely in the next 24 months.
Low interest rates
The Federal Reserve has no intention of increasing interest rates for the next year or two. This keeps borrowing costs low for consumers and businesses. To stimulate the economy, the Fed aims to keep interest rates low through mid-2015 by pumping $85 billion into the economy each month. This is why rates for a 30-year mortgage are close to record lows.
U.S. involvement in Afghanistan ends soon
Most of our troops leave Afghanistan in 2014, saving taxpayers billions of dollars. The cost is expected to be over $88 billion in 2013. But we also need to find employment for the soldiers when they return.
What are some signs that a boom is starting?
Look for unemployment dropping below 6%, real gross domestic product increasing to 4%, interest rates starting to rise, and housing starts breaking above an annualized rate of 1,200,000. Once we see that, we can finally say goodbye to the slow recovery from the financial crisis.
I’ve painted a pretty rosy picture. But short of an unforeseen natural disaster, or our involvement in another war, I’m confident that things can improve.
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Russell Francis, CFP, CPA, is the owner of Portland Fixed Income Specialists in Beaverton, Ore. His website is http://www.pdxfis.com.
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