Are we all doomed?
It’s easy to get worried about the economy. Alarmist news media tend to focus on the most negative trends. “If it bleeds, it leads” still sells papers—or page-views. And, to be fair, there’s a lot to worry about. Plunging oil prices may be just due to OPEC pumping more than expected—or they might indicate a lack of demand. Falling commodities could be due to China’s shift from a manufacturing to a service economy, or they could be part of something more. And the uptick in terrorism threatens to derail consumer spending. After all, didn’t that happen after the 9/11 attacks?
But reports of the economy’s imminent death have been greatly exaggerated. It’s natural to focus on what’s going wrong. We have to be aware of problems in order to fix them. There’s little upside in sitting around humming “Everything is Awesome.” And it is true that China is making a big transition from a manufacturing-based, export-led economy to a services-based, consumer economy. This is a natural and necessary adjustment. China now has a $10 trillion economy—14% of the world. They can’t keep growing just by exporting. There isn’t enough demand everywhere else. Transitions can create economic dislocations, though.
Source: San Francisco Fed
And here in the US, lower energy prices are necessitating a transition. Energy companies are cutting back on exploration and production. That’s creating some unemployment in the oil-patch, and consumer demand hasn’t adjusted to lower gas prices, yet. That’s—and a higher dollar—are what’s behind the latest decline in industrial production over here.
But there are a lot of factors that support the continued growth of the US economy. Housing starts—a traditional leading indicator—have doubled from the depressed levels they were at during the recession, but they’re still only 2/3rds of their average rate. Household debt service is the lowest it’s been in the last 35 years—a result of repeated refinancings at ultra-low rates.
Source: Calculated Risk Blog
And there are demographic tail-winds that are about to kick in, supporting domestic growth. The children of the baby-boomers—sometimes called the “baby boom echo”—have begun to enter their prime earnings-growth years. Adults aged 20-to-24 are now the largest population cohort in the US. This is the age when people start families, earn more, and buy homes and cars.
So don’t get depressed when you hear pols complain that the administration is doing everything wrong or if your favorite news site proclaims, “The End May Be Near.” That’s their job. I’m not suggesting that everything’s coming up roses, or that the market can only go up. But—on balance—I expect that the economy will continue to do better.
Douglas R. Tengdin, CFA
Chief Investment Officer