The world is hanging on the macroeconomists’ every word. Their analyses of US economic indicators had become almost totally irrelevant for investors – but now times have changed.
Economists were ignored last year because movements in the financial markets did not revolve around the classical economic pillars of consumption growth, employment, export and investments. Instead, they were driven by what we could call ‘technicalities’ – the Fed’s impressive bond-buying program.
It was these monthly purchases of USD 85 billion worth of government bonds and mortgages that determined market sentiment. In the same way as a conductor decides how his orchestra will play, the US central bank determined the rhythm and timing in the financial markets. However, conductor Ben Bernanke has now indicated that he will be taking a less prominent place on the podium.
It is worth examining the statistics again
This means that the members of the orchestra will have to get to grips with the music themselves once again. How should all the pieces be interpreted – allegro or fortissimo? What is the real state of the US economy? What are the indicators actually saying about the US economy? If the last meeting of the US central bank made anything clear it’s that the Fed itself is being influenced more than ever by the statistics reflecting the health of the US economy. Those numbers are of crucial importance to the question as to whether the central bank should gradually taper its stimulus policy.
Excessive focus on consumers
So the macroeconomists’ narrative is once again gaining kudos among investment teams. However, it is striking that the macro analysis is in many cases now geared to the wrong part of the economy. The emphasis is on Joe Sixpack, the consumer side of the US economy, leading to fierce debate on the unemployment numbers. The question is, are these unemployment statistics an accurate reflection of labor supply? Have Americans perhaps become so somber about their chances of a job that they are giving up – the so-called discouraged workers? Important and interesting discussion though this is, it doesn’t get to the heart of the matter.
Business holds the key to recovery
Where things really matter right now in the US economy is on the corporate side. After all, Mr. Average US Consumer reverted to his old spending patterns pretty soon after the credit crisis broke. And the predicted dramatic increase in savings levels has not materialized. This means that the United States has now reached the point where higher economic growth will have to come from companies. Without businesses, economic growth will not manage to rise above the somewhat tepid 2% mark. Are businesses going to earmark funds for investment in machinery and other capital goods and to expand their workforce? What’s the state of play?
The corporate starting point is healthy
If you look at the current level of corporate investment as a percentage of national income, then this is rising but remains historically low. At the same time, the profitability of US corporates is quite frankly high.
Earnings are averaging some 12% of that same national income. Crucially, profitability has not been this strong in the last forty years. US companies are doing very well, thank you.
With such a favorable starting point, the key is to focus on forward-looking indicators, including the monthly survey among purchasing managers of large corporates. They recently reported real growth in their order books. Combined with the fact that inventories are pretty low, that is good news.
But when will businesses dare to start taking risks again?
Every shred of new information on ‘corporate US’ potentially provides insight into the entrepreneurial ‘animal spirits’ that are so crucial to robust economic growth. And that’s why investors should once again be sitting on the edge of their chairs when the macroeconomy is being discussed.
