by Gary Alexander

February 25, 2020

America has been in a “Goldilocks” economy for over a decade – neither too hot nor too cold, neither a boom nor a bust, and that’s the best place to be. Rapid (5%) growth may sound sexy, but it’s dangerously sexy, like riding around in a sports convertible with a drink in hand in bad weather. Moderate growth is far healthier, since it is sustainable over long periods of lime – like this record-long 11-year recovery.

Fed Chairman Jerome Powell has a great phrase for this Goldilocks economy. He says the U.S. economy is “in a good place.” He first used that phrase in reference to inflation in a September 26, 2018 press conference. He then used the phrase four times in a March 20, 2019 press conference. In his seven 2019 press conferences, he used the phrase 13 times. In his latest (January 29, 2020) presser, he said that “household debt is in a good place, a very good place,” and in his latest Congressional testimony, he said the U.S. economy is in a “very good place.” (This doesn’t sound like a man about to cut interest rates.)

Most of the world is decelerating right now, but it appears that U.S. growth may be re-accelerating from 2.1% last quarter. The latest GDPNow model out of the Atlanta Federal Reserve predicts 2.6% annualized growth for the first quarter, as of February 19, up from 2.4% the previous Friday. The GDPNow model weighs the actual components of the GDP formula and plugs them into a real-time predictive model.

United States Gross Domestic Growth Bar Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The rise from 2.4% to 2.6% in the GDPNow model last week came from new residential construction, the Producer Price Index, and first-quarter real gross private domestic investment growth, which “increased from 5.1 percent to 6.4 percent.” (The next GDPNow update comes on Thursday, February 27).

Here’s the “heat map” of their latest prediction vs. the dismal prediction of the Blue Chip consensus:

Atlanta FED Gross Domestic Product Estimate for 2020 Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Compared to the Eurozone, Japan, and Hong Kong, U.S. growth rates now look downright spectacular:

European and Japanese Growth Table

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Oddly enough, investors have shied away from participating in U.S. growth, instead preferring U.S. debt! In 2019, investors pulled a net $167.4 billion out of funds that focused on U.S. stocks and sold a net $32.4 billion from international stock funds. In contrast, they poured a net $449.8 billion into bond-focused mutual funds and ETFs. Although bonds did well in 2019, stocks did better, and should do better in 2020.

Presidential Candidates Fail to Address Deficits (or Spending)

Compared to our economy, our political leaders are not “in a good place,” but rather in a state of chaos.

It may be no coincidence, but the stock market’s latest peak came on Wednesday, February 19, right before the latest Democratic candidates’ debate, which was akin to a circular firing squad of personal attacks. Not one candidate mentioned the trillion-dollar annual budget deficits or a plan to reduce them.

The sole mention of the word “debt” was candidate Elizabeth Warren saying, “We could cancel student loan debt for 43 million Americans.” (That, of course, helps some Americans while ripping off others.) And the only mention of the word “deficit” in the two-hour debate was by Amy Klobuchar favoring citizenship for Dreamers, saying that would “bring down the deficit by $158 billion, and will bring peace for these Dreamers.” Other than that, the candidates championed plans that admittedly cost $35 to $50 trillion, when the annual total of all federal expenditures today is $4.8 trillion. So where are the cuts?

During the Obama years, the U.S. national debt roughly doubled, from about $10 trillion to $20 trillion. Deficits briefly fell in Obama’s second term but then began rising again before he left office and are now back above $1 trillion – in good times. Deficits may have their role in “pump-priming” during bad times, but deficits should decrease in good times, like now, unless legislators abandon all pretense of frugality.

United States Budget Deficit by Year Bar Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The problem is not the Trump tax cut. Revenues rose after the Trump tax cut, as they have after previous tax rate cuts under Coolidge (the 1920s), Johnson (1960s), Reagan (1980s), and Bush (2000s), but federal spending has grown faster than tax collections. Tax receipts rose 4% last fiscal year and are up 4.6% in the first three months of Fiscal Year 2020 (beginning October 1, 2019). Corporate income tax receipts are also up an amazing 23% in the first three months of FY20, flying in the face of the doomsday forecasters.

Alas, spending in the first three months of this fiscal year grew at a 6.7% rate. The three biggest spending categories are the biggest and hardest to control, Social Security, national defense, and Medicare. Interest on the national debt is not currently a big concern, with ultra-low interest rates, but if rates begin to rise toward historical norms, this would generate a huge cost increase in the federal ledger. In addition, history shows that the glittering new programs candidates promise cost more than expected, and don’t work as well as expected. President Trump recently fielded a plan to eliminate the deficit within 15 years. I’m not saying his plan is sound or that it will work, but I’d like to see similar plans emerge from the other Party.

From an investment perspective, America and the world have eagerly consumed U.S. debt instruments. American investors bought two-thirds of the extra government borrowing since 2016, about $1.6 trillion, and foreign investors bought the rest, $800 billion worth of U.S. Treasuries. I understand foreign buyers seeking real returns in a strong currency in their negative interest rate world, but American investors are settling for higher-taxed 2% yields when good growth stocks offer better yields and capital gain potential.

In my view, the “Good Faith and Credit” of the U.S. Treasury can’t last forever if Congress and the President don’t roll up their sleeves and start talking and acting on some principles of fiscal austerity. There may come a day when the Treasury tries to sell $2 trillion-a-year in debt auctions and there are not enough buyers, thereby forcing rates to rise. That would drive our deficits much higher, much faster.

These are tough questions journalists must pose to candidates. To paraphrase that great tax-cutter John F. Kennedy, “Ask not what your country can spend on you. Ask what it can stop spending on all of us.”

All content above represents the opinion of Gary Alexander of Navellier & Associates, Inc.

Please see important disclosures below.

About The Author

Gary Alexander
SENIOR EDITOR

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. All content of “Growth Mail” represents the opinion of Gary Alexander

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