Let Us Now Praise the American Economy
Conditions in the U.S. do not preclude sensible investing.
The Economist, a British news magazine, put a cowboy on the cover of its April 15 issue and sang the praises of America’s resilient economy. They wrote, “America remains the world’s richest, most productive and most innovative big economy. By an impressive number of measures, it is leaving its peers ever further in the dust.”
Indeed, while Britain and much of continental Europe are experiencing recession, U.S. GDP expanded 2.6% in the fourth quarter, with the Federal Reserve Bank of Atlanta forecasting 2.5% growth for the recently-completed first quarter. After a volatile period during the pandemic, we appear to be regaining our old form of consistent real GDP growth above 2%. Although some forecasters are contemplating a late-year recession, almost no one expects a deep or long-lasting one.
Solid economic performance has given the Federal Reserve leeway to fight inflation with higher interest rates. With overnight rates now up to 4.75% and at least one more rate hike expected, the challenge is for economic growth to hang tough while higher interest rates go to work constraining prices.
The battle against inflation is still in its early to middle innings, but results look fair so far. Headline consumer inflation was 0.1% for March, below consensus estimates. Core inflation was in line at 0.4% for the month, up 5.6% over 12 months. Housing appears to be cooling off and may become outright deflationary, the direct result of higher interest rates. Energy’s contribution was more deflationary than expected. Inflation seems likely to moderate further as interest rates impact the economy with a lag and as consumers spend down the remainder of their excess savings from the pandemic. Whether the Federal Reserve can get inflation back down in the vicinity of 2% remains an open question, however.
Producer prices increased just 2.7% year over year in March, stoking optimism that cheaper production costs will flow through to consumer prices and reduce inflation even more. Volatile energy commodities affect producer prices more directly than they affect consumer prices, so energy’s surprisingly powerful downward force was likely exaggerated in producer prices. Energy costs have turned higher recently and seem likely to exert an upward force in future statistics.
March’s unemployment rate remained steady at 3.5%. Real wages increased 0.1% per hour but declined 0.1% accounting for a shorter average workweek. Labor force participation improved to 62.6%. This is welcome news after participation stagnated throughout 2022 at an average of about 62.2%. For most of the decade preceding the pandemic, participation fluctuated between 62.5% and 63.5%. By definition, increased participation brings more marginal workers into the measured economy. This is consistent with the trend toward shorter average workweeks, and it is one factor suppressing average earnings by diluting the average quality of jobs in the dataset. Rising economic participation is not inherently disinflationary, although its effect on average wages may appear so.
America’s economy may be top of the heap, but our exceptionalism only goes so far. Investors should focus on buying and hold the best individual companies they can find for their portfolios, such as the three businesses profiled in the May 2023 issue of the Investor Advisory Service. Our analysts profiled three midsized companies in this issue: an energy services company, a transportation services business, and an Internet advertising firm. All three have the potential to thrive in the next five years, delivering above-average returns for their shareholders.
The commentary has been excerpted from the issue of Investor Advisory Service published in late April. To receive commentary like this in a more timely matter and receive actionable stock ideas each and every month, subscribe today. The Investor Advisory Service stock newsletter was named to the Hulbert Investment Newsletter Honor Roll for the 13th consecutive year for outperforming every up and down market cycle since 2002.
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