By Alex Chaloff, Senior Portfolio Manager
Bernstein Global Wealth Management
With recent stock market volatility and the perpetual doomsday scenario being blasted all over the media, it is no wonder that worries have persisted about a double-dip or new recession. The US economy appears to lumber on at an uneven pace, and every new bit of data is scrutinized for clues about current and future growth trends. However, our analysis of the current environment, and especially of what has actually happened in the recent past, gives us confidence in the US economy’s resilience.
The recently released advance estimate for second-quarter GDP also included revised data for the past few years, as the Bureau of Economic Analysis incorporated more complete information on sales, investment, trade, income, and profits. The revised data provide a more accurate picture of recent macroeconomic trends and the big issues that economists and policy makers are grappling with today.
Recent revisions don’t fundamentally change the broader picture of the economy’s moderate growth: In fact, over the past three years, average quarterly growth was revised down slightly, from 2.5 percent to 2.4 percent. But the revisions do show a more resilient economy than is widely perceived—especially in the private sector.
Usually, concerns over a double-dip or new recession surface in the summer and last through the end of the third quarter. Yet, each time, the US economy overcame concerns and grew at a relatively fast pace in the fourth quarter, thanks to strength in the private sector. Indeed, the fourth quarter in each of the past three years saw GDP growth average 3.5 percent—more than 1 percent above the quarterly average. In the private sector, fourth-quarter growth over the past three years averaged a stunning 4.8 percent.
Of course, overall growth matters most to the economy, but the private sector is the chief beneficiary of the Fed’s accommodative monetary policy and the ultimate driver of the broader recovery. We’re encouraged that private sector growth was revised up from 2.8 percent to 3.4 percent over the past two years. And the private sector has posted relatively strong growth after each recession scare, which tells us that the economy is more resilient than is widely perceived. These trends indicate that the private sector has the potential to drive faster economic growth once there is more clarity on fiscal policy.
Investment spending accounted for most of the positive revisions to private sector growth. Real business purchases of equipment and software were revised up from about 9 percent to 10 percent annualized growth over the past two years. Over the past year, the average quarterly growth in nonresidential structures doubled from 10 percent to 20 percent.
As we see it, the slightly faster growth and better balance in investment spending indicate that US companies have the appetite to invest but are holding back because of confusion about fiscal policy. We believe that if Congress provides some clarity on corporate-tax reform, it will promote a further increase in investment spending—an important catalyst for stronger overall GDP growth.
In contrast, government spending has been surprisingly weak. The revised GDP data show the scale, breadth, and duration of the fiscal drag, as total government spending has declined for eight consecutive quarters, the longest stretch of quarterly declines in the post–World War II periods. During that two-year span, total real government spending has fallen 5.5 percent, matching the largest drop since the early 1970s.
Surprisingly, the spending decline was evenly split between state, local, and federal government levels. Although we had anticipated a long period of weakness at the state and local levels because of budgetary cutbacks, we didn’t expect federal spending to suffer too. However, improving revenue growth at the state and local levels should lead to stability in this sector, and we expect the declines in federal spending to moderate in coming quarters as a result of recent budgetary actions.
The US economy has experienced several fits and starts since the recovery started three years ago. Several headwinds have intruded, including the largest fiscal drag in decades, volatility in financial markets, the European sovereign-debt crisis, and two sharp—but short—spikes in energy prices. Despite the cumulative force of all these dampening influences, the US economy has been able to produce moderate growth. GDP revisions and other macroeconomic data reinforce the view that corporate profitability and cash flows are robust, while households continue to improve their balance sheets. In our view, these ingredients for faster growth are in place, but for the economy to fully benefit there must be some resolution of the fiscal uncertainties.
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