Global Macro Strategy
March 3, 2015
Chris Haverland, CFA®, Global Asset Allocation Strategist
Analysis and outlook for the global economy
- Despite recent mixed economic data, our outlook remains positive for U.S. economic growth.
- As the U.S. economy improves, in our view, so should corporate earnings, which should support equity prices.
What it may mean for investors
- We recommend investors maintain an overweight to U.S. large-cap equities and focus on cyclical sectors.
Growing Trend or Temporary Setback for the U.S. Economy?
The U.S. economy has come a long way since the depths of the 2008-2009 recession. Despite growing below levels typically associated with past recoveries, U.S. gross domestic product (GDP) is at an all-time high, and we expect it to expand further during this cycle. Uneven growth has been a theme throughout the rebound. This unevenness was evident in 2014 with a weather-induced contraction in the first quarter, followed by two quarters of robust expansion. The fourth quarter saw a modest slowdown in growth to 2.2 percent, driven by unusual weakness in trade and government spending. The good news is: Real consumer and nonresidential spending climbed by more than 4.0 percent annualized for the quarter.
Real consumer spending (the largest contributor to U.S. GDP) has grown at a moderate 2.2 percent quarter-on-quarter annualized rate since 2010. However, the fourth-quarter number came in at 4.2 percent, and we believe this uptick is a positive sign for 2015. U.S. economic growth is likely to settle between the four-year average and the fourth-quarter reading given the improvement in the employment situation, real disposable income, and confidence.
Real residential spending also had a solid quarter, rising 3.4 percent. This is below the average since 2010, but we believe after some volatility in 2014, the housing market will stabilize and remain a positive contributor this year. Affordability continues to be an added benefit, while improving labor markets coupled with pent-up demand should provide momentum in 2015. Residential investment as a percentage of GDP has increased to 3.3 percent from a low below 2.5 percent in 2010. Unfortunately, 3.3 percent is still one of the lowest levels in 50 years and well below the long-term average of 4.5 percent. This tells us there is still upside in this sector, which should be supportive for domestic GDP growth in the coming years.
After rising more than 5.0 percent since 2010, real non-residential (capital) spending came in at a 4.8 percent in the fourth quarter (revised up from an initial reading of 1.9 percent). A pullback in energy-related projects is expected to weigh on this number. Excluding the energy sector, the outlook for business spending is encouraging as sentiment improves and companies look for productive ways to spend record amounts of profits and cash on their balance sheets.
Real government spending has been a drag on GDP growth since the financial crisis, and that was certainly the case in the fourth quarter of 2014. Fourteen of the past 20 quarters have shown government spending detracted from GDP growth. In fact, if you exclude public spending, real private GDP growth has averaged approximately 3.0 percent since 2010 compared to 2.2 percent when including government spending. We believe there will be little-to-no fiscal drag in 2015, allowing real GDP to grow closer to 3.0 percent.
Despite quarter-to-quarter swings, inventories and trade have had little impact on overall GDP growth since 2010. However, trade was a key detractor in the fourth quarter with imports rising much more than exports. Exports were likely held down due to a stronger U.S. dollar and weaker growth abroad. With the dollar showing signs of stability and brighter growth outlooks coming from many U.S. trading partners, we expect trade to have less of a negative influence on growth in 2015.
We are now 22 quarters into the latest economic expansion. To put this into perspective, since 1961, expansions have lasted on average 27 quarters. When you exclude high inflationary expansions the number jumps to 33 quarters. We would classify this expansion as "low inflationary," and, in our view, it has more room to run.
Chart 1: U.S. Real GDP Growth
Source: Cornerstone Macro, 3/2/15
We've seen mixed economic reports in the first two months of 2015 with weather once again playing a role. Even with somewhat weaker-than-expected U.S. economic data to start the year, first-quarter real GDP growth is still tracking between 1.5 and 2.5 percent annualized. We expect the pace of growth to pick up as the year progresses, especially with solid employment gains, lower inflation adding to real disposable income, consumer and business confidence trending higher, and government spending having a neutral impact. As the U.S. economy improves it should support corporate earnings growth, which is a positive for U.S. equities. We continue to recommend overweighting U.S. large-cap stocks and favor cyclical sectors, such as Consumer Discretionary, Information Technology and Industrials, given the current economic backdrop.
Chris Haverland is a global asset allocation strategist for Wells Fargo Investment Institute (WFII), an organization that provides global manager research and investment strategy advice to Wells Fargo’s Wealth, Brokerage, and Retirement (WBR) division. WBR is comprised of Wells Fargo Private Bank, Wells Fargo Advisors, Wells Fargo Institutional Retirement, and Abbot Downing businesses, accounting for more than $1.6 trillion* in assets under administration.
Mr. Haverland is responsible for thought leadership on the economy, financial markets, investment strategy, and asset allocation. He researches timely investment topics and produces market updates, special reports, white papers, podcasts, and webcasts that articulate strategies for clients that help them meet their long-term financial goals. Other responsibilities include developing capital market assumptions and strategic asset allocations, providing tactical advice, conducting asset class research, assisting in portfolio management, writing commentary for investment publications, and providing investment guidance for financial advisors and clients.
Prior to joining Wells Fargo, Mr. Haverland was a portfolio manager, corporate bond analyst and trader at Jefferson Pilot Financial (now part of Lincoln Financial) in Greensboro, North Carolina, where he managed $2.6 billion in fixed income assets. He has nearly 20 years of experience in financial services.
Mr. Haverland earned a Masters of Business Administration from Elon University and a Bachelor of Science in Business Administration from Appalachian State University. He is a CFA® charterholder and is a member of the CFA North Carolina Society. Mr. Haverland is located in Winston Salem, North Carolina.
*As of Sept. 30, 2014
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