Top 10 Market and Economic Variables to Watch…and 3 to Ignore – Part III
4. Government Spending
Government spending is approximately 18 percent of the Gross Domestic Product‡ (GDP) formula. Remember the potential fiscal cliff that was scheduled to become effective on December 31, 2012? If that combination of expiring tax cuts and across-the-board government spending cuts had been executed, the economy would have been pushed into a recession. Sequestration‡, a result of the fiscal cliff, only lasted a year. In January 2014, a new $1.1 trillion budget was signed and sequestration essentially evaporated.
Federal spending is on the rebound and state and local governments are, on a relative basis, in better financial shape than we have seen in many years. Governments are now spending money and we anticipate that they will make a positive contribution to GDP growth.
3. Housing Momentum
Housing is an important variable in the economy because housing starts‡ mean more jobs. For every housing start, we estimate that there are three direct jobs created (carpenters, roofers, etc.) and another three indirect jobs (carpet manufactures, appliance manufacturing, etc.). We think homebuilder surveys tend to lead to housing permits and starts. Right now, homebuilder surveys are robust and support our forecast of 1 million new home starts in 2014.
Rising mortgage rates and home prices, along with weaker household formation growth, may slow housing activity, but it will not turn negative.
Consumers and business owners gain confidence in the economy as uncertainty wanes. An increase in confidence is an encouraging signal that consumption and economic activity will be on the rise. The University of Michigan Survey of Consumer Confidence‡ and the National Federation of Independent Businesses Small Business Optimism Index‡ measure the consumer and business owner’s confidence levels. Both indices trended lower long before the Great Recession and the equity market peak in October of 2007. In addition, the indices turned to a positive trend early in 2009, long before the market bottom and the end of the recession.
Confidence data is at a five-year high due to the rising stock market, a strong labor market and all-time high household net worth. With consumers feeling good, we anticipate that consumption will continue.
Consumption drives GDP and consumption is 68 percent of the GDP formula. If consumption growth is robust and increasing, we think GDP will follow that path.
Personal consumption expenditures have been disappointingly flat. Although spending has increased, it’s nowhere near the level required to advance economic growth to more than 3 percent. Advance retail sales also show positive growth, but only supporting mediocre GDP growth.
Of all the noise out there, these are the top 10 market and economic variables to watch closely. But what isn’t often discussed are the three that should be ignored. We’ll bring you those soon!
When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.
DISCLOSURE AND IMPORTANT CONSIDERATIONS:
UMB Private Wealth Management is a division within UMB Bank, n.a. that manages active portfolios for employee benefit plans, endowments and foundations, fiduciary accounts and individuals. UMB Financial Services Inc * is a wholly owned subsidiary of UMB Bank, n.a. UMB Bank, n.a., is an affiliate within the UMB Financial Corporation. Banking and trust services offered through UMB Private Wealth Management, a division within UMB Bank, n.a.
This report is provided for informational purposes only and contains no investment advice or recommendations to buy or sell any specific securities. Statements in this report are based on the opinions of UMB Private Wealth Management and the information available at the time this report was published.
All opinions represent our judgments as of the date of this report and are subject to change at any time without notice. You should not use this report as a substitute for your own judgment, and you should consult professional advisors before making any tax, legal, financial planning or investment decisions. This report contains no investment recommendations and you should not interpret the statements in this report as investment, tax, legal, or financial planning advice. UMB Private Wealth Management obtained information used in this report from third-party sources it believes to be reliable, but this information is not necessarily comprehensive and UMB Private Wealth Management does not guarantee that it is accurate.
All investments involve risk, including the possible loss of principal. This information is not intended to be a forecast of future events and this is no guarantee of any future results. Neither UMB Private Wealth Management nor its affiliates, directors, officers, employees or agents accepts any liability for any loss or damage arising out of your use of all or any part of this report.
“UMB” – Reg. U.S. Pat. & Tm. Off. Copyright © 2012. UMB Financial Corporation. All Rights Reserved.
*Securities offered through UMB Financial Services, Inc. member FINRA, SIPC, or the Investment Banking Division of UMB Bank, n.a.
Insurance products offered through UMB Insurance, Inc. You may not have an account with all of these entities. Contact your UMB representative if you have any questions.
Securities and Insurance products are:
NOT FDIC INSURED * NO BANK GUARANTEE * NOT A DEPOSIT * NOT INSURED BY ANY GOVERNMENT AGENCY * MAY LOSE VALUE
K.C. Mathews joined UMB in 2002. As executive vice president and chief investment officer, Mr. Mathews is responsible for the development, execution and oversight of UMB’s investment strategy. He is chairman of the Trust Investment, Asset Allocation and Trust Policy Committees. Mr. Mathews has more than 20 years of diverse experience in the investment industry. Prior to joining UMB, he served as vice president and manager of the portfolio management group at Bank of Oklahoma for nine years. Mr. Mathews earned a bachelor’s degree from the University of Minnesota and a master’s degree in business administration from the University of Notre Dame. Mr. Mathews attended the ABA National Trust School at Northwestern University and is a Chartered Financial Analyst and member of the CFA Institute. He is past president of the Kansas City CFA Society and a past president of the Oklahoma Society of Financial Analysts.