National Economic & Financial Market Update
2013 National Economic & Financial Market Update
I had the distinct pleasure of attending the Downtown Denver Partnership’s forum which featured Jim Paulsen’s 2013 Economic and Financial Market Outlook. Jim Paulsen has been named a Top Economic Forecaster by BusinessWeek and has twice been named Interest Rate Forecaster Of The Year by BondWeek. He is a regular contributor on CNBC and Bloomberg and is currently the Chief Investment Strategist at Wells Capitol Management.
If you have never seen Jim Paulsen speak, he is very dynamic and supports all his predictions with straightforward market data condensed down to show trends over the last 50 years.
The meat of his outlook centered around a concept he coined as “The Gear Year”.
The Gear Year is the year following a recession where growth returns to the economy. Prior to the 1980’s when an economy moved out of recession, confidence returned quickly followed by immediate job creation. That trend has slowed considerably since the mid 1980’s. What we see today - as our economy moves out of recession it takes 4 years for confidence to result in job creation. The 4th year is “The Gear Year”. Jim predicts that 2013 is the US economic Gear Year. Every economic recovery since the ‘80s has shown this trend and has resulted in a slow starting and long lasting recovery. Jim’s predictions are for a 10 year recovery period with a growth rate around 3%, hinged upon inflation.
Delayed and sustainable economic recovery predictions were backed up by following 10 proof points.
- Work aged population growth slowed by 50% in 1985. As the working population contracted so did the economic engine. A less powerful economic engine results in slower performance.
- Consumer confidence always lags with unemployment. Prior to the ‘80s unemployment dropped immediately once an economic recovery began. As confidence responded to job creation everyone could feel the recovery. Today unemployment doesn’t react the same to economic recovery. This produces a period of limbo where the news of recovery is everywhere but nothing feels like it changes. NOTE: Jim emphasized proof that we are in a gearing year based on the labor force numbers spiking which indicates that job creation has returned.
- Individual household net worth has returned to the same level as before the economic correction.
- The debt burden is now near a record low. The debt burden is derived from the US Household Financial Obligation Ratio and represents a ratio of debt to disposable personal income.
- Housing starts are booming. December 2012 housing starts and building permits came in at their highest levels since 2008.
- US home prices are trending up.
- Bank lending has improved dramatically resulting in returned credit creation.
- State jobs are returning. State and local municipalities have done well at reducing expenses and this will result in continued revenue creation leading to more jobs.
- Net exports continue to improve. China has allowed its currency valuation to change from a fixed peg to a managed float. This will result in reduced competitive advantage for China and lead to more export demand for the US.
- The US economy is becoming less sensitive to crisis. Looking at the CBOE VIX Volatility index it shows a correlation of crisis announcement and economic growth. When the VIX spikes the economy freezes. Looking at the VIX historically we see economic reaction becoming less severe.
Jim summed up this portion of the forum with the prediction that this recovery is going to be dramatically different from any previous recovery and will be much more sustainable and less sensitive.
Other predictions from Jim include:
- Talk of the stock market will be “A New All-Time High”. Trends of the market since World War II show periods of earnings (accompanied with flat growth) followed by profit taking (with flat earnings) and third, earnings and growth together. We are entering into a period of profit taking in which the stock market will jump.
- Government grid lock over the deficit is not a bad thing. Historical evidence shows that if laissez-fair or the invisible hand allows the market to operate free of intervention it will correct itself. Jim mentioned the Clinton administration which inherited a deficit that was 4.7% of the national GDP. Clinton ended his administration with a surplus of 2.4% of GDP. This correction was not a result of Clinton’s policies rather a lack of policy allowing the market to operation free of excessive intervention. Jim’s prediction is that deficit talk will disappear and the next crisis will be focused on the FED and the excess liquidity in the market.