Kristina Hooper, CFP®, CIMA® is head of investment and client strategies for Allianz Global Investors Distributors LLC. She has a B.A. from Wellesley College, a J.D. from Pace Law and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.
Economic growth has been hard to come by, so the latest GDP report offered some much-needed good news. But should investors worry about where that growth is coming from?
The stock market was in a holding pattern last week, nervously awaiting the outcome of the fiscal-cliff debate but buoyed by mildly positive economic data. Helping to prop up stocks in the face of worries over Washington was the third-quarter GDP estimate, which showed the economy grew 2.7%, well above the October advance estimate of 2.0%.
But looking past the headline number reveals less encouraging news. Despite improving consumer sentiment, consumer spending was down slightly to 1% in the third quarter from 1.1% in the second quarter. Business spending and inventories—with a heavy emphasis on inventories—rose 0.9%, up from 0.1% in the previous quarter. And a big portion of the GDP gain came from government spending, which increased to 0.7% from -0.1%.
Workin’ on the Highway
The government spending increase, a potential source of consternation for taxpayers, comes as concerns over how to tackle the deficit continue to grow. But federal spending may not be as ominous as it seems, depending on how it is allocated. The San Francisco Federal Reserve last week published a report that asserts money spent on improving public highways has boosted local economies—and not just in the short term. The paper “Highway Grants: Roads to Prosperity?” reveals that the short-term economic benefit of infrastructure projects is driven by increases in overall demand. And better roads have boosted capacity, which has had positive medium-term effects. In fact, each dollar of federal highway grants to a state raises that state’s annual economic output by at least two dollars, creating a “highway multiplier effect,” according to the San Francisco Fed. The bottom line: Infrastructure spending offers a big bang for the buck.
Such research would be helpful for politicians to review—rather than dialing up the rhetoric around the fiscal cliff—as they look to cut onerous debt with the least amount of damage to a still-fragile US economy. Anxiety is high. Some Americans may despair that Democrats and Republicans will not find some middle ground, especially given the chilly tone in Washington. But insider intelligence tells us that the current posturing is a necessary evil. Politicians tend to try to appease their respective parties before ultimately reaching an agreement.
Perhaps many business leaders already believe a compromise is in the offing. An improvement in business sentiment was clearly evident in last week’s Richmond Fed report on manufacturing activity, which highlighted rosier assessments of business prospects for the next six months. Specifically, a larger number of regional suppliers surveyed said they expect shipments, new orders, backlogs, vendor lead times and capital expenditures to grow faster than they expected a month ago.
With most US investors worried about the fiscal cliff, they may have missed some positive news from overseas. China’s PMI, a key economic gauge given concerns of a hard landing in China, rose to 50.6 in November, up from 50.2 in October. While the PMI fell short of estimates, it still hit a seven-month high. Meanwhile, new orders also moved higher, providing further evidence of stability in the region and economic progress globally.
Looking ahead, we can only hope that the fiscal cliff doesn’t prevent what has historically been a reliable December rally. According to the Stock Trader’s Almanac, the average return for the S&P 500 since 1950 has been 1.7% in December—the single best month of the year. Fair or unfair, Congress may decide whether the stock market is naughty or nice this holiday season.
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