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By HaleStewart November 26, 2014 9:07 am
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US Economy Appears To Have (Finally) Hit Escape Velocity

          It seems that every year or so, economists proclaim the US economy has reached “escape velocity” – a pace of self-sustaining growth no longer in need of monetary or fiscal stimulus.  And, just as quickly as these pronouncements are made, an outside event sufficiently slows growth to make that prediction moot.  The US economy has once again printed several quarters of solid annualized GDP growth which again begs the question: is the economy now at that magical point of expansion?  This time, the answer may finally be yes.

          Let’s start with the most important chart: annualized GDP growth for the last five years.  In four of the last five quarters, annualized growth has been over 3%.  And the first quarter’s contraction was due to a serious outside event – inclement weather that paralyzed half the nation for an extended period of time.  Once the weather cleared, the economy resumed is expansionary trajectory. 

          In addition, consumers continue to spend at a good but not great pace.  The three charts above show various measures of consumer spending.  The top chart is the YOY rate of change in personal consumption expenditures, which is derived from the BEAs GDP report.  While this pace of growth is slower than other expansions, it has been moving at a consistent clip since the end of the recession.  The same can be said of overall retail sales (middle chart).  And finally we see that auto sales (bottom chart) have been consistently increasing since the last recession’s end.  All three of these charts show a consumer sector that is moving solidly forward.

          Overall investment is also helping.  The above graph shows residential and non-residential investment calibrated to a base 100 for the last 5 years.  While residential investment (blue line) is obviously still seriously compromised as a result of the housing bubble, it is still expanding.  And business investment (red line) is also showing clear signs of improvement.

          The employment picture is also improving, as shown by the total number of establishment jobs in the graph above.  While there are still problems – especially in the large amount of long-term unemployed and under-employed – the above charts shows a continued pace of improvement.

          Finally, there is the overall business environment shown in the two charts above.  Industrial production (top chart) has been increasing consistently for the last five years.  And both ISM composite indexes (bottom chart) are showing clear signs of expansion.

          This is not to say that improvement isn’t possible.  The biggest problem facing the economy is still the employment situation where a more nuanced reading of the numbers shows some serious problems.  Washington is also (still) a potential train-wreck waiting to happen.  And it appears that we’ve simply swapped one debt problem for another by substituting education debt for mortgage debt at the macro level.  But, at least for now, the overall picture of the US economy is positive.

         Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer


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