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This was a good news economic week and explains why I’ve been positive on the economy. Here's what happened.

Is my economic and market positivity misplaced?

Peter Switzer
9 September 2016

By Peter Switzer

Despite some of my buddies on the economics and media caper expressing concerns about the 3.3% economic growth number we showed this week, it was a good week for the economy. Not as good for the stock market as the chart below shows, but we’re still up.

We started at 5372.8 on Monday. By Thursday afternoon, we were at 5385.8. The Dow is slightly negative overnight, but the overwhelming feeling is that the stock smarties are waiting for and playing the Fed, which looks likely to avoid raising interest rates in September. This gives little reason to sell off stocks madly or go wild splurging on shares as the US markets are near all-time highs.

Apart from the good economic data here this week, I loved this take on US stocks from Ninh Chung, head of investment Strategy and Portfolio Management at Silicon Valley Bank: "We think U.S. interest rates will move higher, so we're positioning our portfolios to take advantage of that.

"When you look at the fundamentals of the U.S. economy, especially the labor market, we're very close to full employment," he said. Even if the Fed raises rates 25 basis points, I think that won't slow down the economy.”

I hope he’s right as this would be the first big step towards a normal economic situation. I think the Fed will raise interest rates in December, after the US election. If Donald Trump wins, they could even change their mind. Why?

Well, there could be a sizeable market sell off, as Trump would be like a Brexit event. Rather than being a black swan, he could be an orange haired swan that will throw uncertainty in the market with all of his promises around US protectionism. Remember that the Great Depression and Japan’s entry into World War II wasn’t helped by the infamous Smoot-Hawley tariffs imposed by the Yanks.

My preferred world for stocks is nothing crazy from OPEC and central banks over September and October, which means the Fed doesn’t raise rates later this month. The likes of Barclays and Goldman Sachs think it will happen, but they’re in a minority. 

Next, I want to see Hillary Clinton win to simply avoid the market mayhem that Donald could create and then see the Fed raise interest rates. The stock market should sell off but, given what Ninh Chung said, I think it would be a buying opportunity into companies inside an economy on the up.

By the way, overnight, the European Central Bank didn’t do anything crazy but it did do something strange — nothing! This could be a good sign that it thinks the European economy is doing OK and doesn’t need anything, or it could mean Germany is stopping the ECB engaging in more monetary stimulation.

The German stock market only fell 77 points or 0.72% and the French market only lost 0.34%, so it doesn’t look like the ECB’s inaction was too worrying. That actually could be another normalization sign to be cheered.

OK that’s overseas. What about what’s happened to our economy this week? This is what happened:

  • Economy-wide, sales rose by 0.6% in the June quarter. Sales are up 3.5% over the year – the biggest annual gain in 7½ years. (Great news!)
  • Company operating profits rose by 6.9% in the June quarter to be broadly unchanged over the year. (Good solid news but not great, yet!)
  • Job advertisements rose by 1.8% in August to 4-year highs. Job ads are up 8% on a year ago. (That has to be great news!)
  • New car sales were up 4.6% in August to create a record for the year of 1,178,348 new sales. (More great news!)
  • The Australian economy has just completed 25 consecutive years of economic growth. The last recession ended in June 1991.
  • Growth in the June quarter was 0.5%, taking annual growth to 3.3%.
  • The RBA would add March’s growth and June’s together, which would be 1.5%, and then multiply it by two to annualize six months of growth and that would be 3%, which is a great number. The US is growing at less than 2% and closer to 1%!
  • Fourteen of the 19 industry sectors expanded in the June quarter, which means only five sectors are struggling.
  • Our trade deficit narrowed from $3.25 billion in June to $2.41 billion in July. It was the 28th consecutive monthly deficit. The rolling 12-month deficit improved from $36.898 billion to $34.974 billion, which is the smallest deficit in eight months.

This was a good news economic week and confirms why I’ve been positive on the economy. This will underpin company profits, which should help stock prices.

Growth over 3% leads to jobs and people with jobs spend better than those without them, so it has to be a plus for the economy and stocks.

Some whingers point to the role of government spending in this growth number but most of the increase was investment, so things such as road widening by the NSW Government, would be helping growth. Are the whingers complaining about the positivity of better roads?

Here’s the breakdown of the contributors to the good growth number: public investment (+0.7 percentage points), government consumption and inventories (both +0.3pp), household spending (+0.2pp), dwelling investment (+0.1pp) and private equipment investment (+0.1pp). The biggest drag on growth was from non-residential building (-0.8 percentage points) and this is linked to slowing down of mining and net exports (-0.2pp).

I remain positive on the Oz economy and loved this from CommSec’s Craig James: “In late August, dividends started flowing to shareholders from those companies that reported early in the recent earnings season. Conservatively, around $24 billion (or around 1.5% of GDP) will be paid out by companies over the next few months.”

That has to help the economy and another area where whingers have been bellyaching about has been the so-called income recession. There were some quarters where economic growth was good, but National Income was falling. Because it happened over two quarters or more, the pessimists whined about an income recession, despite the fact that a lot of it came from a shrinking mining sector that employs only a small chunk of the workforce.

Well, income is on the rise again.

Real gross national income rose by 0.6% in the June quarter to be up 2.5% on the year. In nominal terms, GDP lifted 1.3% in the quarter and rose by 3.4% over the year.

Interestingly, St George’s economics team pointed out that: “Weakness in business investment weighed on State final demand in most of the major States.” However, surveys of business investment plans for 2016-17 have been bumped up two surveys in a row, and the last nice rise really surprised many economists.

This not only shut up the whingers (if that’s possible), it will help tax collections and the Budget Deficit reduction.

One day, when the data tells me so, I’ll have to turn negative. Now is not the time. When I do turn, you’ll be the first to know!

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