Last week saw some continuation of the recent trend of modestly positive economic news, including a drop in jobless claims, a narrowing of the trade balance and an increase in wholesale inventories, all of which lent support to the idea that the economic recovery remains intact. Against this background, stocks posted modest gains, with the Dow Jones Industrial Average inching up 0.1% to end the week at 10,463, the S&P 500 Index advancing 0.5% to 1,109 and the Nasdaq Composite increasing 0.4% to 2,243.
Last week’s positive economic news helps reinforce our view that a slow economic growth environment is more likely to occur than is a double-dip recession. By our analysis, economic data has turned more positive in recent weeks when compared to the mid-June to mid-August time frame. There are, of course, some significant downside risks that could continue to weigh on economic growth, including ongoing consumer deleveraging, a still-troubled global financial system and a weak housing market. The labor market also remains depressed, but we have seen some signs of improvement. Temporary hiring levels have been somewhat higher recently, the number of hours worked has been improving and wages have increased. Taken together, these factors should translate into stronger jobs growth. On balance, we expect the economy to muddle through over the next several quarters, and in our estimation, US gross domestic product growth should come in at around 2% for the near future.
Now that we are past Labor Day, the mid-term elections season appears to be heating up. Last week, President Obama announced a series of economic initiatives that have some obvious political ramifications. The president proposed increased infrastructure spending, an extension of research and development tax credits and changes to the tax code that would make it easier for companies to purchase capital equipment. Whether any of these initiatives could become law in the current environment remains to be seen. There are a number of details that would still need to be worked out, not the least of which is how any new spending or tax reductions would be paid for. It is possible that the president would push for taxing foreign-sourced income on US multinational corporations, although Republicans are not likely to support such an initiative.
One area of political debate on which many are focused is the fate of the Bush tax cuts, which are set to expire at the end of this year. The Obama Administration may be supportive of a hybrid approach in which some tax cuts are extended, but not those that benefit upper income tax brackets. However, it appears unlikely that the Senate would go along with such a proposal. With the political backdrop becoming increasingly contentious, it is hard to imagine any tax-related legislation being passed until after the mid-term elections.
By making some new economic proposals, it appears the president is attempting to shift the debate from the elections being a referendum on the current party in power to one that is more about choices between competing ideas. Current polls suggest that the outlook is growing increasingly dire for the Democrats, but the elections are still almost two months away.
