Second, since the summer, the annualized growth in the U.S. money supply has surged! The annualized six-month growth rate in the M2 money supply has nearly tripled since June from about 5 percent to more than 15 percent. While some of this money supply surge is probably due to fallout from worries over the European crisis, it nonetheless has massively improved economic liquidity conditions, and similar to last year, should help improve the pace of economic growth in future quarters. During the 2010 economic soft patch, the annualized growth rate in the M2 money supply rose from about zero percent in June to about 6 percent by October probably helping lift the pace of economic growth by late 2010.
Third, despite a recent surge in the value of the U.S. dollar, the trade-weighted dollar index is still currently more than 15 percent below its highs in mid-2010 and about 8 percent lower than it was at the beginning of 2011. A weak dollar has typically been a good indicator of future improvements in U.S. net exports. After regularly subtracting from U.S. real GDP growth throughout 2010 and into early 2011, net exports have now âaddedâ to real GDP growth in each of the last two quarters. U.S. dollar weakness during the last 18 months implies net exports should regularly add to real GDP growth in the coming year.
Fourth, although not by a large amount, energy prices have fallen since late spring. Overall, the S&P GSCI Energy Commodity Price Index is off by about 15 percent since April. The national average nonleaded gasoline price is down by a similar amount. Is a lower âenergy biteâ already evident in producing stronger consumer spending trends than most had anticipated?
Fifth, U.S. corporate profits posted yet another solid quarter of growth in the third quarter probably rising at an annualized pace of about 20 percent! Total U.S. corporate profits are more than 20 percent âhigherâ than their peak during the last recovery cycle in late 2006. This record-setting profit recovery cycle has produced tremendous âdry powderâ in the business sector which could (with just a little improvement in business confidence which may be forthcoming as European fears calm and U.S. recession fears evaporate) be used to quicken business spending and improve job creation during 2012.
Finally, as evidenced by the recent recovery in U.S. auto sales, as the Japanese economy bounces back from its early-year tsunami, U.S. manufacturing supply chain problems are rapidly diminishing. This post-Japan disaster recovery is also illustrated by a bounce recently in most ISM manufacturing surveys across the country. A full year of economic growth without earthquakes and floods in Japan should allow even further U.S. manufacturing revival in the coming year.
The potential positive impact from âself-medicated economic stimulusâ is probably being greatly underappreciated. Indeed, rather than muddle along at only about 2 percent growth, we expect U.S. real GDP growth to surprisingly jump to between 3 to 3.5 percent during 2012.
What About Europe and the Emerging World?
Our expectation for U.S. growth in 2012 is not based on a big recovery in Europe. Rather, the euro zone may already be in a mild recession or at best will exhibit nearly flat lined performance next year. However, we do think the slowdown evident among emerging world economies during the last year is coming to an end. Economic authorities in most of these economies now recognize inflation risk is ebbing and will soon likely begin adopting more accommodative economic policies. By early next year, we anticipate a consensus developing of a âsoft landingâ in the emerging world which will improve confidence in the longevity of the global economic cycle. Weaker growth in the European region may be largely offset by somewhat stronger growth next year among most emerging economies.
Investing Implications? In the last month, the stock market has âresetâ values as expectations backed away from an imminent recession thesis. The upside price action in the stock market from decaying recession probabilities has mostly already been incorporated into the stock market with the S&P 500 now near 1300. However, an âeconomic accelerationâ catalyst is what may now carry the stock market to new recovery highs during 2012.
Exhibit 2 overlays the S&P 500 Stock Price Index with initial unemployment insurance claims. Since 2000, there has been an extremely close relationship between momentum on Main Street (as evidenced by declining jobless claims signaling an improving job market) and stock market momentum. As shown by this exhibit, during 2011 both the economic and stock market recoveries stalled (i.e., both the dotted and solid lines trended sideways).
If real GDP growth continues to remain sluggish in 2012 at about 2 percent, then both the level of unemployment claims and the stock market will likely remain range bound. However, if as we expect, the pace of real GDP growth surprisingly accelerates (and unemployment claims finally decline below 400 thousand towards 350 thousand) the stock market should again prove rewarding for âriskonâ investors.
Copyright © Wells Capital Management (Wells Fargo)
