FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
January 10, 2017
1. US Consumer Spending Hit Nine-Year High in December
2. US Economic Confidence Matches Record High in December
Odey's Brook Absolute Return Fund was up 10.25% for the third quarter, smashing the MSCI World's total return of 2.47% in sterling. In his third-quarter letter to investors, which was reviewed by ValueWalk, James Hanbury said the quarter's macro environment was not ideal for Brook Asset Management. Despite that, they saw positive contributions and alpha Read More
3. Americans’ Investor Confidence Ends 2016 at Nine-Year High
4. Gallup’s US Job Creation Index Ends 2016 on High Note
5. US Conservatives Outnumber Liberals by Narrowing Margin
When the Commerce Department reported on December 22 that 3Q Gross Domestic Product increased at an annual rate of 3.5%, many of us in the forecasting business wondered if that figure might be too optimistic. We also wondered whether the economy could sustain a 3+% growth rate in the 4Q.
While we won’t get our first official look at 4Q GDP until January 27 when the government will release its “advance” estimate, there are several signs and stats which suggest the economy did in fact end 2016 on a strong note, certainly in November and December. We’ll look at some of that data as we go along today.
As I wrote in my Blog last Thursday, the Consumer Confidence Index rose to the highest level in over a decade in December at 113.7 versus a revised 109.4 in November. Most analysts believe the surge in confidence is due to the election of Donald Trump, but I believe part of it is also that millions of Americans will be happy to see President Obama leave office on January 20.
Along with the various economic stats we’ll look at below, there is a new survey from Gallup which shows that the percentage of Americans who identify as conservatives remains well above the percentage who identify as liberals. However, Gallup notes that liberals have been gaining on conservatives since 1996. Whatever your political leaning, you’ll find this interesting.
So let’s get started.
US Consumer Spending Hit Nine-Year High in December
Americans’ annual end-of-the-year holiday shopping spree boosted Gallup’s daily measure of consumer spending to the highest average for December since Gallup began tracking spending in 2008. The self-reported daily average spending of $105 is a $7 increase from $98 in November and a $6 hike from $99 last December.
The $105 average for December is also the highest for any month since May 2008 ($114), when spending was boosted by government-issued rebate checks designed to stimulate the economy.
The December average is based on more than 13,500 interviews conducted as part of Gallup Daily Tracking throughout December. Gallup asked Americans each night to report how much they spent the previous day, excluding normal household bills and major purchases such as a home or car. The measure gives a good indication of discretionary spending.
December marks the third consecutive month and the fifth month this year (including March and April) that the daily spending average has matched or exceeded the highest average for that month in Gallup’s trend. The $92 overall average for all of 2016 is still slightly below 2008’s average of $96, but higher than any year since.
Affluent Americans’ purchases helped drive last month’s rise in spending. Households with annual incomes of $90,000 or more increased their daily spending from an average of $146 in November to $170 in December, while those earning less than $90,000 averaged $82 in both months.
The best news from this survey was the fact that annual spending among lower income households, those earning $90,000 or less, increased more on a percentage basis than those making $90,000 or above. Households making less than $90,000 increased spending by 30% from January to December, while households above $90,000 increased spending over the same period by 27%.
US Economic Confidence Matches Record High in December
Americans ended 2016 with higher confidence in the US economy than they have expressed at any other point since 2008. Gallup’s Economic Confidence Index averaged +9 in December, up eight points from November. In the final week of December the Index averaged +11, the highest since Gallup has been tracking this data.
The record-high confidence is largely the result of increased optimism among Republicans after November’s election. Before President-elect Donald Trump’s victory, the Index score was negative in nearly all weekly and monthly readings Gallup has recorded since 2008, as you can see in the chart below.
Gallup’s US Economic Confidence Index is the average of two components: how Americans rate current economic conditions; and whether they feel the economy is improving or getting worse.
In December, 30% of Americans rated the economy as “excellent” or “good,” while 22% said it was “poor,” resulting in a current conditions score of +8. This was up from November’s +5 current conditions score and marks the highest reading for this component since 2008.
Americans’ Investor Confidence Ends 2016 at Nine-Year High
After reaching a nine-year high in the 3Q, the Wells Fargo/Gallup Investor Optimism Index rose further in the 4Q to its highest point since January 2007. The Index now stands at +96, up from +79 in the 2Q and from +40 in the 1Q when stock market volatility rattled investor confidence.
Reflecting the results of the 2016 presidential election, investor confidence zoomed 155 points in the post-election poll among investors who identify as Republican, from an Index score of 0 in the 3Q to +155 in the 4Q. Conversely, Democrats’ confidence fell by nearly as much, from +174 to only +25.
Of the seven elements that form the Optimism Index, investors were most confident in the 4Q about maintaining or increasing their income over the next 12 months — 69% were optimistic about this while 15% were pessimistic, for a +54 net optimism score.
Investors were nearly as hopeful about reaching their five-year investment goals, with 68% optimistic. Slightly fewer were optimistic about achieving their 12-month investment targets (58%) and in their 12-month outlook for US economic growth (57%) and stock market performance (54%).
The 4Q reading is based on telephone interviews conducted in late November with a nationally representative sample of 1,012 US investors who reported having $10,000 or more in stocks, bonds, mutual funds or a self-directed IRA or 401(k).
Gallup’s US Job Creation Index Ends 2016 on High Note
Hiring activity in US workplaces appeared to be strong in December, as Gallup’s US Job Creation Index remained at +33, matching the measure’s high since Gallup began tracking it in January 2008. The latest reading is up from +30 a year ago.
After bottoming out in 2009 amid the global financial crisis, US job creation has steadily improved — surpassing its pre-recession high of +26 in 2014. The Index plateaued in 2015 after years of steady gains, but managed to tick higher to its peak of +33 in May 2016. The Index has registered this same high score in nearly every month since.
Gallup’s Job Creation Index is based on employed US adults’ perceptions of their companies’ hiring and firing activity. Gallup asks a random sample of employed adults each day whether their employer is hiring new people and expanding the size of its workforce, not changing the size of its workforce, or letting people go and reducing the size of its workforce.
The resulting Index — computed by subtracting the percentage of employers letting workers go (10% in December 2016) from the percentage hiring (43%) — is a nearly real-time indicator of the nation’s employment picture across all industry and business sectors.
All four regions of the country — the West (+34), South (+33), Midwest (+33) and East (+31) — ended the year with slightly stronger hiring rates than they had at the start of 2016. This is very encouraging.
US Conservatives Outnumber Liberals by Narrowing Margin
Many more Americans have considered themselves politically conservative than liberal since the early 1990s. That remained the case in 2016, when an average of 36% of US adults throughout the year identified themselves as “conservative” and 25% as “liberal.” Yet that 11-percentage-point margin is half of what it was at its peak in 1996 and is down from 14 points only two years ago.
Since Gallup began routinely measuring Americans’ political ideology in 1992, conservative identification has varied between 36% and 40%. At the same time, there has been a clear increase in the percentage identifying as politically liberal, from 17% to 25%. This has been accompanied by a corresponding decrease in the percentage identifying as “moderate,” from 43% to 34%.
Moderates were consistently the most prevalent group from 1992 to 2002, before first yielding that designation to conservatives in 2003. Within the long-term stability of conservatism, the percentage of Americans self-identifying as conservative jumped to 40% several times between 2003 and 2011, but it has since returned to 36%.
Most of the long-term change in Americans’ political views occurred after 2000 and can be explained by one overarching factor — an increasing likelihood of Democrats (including Independents who lean Democratic) to self-identify as liberal. Democratic liberal identification has increased by about one percentage point each year, from 30% in 2001 to 44% in 2016. As a result, liberalism now ranks as the top ideological group among Democrats.
Meanwhile, there has been an eight-point decline since 2001 in the percentage of Democrats identifying as conservative and a six-point decline in the percentage of Democrats who are moderate. More Democrats are moving to the left year after year.
The bottom line, as evidenced from the chart above, is that the percentage of Americans who identify as conservative has been dropping since 2009, while the percentage of liberals has been increasing over the same period. While conservatives still hold a comfortable lead, the trend is not good.
Conclusions: Are Expectations Too High, Too Early?
Clearly there was significant improvement in the US economy in the last half of 2016, as the statistics illustrated above show. Much of the improvement in the spending/confidence indexes is a result of the election of Donald Trump as our 45th president. I also believe that confidence is soaring because millions of Americans are cheering the fact that President Obama will be out of office on January 20.
My concern is that many Americans don’t realize how difficult it will be for Mr. Trump to implement many of his (controversial to many) economic policies. Some of his policies that would reverse certain actions taken by President Obama can be enacted by Executive Orders and the like, but most will require congressional approval.
Despite Republican majorities in the House and the Senate, that does not give Trump a green light, especially on key priorities such as across-the-board tax cuts for individuals and corporations, over a trillion dollars in infrastructure spending and rolling back many government regulations.
Most of these major priorities will take longer to implement, if at all, than millions of Americans expect. Take the tax cuts for example: even if Trump gets all the tax cuts he wants from Congress in the next several months, those reductions likely won’t go into effect until 2018.
As a result, I fear that disappointment could set in fairly quickly in the new administration. Since consumer spending accounts for apprx. 70% of the economy, the impact of such disappointment could be very serious.
Some fear it could throw us back into recession by the end of this year or early in 2018. With bullish consensus on stocks above 50% (as noted earlier), there is the potential for a major downward correction in US equities this year, which most investors are not prepared for. And these are just two of the risks we face in 2017.
In my view, risks are higher this year than at any time since late 2007/2008 when the Great Recession played out. As a result, we have revised and updated our Special Report: Seven Risk Factors That Could Drive the Markets Lower.
If you think about it, a LOT has changed in the last several months, not the least of which is the election of Donald Trump and all the uncertainty he brings. The Fed raised interest rates in December and warned of three more rate hikes this year.
Meanwhile, China’s economy remains sluggish and its debt has ballooned to 200% of GDP. At the same time, Chinese corporations are loading up on debt. Then there’s the question of what Mr. Trump may do about China. It’s a ticking time bomb.
These are just a few of the risks we discuss in our updated Special Report. Click on either of the links above to get your FREE copy of this timely information, complete with some advice on what to do to help protect yourself from these risks.
Wishing you profits in an increasingly risky world,
Gary D. Halbert
Victor Davis Hanson: Obama’s Legacy Of Deceit (excellent read)