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All Growth Is Good Growth

Payroll data for March has just been released, and with it came concerns about whether the recovery has seen its best months or that they may even be behind us.  We don’t see it that way at all.  What we see is a continuation of the slow, but relatively steady, growth in the economy and the equity markets.

Last Friday’s employment data, distilled from a survey of businesses, showed the US only created 98,000 jobs in March.  This was shy of the consensus expectation which called for job growth of 175,000. The lower number has caused some to question whether the recovery has lost steam, or even peaked.

We don’t see that as a problem.  Employment data is volatile, and monthly jobs numbers are just estimates.  In fact, there were a couple of other estimates of jobs growth which were published for March.  The survey of households showed 472,000 new jobs in March, and an ADP estimate put the growth at 263,000.

Which is right?  Nobody really knows, but there are a couple of important points to consider.

First, after adjusting for statistical margins of error in these reports, there isn’t much difference between the 98,000 government survey and the 263,000 ADP estimate.  So, we may very well be right at the “consensus” expectation of 175,000.  Furthermore, the household survey may actually be the reality, in which case the consensus was beaten handily.

Second, the key item is that private jobs have grown for 85 consecutive months, and our economy is on the cusp of completing eight consecutive years of growth.  For perspective, consider that the average post-World War II recovery had 61 months of consecutive growth.

But does that comparison just add evidence to suggest the recovery has peaked and that a recession or pullback is upon us?  Can the US economy sustain eight years of growth when the average is 5?

All good questions, but the answer is heavily dependent on the nature of the recoveries.  Our current recovery is unique in two significant ways.

First, it has been much slower each year than the post-WWII average.  Simply put, we have further to go until we reach some parity with other recoveries.

More significant, though, is the nature of the changes which are taking place in the economy simultaneous with the recovery.  For the past eight years, the US economy has grown on a wave of new technologies which helped the economy overcome burdensome economic policies and political uncertainties in Washington.  In many ways, it is fair to say the economy was recovering in spite of policy decisions, not because of them.

Technologies such as fracking, 3-D printing, composite materials, human genome mapping, development of the cloud, smartphones, and tablets have all had a tremendous positive impact on our economy, and there are many more.

To provide perspective on how important these developments are, a noted European CEO said that fracking, in particular, was a “game changer” for the US.  The promise of abundant and cheaper energy gives us a huge advantage and has prompted many foreign companies to actually open facilities in the US.

The truth is jobs are growing, incomes are increasing, and profits are rising.  As a result, the stock market is still undervalued.  US stock prices should continue to rise given current levels of profits and even with projected moderate increases in US interest rates.  Furthermore, profits are expected to grow more.  We still place the broad equity market as being about 15% undervalued.

Turning to DC for a moment, it is true that leadership has changed, but as of now, there haven’t been any major policy changes.  There has been a change of tenor and certainly a change in focus on taxation and regulation.  The markets clearly see that the new administration wants to relieve some of the economic uncertainty, which has stifled growth, and to rationalize the US corporate tax code, which has impeded the necessary capital expenditures to support growth.

How quickly the administration and Congress can get to those is uncertain.  But whatever any of our personal opinions are on regulation and taxation, we should all recognize that businesses need certainty to operate and a rational corporate tax structure to compete globally.

Going forward, we do not foresee massive swings in the economy.  There won’t be any immediate boom or bust.  We’re counting on economic growth of anywhere between 2% and 4%, depending on what eventually comes out of Washington, but it should be growth nevertheless.  It is only the rate of growth that we are debating.