NUMBERS SHOW AMERICA’S STILL GREAT
Cheap money and gasoline fuelling U.S. economy, writes
At last week’s Republican convention in Cleveland, speaker after speaker lined up to try to convince Americans of two things: that Hillary Clinton is a crook, and that the United States of America in general, and its economy in particular, has gone to hell in a handbasket.
I won’t touch the first allegation — we’ve all certainly heard enough about it — but the second merits some examination. Being down on America has been the flavour du jour for much of recent history. Observers from Niall Ferguson to Thomas Friedman and Fareed Zakaria have gone on and on about the decline of the America empire, whether in response to China’s economic growth or the credit crisis. Now we can add Donald Trump to the list of high-profile declinists.
Trump thinks pretty much every country in the world is doing better than the U.S. The Chinese, the Mexicans, and countless others are laughing behind Barack Obama’s back about what a sucker he is. Millions upon millions are living in poverty, he says; jobs are being shipped overseas; the “real” unemployment rate is maybe eight times higher than official figures.
On its face, the claim that America has lost its economic position and fallen on hard times is almost certainly not true. When we take a closer look, however — well, it is still almost certainly not true.
GDP growth in the U.S. will come in around 2.2 per cent in 2016, according to the International Monetary Fund. That’s higher than any other advanced economy, except for Spain, which the IMF nevertheless expects to lag the United States in 2017. Even if the IMF numbers end up wrong in absolute terms, they are unlikely to be relatively wrong. Simply put, the U.S. is growing faster than any of its peers.
As for unemployment, at 4.9 per cent, it’s well below the longterm average. In June, the U.S. economy created 287,000 jobs, and labour force participation went up, too. If, as many analysts believe, the United States is nearing full employment, we can reasonably expect wages to rise as job growth tails off.
Meanwhile, consumers — who comprise about two-thirds of the U.S. economy — are pretty positive, all things considered. Consumer sentiment, as measured by the University of Michigan index, remains strong. Consumer spending was up 0.4 per cent in May for the second straight month, and is on track for 4.3 per cent annualized growth in the second quarter, according to the Atlanta Federal Reserve. Retail sales in June were up 2.7 per cent year-over-year. Housing prices have increased by more than five per cent so far in 2016, as have housing sales.
Meanwhile, automotive sales last month were the strongest for any June in more than a decade. And what are Americans doing with all those cars? They are driving. According to the latest figures from the U.S. Department of Transportation, the 12-month moving average of miles driven stands at nearly 3.2 billion — the highest road use in American history.
And why wouldn’t Yanks be buying cars and driving them? Money and gasoline are cheap.
Yet despite all these positive signs, one sector that’s benefiting in the real world from this confluence of low borrowing costs, confident consumers and inexpensive petrol doesn’t seem to get much respect from the stock market.
I’m talking about North American automakers, and GM in particular. On July 21, the once-troubled company (NYSE: GM) reported record secondquarter profits of nearly US$2.9 billion, more than double its year-ago mark. Revenue was up 11 per cent. Domestic sales were down, but only because the company moved away from leasing company sales to focus on the consumer segment, where sales were up. GM’s adjusted profit margin in the region came in at 12.1 per cent — higher than its goal of 10 per cent.
You’d expect investors to rev up their interest in GM. Well, they did, but not much. The stock gained US$0.60 on July 21, up about two per cent, but it’s still down nearly three per cent on the year as the rest of the S&P 500 has gained.
Clearly, the market is worried that the good times can’t last. Auto sales might be peaking. Consumer sentiment might take a hit from Brexit. A recession might be around the corner.
Those are certainly risks, but they are at least counterbalanced by those two big drivers — cheap money and cheap gas. With the U.S. Federal Reserve seemingly stuck in limbo, and with record oil supplies continuing to suppress fuel prices, it’s hard to see either of those conditions going away any time soon.
That makes GM look like a potential value play, with a forward price-to-earnings ratio of about five per cent. Or maybe it’s a dividend play, since its current yield is 4.75 per cent. Or maybe it’s a growth play — and it’s certainly a cheaper one than, say, Tesla (Nasdaq: TSLA), which loses money and is up three per cent on the year.
It might be that the market has overbought the spirit of decline in the United States, and underestimated U.S. automakers’ resurgence. If so, an investor might find that preaching the end of American glory may get you elected, but it likely won’t get you rich.