Tue 4/3/12 4:30 PM – Economic Growth for Next 12 Months

How is the economy doing? In terms of simple growth the following chart may help.

You can see the big drop during 2008-09, the tepid recovery of less than 4% growth, half of what past recoveries from sharp recessions have been, the dip and the recent recovery again.

Recent data suggest that housing is improving, consumer spending and manufacturing are improving and the unemployment rate is coming down. That’s the current trend.

What is more interesting is what might lie ahead. On that score, we should note that consumer spending is growing much faster than wages. That means people are borrowing again to spend. I guess the recent lesson was not strong enough. You have to wonder how much more borrowing they can do. On the other hand, credit for small businesses has been improving and that is more fully a positive sign.

Profit growth for companies has probably peaked in terms of its rate of growth and one should not wonder about that – it was after all due primarily to delaying projects, reducing inventory, laying off workers and refinancing corporate debt at super low interest rates. Those trends have reversed in the caeses of jobs and projects. Interest rates have stopped falling. As profit growth slows down quite a bit so will spending on projects and workers. Analyst estimates of profits have been coming down and projections of economic growth are being reduced as well.

A huge injection of liquidity from the Fed and huge spending and borrowing the by the federal government has helped goose the recovery. That may end with a Republican taking of the Senate and/or the White House, the latter of which is less than a 50% probability right now.

The other big factor was that the rest of the world was recovering along with the US. But that is changing. China’s hot growth is slowing, especially its imports of materials for its infrastructure building binge. According to PIMCO, China cannot continue its recent pace and must slow its growth of credit. As China’s imports slow, so will economies that rely on exports to them, such as Australia and the rest of Asia, Brazil, Mexico, the US and Europe.

Europe is in recession and Japan’s demographics preclude anything other than stagnation. Their population is aging rapidly and immigration is as usual extremely light. Europe’s problems are not going away anytime soon. I expect them to be in a long recession.

It all adds up to a slow growth picture for the US, both in economic and profit growth. I think it will surprise people how much it slows down over the next twelve months. The 3% growth of the last quarter may be our high mark for 2012. That’s why I continue to hold some bonds and why a good bit of our stock exposure is in high dividend stocks. If the stock market is disappointing in the second half of 2012 – early 2013 we need to be fairly defensive.

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