A Growth Spurt That Won't Quit
A strong run by the U.S. economy is helping to push equities back near record levels, while some economists, including new Fed Chairman Ben Bernanke, expect growth will begin to decelerate over the course of the year, while indicators both in the U.S. and abroad remain bullish for stocks.
The U.S. economy is expected to grow 3.4% this year, according to Blue Chip Economic Indicators, down fractionally from the 3.5% rise in 2005, in spite of a cooling down in the housing market and skyrocketing energy prices. The economy will keep up its good performance because key fundamentals for solid growth are still in place: Businesses are drawing on their hoards of cash to hire more workers, buy new equipment, and build new plants.
Equities stand to benefit from all this activity, especially the stocks of capital- goods makers. Production of business equipment is growing at a double-digit pace, and overall business investment should post another strong year.
Idle production capacity in the U.S. is quickly disappearing, and robust global economic growth is forecast to remain above 4.6% both this year and next by the International Monetary Fund. But all that growth also raises concerns.
Demand for metals and oils is not easing. Indeed, U.S. consumption of gasoline has exceeded year-ago levels despite the price surge. That will likely keep commodity prices elevated and inflation concerns front and center. Tighter labor markets are also producing faster wage growth. The combination has the potential to eat into corporate earnings, especially in a more competitive global economy.
So far, U.S. companies have overcome higher costs by getting more productivity out of their workers, but that will be hard to sustain if both hiring and wages follow current trends. Average hourly wages rose 3.8% from a year ago in April, the fastest pace since mid-2001. Companies that don't find a way to raise prices may see margins slip.
Recent inflation figures show that businesses may be gaining some pricing power -- one reason why the Fed isn't ruling out more rate hikes. Investors are concerned that the Fed could go too far with them and hurt economic prospects. But economists still believe the central bank will pause soon, if just temporarily, to assess the effects of prior hikes. If and when the Fed does take a break, it would be yet another reason to expect stocks to keep on climbing.
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The U.S. economy is expected to grow 3.4% this year, according to Blue Chip Economic Indicators, down fractionally from the 3.5% rise in 2005, in spite of a cooling down in the housing market and skyrocketing energy prices. The economy will keep up its good performance because key fundamentals for solid growth are still in place: Businesses are drawing on their hoards of cash to hire more workers, buy new equipment, and build new plants.
Equities stand to benefit from all this activity, especially the stocks of capital- goods makers. Production of business equipment is growing at a double-digit pace, and overall business investment should post another strong year.
Idle production capacity in the U.S. is quickly disappearing, and robust global economic growth is forecast to remain above 4.6% both this year and next by the International Monetary Fund. But all that growth also raises concerns.
Demand for metals and oils is not easing. Indeed, U.S. consumption of gasoline has exceeded year-ago levels despite the price surge. That will likely keep commodity prices elevated and inflation concerns front and center. Tighter labor markets are also producing faster wage growth. The combination has the potential to eat into corporate earnings, especially in a more competitive global economy.
So far, U.S. companies have overcome higher costs by getting more productivity out of their workers, but that will be hard to sustain if both hiring and wages follow current trends. Average hourly wages rose 3.8% from a year ago in April, the fastest pace since mid-2001. Companies that don't find a way to raise prices may see margins slip.
Recent inflation figures show that businesses may be gaining some pricing power -- one reason why the Fed isn't ruling out more rate hikes. Investors are concerned that the Fed could go too far with them and hurt economic prospects. But economists still believe the central bank will pause soon, if just temporarily, to assess the effects of prior hikes. If and when the Fed does take a break, it would be yet another reason to expect stocks to keep on climbing.
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posted by Bob Moser at
1:57 PM
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