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business newsEconomic Growth Could Get Scary
By
James Kostohryz
Mar 31, 2010 8:50 am
A look at some macroeconomic predictions and their larger implications.
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The upshot is that surging growth could get scary.
Private Expenditures Will Surge Even Assuming Stable 10% Unemployment
In an article written on September 4, 2009 entitled Bears Are Overly Pessimistic About Employment, I made a specific prediction that by April or May of 2010, private expenditures would grow by a minimum of 4% and perhaps by as much as 7%, and fully laid out the rationale. The purpose of that article was to demonstrate that if the unemployment rate stabilized at 10%, overall private expenditure in the US economy would grow at a rate of no less than 4%. Indeed, in that article I predicted that the unemployment rate would stabilize by April or May of 2010.
I have reiterated my bullish predictions regarding private consumption on various occasions expounding upon it in articles such as Reflexivity and the Stall in the Economic Data and The Macro Economy and the Stock Market: Analysis and Review.
I’ll summarize the key contributing factors outlined in my September 4 article that could combine to result in up to a 7% growth rate of private expenditures between April-May 2010 and April-May 2011. I’ll also provide a brief update of where we are in relation to fulfilling the conditions required to achieve such a result and make modifications to the forecast accordingly. Please recall that this scenario assumes a stable unemployment rate of 10%.
1. Growth in the labor force provides a contribution of 1.0%.
As I outlined in The Macro Economy and the Stock Market: Analysis and Review, if it hadn’t been for extraordinarily adverse weather conditions, non-farm payrolls in February would probably have increased by about 150k-200k. This result combined with the March report to be released on Friday should confirm that unemployment has stabilized and that the labor force should grow by at least 1.0% for the next 12 months -- or growth of roughly 100k jobs per month. The concomitant increase in income implies a contribution of roughly 1.0% to the growth of total private expenditures. Obviously, if non-farm payrolls grow by more than 100k per month, private consumption will grow by even more.
2. Average hourly earnings growth provides a contribution of 2.6%.
Depending on the data one looks at, average hourly earnings are increasing at a rate of between 1.9% to 2.5%. Therefore, I’ll adjust my assumption for contribution from hourly earnings to 2.3%. However, hours worked are rising and seem set to rise in the next 12 months. Therefore, a forecast of total nominal wage growth of 3% for the next 12 months seems conservative.
3. Corporate earnings and cash flow growth contribute 1.4%.
Earnings and cash flow growth are currently surging at a rate that suggest a net contribution to private expenditures of at least 2.0%.
No positions in stocks mentioned.
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