Put Your Hands On The Desk Please!
In our last blog posted in October, we forecast a dramatic slowing of economic growth for US economy. We believed that ObamaCare, with its onslaught of higher premiums, deductibles, and taxes beginning on January 1, would adversely affect consumer expenditures during the critical holiday retail season.
Our concern about fourth and first quarter GDP was predicated on declining consumer confidence data we were seeing in the late summer and early fall ahead of the negative news reports on ObamaCare. We felt this decline in confidence would be further exacerbated by widespread consumer anxiety about the reports of significantly higher deductibles and premiums under the program. As most of you are aware, consumer expenditures represent approximately 66% of total domestic economic activity.
After our forecast of declining growth, the release of additional data on the economy seemed to support our view, as new home sales decreased to 354,000 from a high of 479,000 in July. Existing home sales also declined during through late summer and early fall. On October 28th, the Pending Home Sales Index was released having declined 5.6%. While there is no question that rising home mortgage rates over the corresponding period was a factor, declining consumer confidence can also have a profound impact on home sales.
Weak data for some of the Federal Reserve Manufacturing Districts showed production levels above final demand, validated when the US GDP data for the third quarter was released. The critical report of Personal Income and Outlays revealed domestic personal outlays above domestic personal income growth for both October and November. Release of the third quarter US GDP number showed economic growth accelerating to 4.5%, however, a significant amount of the acceleration was due to a build in inventories across broad sectors and not an increase in final demand (1.9%).
As of mid-November, we still felt confident our forecast of slowing economic growth was prescient.
From the US Government’s Consumer Confidence survey for November…
“The Conference Board’s consumer confidence index fell further in November, to 70.4 from October’s revised 72.4. Confidence took a big hit in October, falling from September’s 80.2 amid the government shutdown and budget standoff. The weakness continued to be centered in the expectations component where wide swings are common. Expectations fell to 69.3 from 72.2 in October and against 84.7 in September…
Consumers are showing less confidence in their income prospects and especially on the outlook for the jobs market. But the present situation component continues to hold up, at 72.0 in November for only a 6 tenth decline from October.”
As subsequent economic data has continued to come in, we began realize we were too pessimistic in our forecast. Based on the data, we now expect moderate GDP growth, in the range of 2.25 to 2.75%, is likely for the fourth quarter. The domestic energy, housing, auto, aerospace sectors are proving too resilient, and foreign demand for US goods is strengthening slightly as Europe begins to make marginal economic gains.
Subsequent modifications made to ObamaCare through executive order limited the impact on consumer behavior and economic activity. These changes coupled with unexpectedly low levels of participation thus far have further blunted changes in widespread consumer expenditures. The penalty for not signing up, not due and payable until April 2015, is much lower than the cost of most of the policies offered on the exchanges. The fact of the matter remains, if you are uninsured and have low income and no assets, you can still walk into a hospital and get free care.
We are in uncharted territory on this one. While we have not seen government intervention in the US economy on the scale of ObamaCare since the 1960’s, and we feel the higher healthcare plan premiums, deductibles, and the new taxes the program imposes will still play a dampening role on domestic economic growth throughout 2014 and 2015. Our healthcare plan went up only 13% for 2014, so we count ourselves among the lucky. The adverse impact on 2014 domestic economic growth will be further magnified if employers’ dump sixty to seventy million employees into the individual market as widely predicted in the third and fourth quarter of 2014. Dramatic increases in premiums for 2015 could also still be ahead as insurers raise premiums to compensate for low levels of “young invincibles” in the risk pools.
Bernanke also surprised us on the taper along with many others. Upon reflection, we should have seen that coming as this “historic” Federal Reserve Chairman saw the move as necessary to take the heat off his successor, Janet Yellen. The ten billion dollar a month “taper” was a non-event for the financial markets worldwide, and most importantly, the yield on the Ten Year US Bond remains below 3%.
While we are sufficiently chastened about our recent forecast, caution continues to be our watchword…
The domestic equity market has been on a long run with nary a pause. Thus far, corporate earnings reported for the fourth quarter and forward earnings guidance has been a “mixed bag”. If corporate earnings continue to come in light, the correction we have anticipated could occur in the near term.
Investors are strongly urged to continue to apply systematic and stock specific techniques to their portfolios to mitigate downside risk (index puts, and/or married puts, or collars, etc).
January 22, 2014
Paul A. Balboni