We continue our 8-part SIC Speaker Series today with my good friend Lacy Hunt of Hoisington Investment Management. In their fourth-quarter 2017 review and outlook, Lacy and partner Van Hoisington take a definitely contrarian stance on the coming year.
Where most analysts – and the Federal Reserve itself – are expecting robust US economic growth, stable inflation, and modest interest rate increases in 2018, Lacy and Van foresee disappointing growth, lower inflation, and ultimately lower long-term interest rates.
Lacy and Van focus their argument on the US consumer. Although consumer spending expanded by 2.7% in the past year, in line with its average growth of 2.5% over the past eight years, personal income rose by only 1.9%. Thus, the authors note,
It was only the ability to borrow that supported the spending increase. In economic terms, borrowing is a form of dissaving. The saving rate for consumers dropped from 3.7% a year ago to 2.9% in November, a 10-year low.
The only period in which the US saving rate was lower than it is today was 1929–1931! And historically, a low saving rate portends a slower rate of economic growth. Personal income should slow even further this year as employment growth continues to tail off, and the Fed’s 125bp increase in the federal funds rate should put a dent in consumer borrowing, too.
When Lacy veers away from the consensus view, I have learned to pay attention. 2018–2019 shapes up as another watershed period for the US and world economies; and so I’m anxious to get Lacy and our other great speakers together in San Diego in a month and a half to bounce off each other and really work the issues before us. I want you to be part of the mix, too – and here’s my personal invitation:
I’ll wrap up our SIC Speaker Series next week with Mauldin Economics’ very own Jared Dillian, intrepid editor of The 10th Man, The Daily Dirtnap, Street Freak, and ETF 20/20.
I will make my personal remarks very short today. I am used to being relatively healthy most of the time, but being in and out of the cold air in Boston, and maybe sitting across the from someone who was very sick on the plane on the way back, has given me a nasty cold. And I have meetings starting in 10 minutes, a TV interview to do (for which I have no idea what I will look like), and in theory I have promised a friend to take him to the Dallas Mavericks game tonight. Maybe I need to put my rally cap on. You have a great week!
Quarterly Review and Outlook, Fourth Quarter 2017
By Lacy Hunt, Ph.D., and Van Hoisington, Hoisington Investment Management
Optimism is pervasive regarding U.S. economic growth in 2018. Based on the solid 3%+ growth rate during the last three quarters of 2017, this optimism is well-founded. The acknowledgment of this economic health by the Federal Reserve (Fed) is evident: they have outlined a continued pattern of increasing the federal funds rate over the coming year. Further, the solid 2017 performance of the European Union and of Japan is forecast to continue in 2018. Finally, the recent enactment of a tax cut is expected to boost U.S. economic growth in the new year. Well-regarded economic research suggests a 2.5% – 3.5% real growth rate in 2018 with continuing stable inflation. In addition, most surveys suggest a modest interest rate increase across the entire maturity spectrum of the yield curve.
Our view of the economic environment is somewhat divergent from the consensus opinion. Our analysis of concurrent and leading economic variables, including consumers, taxes, monetary policy and the yield curve, suggest that disappointing growth, lower inflation and ultimately lower long-term interest rates will hallmark the new year.
Consumers
Consumer spending, the economic heavy lifter of U.S. economic growth, has expanded by 2.7% over the past year (as measured by real personal consumption expenditures, or PCE, as of November 2017). This is similar to the past eight years of the expansion, with real PCE averaging 2.5%. What is interesting about the increase in spending is that incomes have failed to keep pace. Real disposable personal income rose by only 1.9% over the past year. It was only the ability to borrow that supported the spending increase. In economic terms, borrowing is a form of dissaving. The saving rate for consumers dropped from 3.7% a year ago to 2.9% in November, a 10-year low.
