While fourth-quarter GDP was reduced further to 2.2 percent and first-quarter projected results were reduced to less than 1.0 percent, we remain optimistic about the rest of the year and 2016. The key to growth remains the consumer; consumer spending actually accelerated in the fourth quarter to a 4.4 percent rate of gain. Offsetting factors were relatively weak exports, a downward revision of inventories and government spending and weak reported profits, which are understated. I’m closely watching economic data for April to see if the economy accelerates as anticipated after a very harsh winter. I expect it will.
Federal Reserve Chairman Janet Yellen spoke on Friday and acknowledged how Fed policy is being influenced by a strong dollar and weak growth overseas. In addition, she stressed that the path in interest rate policy after the first increase will be very gradual, unless the data suggests a different course of action. While the financial markets may pause after the first funds increase, I expect the economy to keep rolling along. I find it hard to fathom that the 10-year bond is below 2.0 percent at this point in our economy. An improving economy and higher inflation will be good for profits and more than offset any small increase in rates.
Harry Reid's announcement that he will step down as minority leader in the Senate could also have an economic impact. I have not been a fan of his policies and actions and believe that if Sen. Chuck Schumer assumes the role, his leadership of Senate Democrats will be better for business, financial companies specifically, and our economy.
Meanwhile, it is becoming increasingly clear that economic activity is improving in the Eurozone for the reasons we have mentioned many times before:
1. QE is having a positive effects on interest rates.
2. A decline in the euro has improved global competitiveness and exports.
3. The decline in energy prices has boosted consumer disposable income and spending.
The closely watched purchasing manager's index rose to a four-year high reading of 54.1 in March, indicating a sharp pickup in economic activity. Mario Draghi, head of the ECB, reaffirmed that the bond purchase program will continue at least until September 2016. But as I noted earlier, much will depend on how events unfold with Greece.
Finally, events in Japan and China continue to develop as anticipated. While inflation is being held down near the zero line in Japan due to declining energy prices, the call by government for corporations to raise wages is finding wide acceptance. Consumer spending is rising in Japan, while the unemployment rate has declined to 3.5 percent. Watch for policies to reduce leverage at the BOJ and the accumulated deficit of the government.
China's creation of an Asian Infrastructure bank has found traction, with many countries in and around the region joining as founding members. China has introduced initiatives to leverage hundreds of billions of dollars to finance major rail, port and other projects to assist in regional economic integration and global trade. China's government focuses a lot of its attention on its long-term goals as well as on the shorter-term needs of its economy. China's role as a major player on the world stage is being cemented by its actions, which is all good for the future.
Let's wrap this up and reveal why I advise investors to stay the course:
The harsh winter has had a huge negative impact on the level of economic activity in the United States over the last several months, but the key ingredients for resumption in 2.5 percent to 3.0 percent growth are in place. The consumer, which is over 60 percent of GNP, will lead the way, boosted by an increase in disposable income due to declining energy prices.
While many headwinds remain, like the impact of a stronger dollar on exports and reported profits from overseas operations, the U.S. continues to improve its competitive position in the world and improve its operating efficiencies globally.
Interest rates will stay historically low, influenced by strong foreign capital flows; the Fed will not raise rates until the fall at the earliest and the rate of increases will be gradual; the dollar advance will be gradual until growth overseas is more sustainable; the inflection point in European growth has occurred, but watch events in Greece next week; the foundation for sustainable growth has improved in China, Japan and India, which will add to global growth; energy and commodity prices will remain weak until supply, demand and inventory levels are in better balance and, finally, the financial markets will remain healthy. But all regions, industries and stocks are not equal.