Good News, Investors! 3 Signs the U.S. Economy Is Expected to Remain Strong.
Larry Ramer
4 min read
For months, economists said America is about to enter a recession. They also said the U.S. economy outlook was poor. Yet, many are now starting to realize that they were mistaken, as I’ve maintained for over a year. The bearish economists embraced two main fallacies. Specifically, they believed that the economy would be dragged into a recession by elevated interest rates. All because that’s what happened in the early 1980s. In addition, they thought that the Fed would keep hiking interest rates relentlessly. All until the Consumer Price Index fell to the central bank’s 2% “target.”
But those ideas were mistaken for two main reasons. First, unlike in the early 1980s, there have been multiple powerful U.S. economic trends in recent years. And although the Fed talks about its 2% “target,” and its “dual mandate” of enforcing “price stability” and “low unemployment,” those are only the central bank’s goals on paper. In reality, the Fed has many ambitions, including helping Wall Street, ensuring financial stability, avoiding recessions, and pleasing America’s most powerful politicians. If the Fed was only focused on its “mandate” and “target,” the central bank would be hiking rates relentlessly now and would have begun doing so as soon as it became clear that inflation was surging in early 2021.
Here are three positive U.S. economy outlook trends that should keep stocks rallying for the foreseeable future.
Wooden tiles spelling "GDP" laying on top of an American flag backdrop
Source: shutterstock.com/WESTOCK PRODUCTIONS
On June 29, Washington announced that the U.S. economy expanded at a 2% real annual rate in the first quarter. That was above the previous estimate of a 1.3% expansion. It’s now estimated that the economy expanded at an annualized rate of 2%.
One of the key factors behind the increase was the strength of consumer spending. That’s estimated to have surged at a real, annualized rate of 4.2% last quarter, representing “the highest quarterly pace since the second quarter of 2021,” according to CNBC. CBSreports that “Consumer spending accounts for about 70% of America’s gross domestic product,” In my view, the biggest reason for the rapid growth of U.S. consumer spending , despite rising interest rates, is the continued strength of the American labor market. I’ll discuss the latter factor in some depth in the following section.
Some have dismissed the Q1 GDP update as “backward looking.” However, providing a retort to that idea, CNBC reported that “The upward revision helps undercut widespread expectations that the U.S. is heading toward a recession.”
Moreover, as of June 30, the Fed was estimating, based on recent economic data, that GDP had jumped by a real, annualized rate of 2.2% in the second quarter.
The Labor Market Remains Rock-Solid
An image of someone using a laptop on a white table with 'jobs' on the right
Source: TierneyMJ / Shutterstock
Workers continue to on the whole, be in the drivers’ seat. That bodes well for the U.S. economy outlook. According to a recent survey of employers, employees’ wages are expected to jump 4.4% this year and another 4% in 2024.
Further, weekly jobless claims fell 26,000 in the week that ended on June 24. That represented the biggest such decline “in 20 months,” Reuters noted. Meanwhile, continuing claims sank to 1.74 million from 1.765 million in the previous week.
Despite doubts by some economists on whether the labor market’s strength is good economic news for investors, it is upbeat for stocks. That’s because the profits of most U.S. companies, directly or indirectly, rise and fall in tandem with consumers’ consumption. And with the Fed anxious to avoid pushing further banks into bankruptcy and nervous about triggering a recession, the central bank is unlikely to push interest rates much higher before the end of next year.
Also likely to keep the labor market very strong for a long time to come are the green revolution and the onshoring trend.
Artificial Intelligence Will Boost Profits
Graphic of letters "AI" in bold font surrounded by circle of tech symbols in purple and blue against a dark background. ai stocks to buy
Source: shutterstock.com/Tex vector
AI will make companies much more productive. And that should greatly boost profits in the process, According to McKinsey, ” Our latest research estimates that generative AI could add the equivalent of $2.6 trillion to $4.4 trillion annually across the 63 use cases we analyzed… is estimate would roughly double if we include the impact of embedding generative AI.” AI will greatly enhance firms’ “Customer operations, marketing and sales, software engineering, and R&D,” McKinsey explained.
Goldman Sachs has estimated that the technology “could boost productivity growth by 1.5 percentage points per year over a 10-year period.” That could potential lift the index’s bottom lines ” by 30% or more over the next decade.
On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been PLUG, XOM and solar stocks. You can reach him on Stocktwits at @larryramer.
