July 2014

Income Up, Consumption Down

Despite the repugnant United States Q1 GDP figure of -2.9% (revised), things below the surface look a little rosier. The ‘Polar Vortex’ amongst other one-off items created what appears to be a non-recurring shock to the US Economy, while current data in Q2 combined with leading indicators for Q3 paint a prettier picture. The second quarter has seen new home sales, auto sales, and core capital goods running at 30%, 20%, and 10% above their Q1 figures, respectively. Manufacturing average weekly hours worked has hit another high after rebounding from its 2009 low and weekly overtime hours have ticked up to 3.5, again reaching a high from its 2009 level. Another bright spot was productivity, which alone will add 3.5% to Q2 GDP assuming the current rate stays constant and all else is equal (Rosenberg, 2014). So, despite the slow start to the year it appears that things are beginning to look up for the US Economy, and at worst the potential for a depression in the near future is remote. 
Interestingly enough, the cold weather across North America had a fairly positive impact for equities in the Canadian market given their reliance on commodity prices and their limited exposure to consumer spending. Cold weather combined with political instability in Russia/Ukraine pushed up oil and gas prices to levels that helped to improve company profitability. In addition, the political instability and weakness in gold prices throughout 2013 helped to mount a comeback for the precious metal in the early part of 2014; this gave the Toronto Stock Exchange (TSX) a nice boost. Although Canadian GDP growth in the first quarter of 2014 outpaced its neighbor to the south, the trend is expected to reverse going into the later stages of the year (Scotiabank, 2014).
Personal incomes in the United States grew 0.4% in May as 2014 continues its perfect record of increases to date. Over the past year we have seen incomes rise 3.5% helped by an uptick in hiring and weekly jobless claims which continue their downward trend. Although a definite positive that incomes are rising, it appears these gains are not being transferred to business owners – Americans are parking the money in their pockets as the savings rate increases from 4.5% to 4.8%. A likely suspect for the increase in savings is inflation and secondarily taxes. Disposable income has grown a much smaller 1.9%, and combined with the record high debt levels in recent years helps to explain why Americans aren’t spending their money. Given that consumer spending is the main growth engine of the US Economy and accounts for roughly 2/3 of GDP some economists have slightly revised down their growth projections (MarketWatch, 2014). Either way, if incomes continue to grow and inflation remains intact, the economy will receive a boost when consumers begin to spend their earnings in a more meaningful way.

This newsletter was prepared solely by Bruce Morrison who is a registered representative of HollisWealth™ (a division of Scotia Capital Inc., a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada). The view and opinions, including any recommendations, expressed in newsletter are those of Bruce Morrison only and not those of HollisWealth. TM Trademark of The Bank of Nova Scotia, used under license. Morrison & Partners Wealth Strategies is a personal trade name of Bruce Morrison.