If the last time you heard that “the economy is doing well” and thought to yourself “no way that’s true,” and “the source must be crazy”, then this blog is written for you.
I consistently discuss the state of our economy on WSB radio, and here in many of my blog posts. I’ve noted the economic bounce back we’ve experienced over the last several years and more recently noted how the economy is firing on multiple cylinders. I’ve also noted that we’ve been out of the recession since 2009 (also according the NBER who officially keeps tabs on economic cycles). While I continue to discuss extensive data to support the economic expansion we’ve been seeing, I’ve been amazed by the number of responses I’ve received from people who say that they don’t believe me (and not all of them say it so nicely). In my post several weeks ago I referenced a survey by the Public Religion Research Institute which said that 72% of US survey respondents still think we’re in recession.
I understand that when you see two of your neighbors out of work for months at a time, or your 25-year-old son can’t find a job, it’s easy to think that the economy hasn’t recovered. But, according to the Bureau of Labor Statistics US employment is actually at just 5.8% as of November. While it might not feel like the economy has recovered based on what you see around you, as investors, we have to look at the bigger picture when talking about the economy. We can’t zoom in on what we see happening in our own backyard.
One of my favorite Warren Buffett analogies has to do with the US economy and how it related to an “Economic Pie.” To breakdown his idea into simple terms, he believes that as the “pie” gets bigger, investors will, over time, participate in that growth. It’s important to know, though, that it doesn’t necessarily mean that every single ingredient in the pie, or even every slice, has to get bigger or grow at exactly the same time.
Now let’s look at how this translates into the real world today. At any given point in the economic cycle we will see unemployment numbers fluctuate, consumer confidence jump up and down, the housing market zigzag and manufacturing constantly move in fits and starts. While we rarely see every single economic indicator move up at the same time, it’s the sum of the pieces moving together in an upward (growing) direction that really matters. The pie as a whole is what we need to pay attention to – not just what you see anecdotally. And, as a whole here are a few important points to note the economic progress that we have made since the recession ended in 2009:
- Unemployment – Peaked at 10.1% in 2009, today it stands at 5.8%
- Housing – Housing starts bottomed in April of 2009 at close to 450,000. Today we are building close to 1.0 million new homes a year.
- Manufacturing – The ISM manufacturing index has risen from below 35 (indicating severe contraction), to nearly 60 today (any number above 50 spells expansion)
- The question is will we continue to see a moderate to strong economy over the next 6 to 12 months?
Economic forecasting is a difficult business; however, building on where the economy stands today and factoring in the impact of lower energy prices – the outlook is healthy:
- Lower energy prices = increased consumer spending
- Lower energy prices = continued low inflation
- Low inflation allows the Federal Reserve be patient about raising borrowing rates
- Continued low rates are a tailwind for the economy, jobs, housing and the stock market.
Warren Buffett’s analogy about the “Economic Pie” getting bigger is exactly what has happened here in the US over the past 5.5 years. While the economy sometimes feels like it’s zigzagging and confusing, overall we’ve been seeing the pie grow. As this continues we will see continued prosperity in the US. That’s good news! Even if it’s sometimes hard to see.
Read the original article here.