Tuesday, September 17, 2013

Strong Private Sector

At least one economist is not bemoaning the slow growth in the economy. Total GDP is growing at a barely tolerable 1.8%. This economist suggests that with a low growth in workforce additions through a coming-of-age generation and immigration, the maximum expectation could be 3%. It couldn't be any higher like the 'good old days' of pre-1980 when all the Baby Boomers had entered the workforce, along with a growing proportion of women.

Surprise of surprises! The private sector GDP has grown by 2.9% YTD, and 3.3% this past quarter. Why hasn't the total GDP increased as much? Because the public sector has shrunk, mostly through the federal spending decrease caused by the sequester of funds, an attempt to balance the federal budget...and a lot of states trying to get their fiscal houses in order. US Corporate Net Cash Flow (private sector) as a ratio to capital spending is at a 30-year high...and not just a high but essentially off the charts. If you put SPC control limits on the period 1980 to 2009, it clearly went 'out of control' (in a good way?) in 2010, and has set a new 'target' of expectations (center line) at around 115%. In other words, companies are creating 115% cash compared to their capital investments for growth. Not only is the private sector growing dramatically, but it could be growing even more...if more capital investment could be made.

What's keeping corporation from investing more, and growing more? It's not the tax rates. It's the demand for goods and services. From the public sector? Maybe. From consumers? "After both the 1950s and 1980s, the economic recoveries in the following decade were juiced by a catch-up in big ticket spending...pent-up demands created since 2000 might be the largest ever. In both the 1950s and 1980s, even though big ticket spending slowed, it still rose mildly during the decade. Since 2000, however, big ticket spending has almost flat-lined." (Jim Paulsen) Big-ticket spending so far hasn't provided the bump in GDP that we needed. Perhaps it will come soon. Consumer confidence is also rising which presages consumer spending increases.

Seems like there is going to be more demand from the private sector for the private sector. Maybe it can overcome the decrease in public sector spending, and regain everyone's confidence in the economy. We can then stop whining and moaning.

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