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What is going to get us out of this mess? One word - Growth, economic growth. Economic growth is measured by the percent increase in GDP - Gross Domestic Product. GDP is the sum of all goods and services produced by the U.S.
The formula for GDP is: = private consumption + gross investment + government spending + (exports − imports). We are a nation of consumers. 70% of our GDP is from personal consumption. Business Investment is 3%, Government Spending accounts for 35% and we import more than we export, so that number is -9%. Given this formula, you can see how important it is for consumers and businesses to feel confident about the future. Why does Business Confidence remain flat while Consumer Confidence is improving?
My colleagues at Charles Schwab commented recently, "after surging at an 18% annual rate in the third quarter of 2011, investment in equipment and software was flat in this year's third quarter, and some economists are expecting business investment to post a decline in this year's fourth quarter thanks to ongoing uncertainty about the fiscal cliff. Weak third-quarter earnings have been a tie-in to this malaise as well, and earnings of multi-national/export-oriented companies have been hardest hit."
Regulatory policy and tax issues remain uncertain. As long as that uncertainty remains, business investment will continue to decline or, at best, remain flat. I expect it will be at least well into Q1 before we see what direction Business Confidence is headed and we have a good forecast for 2013.
The formula for GDP is: = private consumption + gross investment + government spending + (exports − imports). We are a nation of consumers. 70% of our GDP is from personal consumption. Business Investment is 3%, Government Spending accounts for 35% and we import more than we export, so that number is -9%. Given this formula, you can see how important it is for consumers and businesses to feel confident about the future. Why does Business Confidence remain flat while Consumer Confidence is improving?
My colleagues at Charles Schwab commented recently, "after surging at an 18% annual rate in the third quarter of 2011, investment in equipment and software was flat in this year's third quarter, and some economists are expecting business investment to post a decline in this year's fourth quarter thanks to ongoing uncertainty about the fiscal cliff. Weak third-quarter earnings have been a tie-in to this malaise as well, and earnings of multi-national/export-oriented companies have been hardest hit."
Regulatory policy and tax issues remain uncertain. As long as that uncertainty remains, business investment will continue to decline or, at best, remain flat. I expect it will be at least well into Q1 before we see what direction Business Confidence is headed and we have a good forecast for 2013.
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Consumers appear to be gaining confidence in the economy. We see spending increases in housing, autos and recreation. Residential investment in housing surged by 14%, recently, and the stock market has made very nice gains in the past 12 months. Consumer net worth is made up of financial components (stocks, savings, etc.) and housing. What is puzzling is, why the confidence when wages appear flat, or falling. Unemployment remains high and business spending is on hold.
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I believe that consumers are back to our old habits, buying on credit and spending from dead 401Ks and saving's accounts. Is it the wealth effect? Housing prices up, market up, so spending is up? Consumers are feeling better. Not me. We have huge hurdles ahead, it will be business that gets us out of this. An increase in hiring, business spending, and overall business confidence will spur this consumer's confidence. And look again at how large the Government contribution is to GDP. What will it take to increase your confidence? Sua Sponte.
Action is a great restorer and builder of confidence. Inaction is not only the result, but the cause, of fear. Perhaps the action you take will be successful; perhaps different action or adjustments will have to follow. But any action is better than no action at all. - Norman Vincent Peale
Bradford C. Bruner for Sua Sponte Wealth Management
Action is a great restorer and builder of confidence. Inaction is not only the result, but the cause, of fear. Perhaps the action you take will be successful; perhaps different action or adjustments will have to follow. But any action is better than no action at all. - Norman Vincent Peale
Bradford C. Bruner for Sua Sponte Wealth Management
