Chatter, as always, drives a market low on volume. Yesterday and today, the market is moving on low volume. Better to take a day off than get all worried. In this light, here is an interesting take on the US economy, something to take your mind off a market moving on low volume.
- Corporate America has proven very adept at cost cutting and most of those cost cuts have been in the labor area. In the short term, that has proven to be a very successful strategy in terms of corporate profits. Longer term, the strategy can’t work, as we need consumers with money in their pockets to buy what companies sell and we are destroying the consumer to the short term benefit of the elite.
I do agree cutting back on labor is one reason corporate America has held onto profit. Part of that is the reality that in the last ten years or so corporate America has invested a heap of money into modernizing all facets of American business.
On the large scale, factories are now utilizing robotics run by software, which means the folks who used to stand on “the line” and put together products are now out of work. On a smaller scale, the local mom and pop who use to use a bookkeeper are now using accounting software to do their own books. In between, unskilled and skilled labor folks in all forms of businesses are now out of work because of advanced machines or computers. This is just the way evolution goes, and this is the bad news.
The good news is that for some years now, private/public colleges and universities have teamed with big and small government in most US states to provide both retraining and training for those who are out of work because of the industrial/technological evolution underway and for those just entering the more highly specialized work world in America.
As to the idea that this evolution is “destroying the consumer to the short term benefit of the elite,” well, that seems a bit out of synch with current economic data and not at all in tune with American history.
As I have pointed out time and again, the American consumer is far from destroyed. If anything has kept the US economy moving forward, it is the American consumer. Houses, cars, and stuff to fill both are selling briskly, while overall household debt is lower and savings are higher. Does this translate to an American consumer in the throes of destruction?
As to manufacturing, which has been a traditional bastion of employment in America, and which has steadily declined over the last three decades, America is once again turning to exports to drive its growth. The reason US exports are on the rise (touching record highs again) is directly related to lower production costs, which are directly attributable to the modernizing of infrastructure. Machines cost less than people. This is the bad news.
The good news is that as America increases its exports to Europe and China, its two largest markets, the now updated factories will increase production to meet demand and they will need both retrained and trained folks to do the jobs. Even better news is that even if the work that now needs to get done requires less people, those people who are doing the work get paid more because of the high skillsets needed to operate the means of production.
As to the demand, well, the current crop of economic data coming out of Europe and China speaks positively to continued and renewed growth there, which speaks to markets for US exports heating up.
- Exports to China, which have been growing more slowly than in recent years, increased 4.5 percent in June. China has been one of the fastest growing markets for U.S. goods, and exports to that country were up 4.2 percent for the first six months of 2013.
- U.S. exports to the 27-nation European Union rose 1.5 percent in June.
Now, this brings us back to the US market, and my constant preaching that the ultimate driver of market momentum is corporate profit, which, by the way, is moving into five years of positive earnings. Yet even with that and even with the reality I described above, there are those that still don’t get it. Their myopic and short-term view of corporate America closes off the big picture, thus, we get analyses such as Q3 and Q4 will be a bust because the data below.
- 87: That’s the number of companies in the S&P 500 that are expected to boost sales at least 10% in 2014. And only 21 of those are expected to generate at least 20% revenue growth in 2014. Fully 40 companies in the S&P 500 are expected to see revenues fall in 2014.
First, off companies most always underplay forecasts because when they achieve or exceed them, everyone wins. Second, who needs 10% and 20% growth? An average increase of 5-8 percent will do just fine. Third, even in the “support” data above, we are still only talking about 40 companies out of 500 that expect to see revenues fall and only 87 pushing up revenue growth. Can we at least wait until all the forecasts are in?
Finally, the data I see suggests near-term (6-12 months) corporate earnings will continue to surprise to the upside, just as they have done to the tune of 62% on average for quite some time (67% so far this quarter). One reason is increased exports, yes, but, once again, we have to go back to the consumer that some analysts keep writing off.
- The average age of a car or truck in the U.S. is at an all-time high of 11.2 years, according to research firm Polk.
- Though the increased reliability of vehicles is a major consideration, the trend also confirms that there is still plenty of pent-up demand ready to be unleashed for Ford (F), General Motors (GM), Toyota (TM), and Chrysler (FIATY.PK), especially with new models boasting fuel economy significantly better than what most drivers are realizing with their current cars and trucks.
American consumers buying cars, houses, and the stuff to fill them is the key. As long as this is the case, the market will keep going up. As well, as history tells us, coming out of these cyclical technological evolutions are boom periods where jobs are plentiful, the standard of living goes up, corporate America makes money, and, most importantly, the market goes up.
Trade in the day; Invest in your life …
