I've believed the underlying U.S. economy is stronger than most people expect but is weighted down by our politicians. Last Thursday, we learned that GDP growth in the third quarter of this year was revised higher from 2.0% to a surprisingly strong 2.7%. In fact, it was double the growth rate in the second quarter, which was 1.3%.
If growth had doubled, I would have been able to see it, feel it, even taste it. So, there had to be something misleading in the numbers! (Now, nobody is "monkeying" with the numbers for political purposes. The numbers are what the numbers are, and the reason God made economists was to figure out what the numbers really mean.)
The third quarter growth was skewed by a 12.9% increase in defense spending, which is clearly not sustainable, especially if we go over the Fiscal Cliff. Even more important, there was a big increase in inventories. When that happens because business is expecting big sales, it is a good thing. When that happens because consumers stop buying what is already in inventory, that is a bad thing. This was a bad thing and hopefully is not sustainable! Consumer spending increased only 1.4% instead of the 2% that was expected, causing inventories to accumulate.
Business is still sitting on $2 TRILLION of cash, which would provide a huge boost to economic growth if it was invested. However, a bad sign is that business spending on equipment & software actually fell in the third quarter, for the first time since the recession began in 2008.
Don't expect GDP growth in the fourth quarter to be nearly as technically "robust" as the third. We will not see another 2.7% until we throw off the dead weight of live politicians. Morgan Stanley, for example, is predicting only 0.6% growth this quarter.
With both consumers and businesses cutting back ahead of the Fiscal Cliff, we are tightening the spring and could easily enjoy a spring-loaded recovery next year . . . IF the Democrats don't over-reach (which worries me the most) and IF the Republicans don't still think compromise is a four-letter word.
Regardless of how much my taxes increase next year, my portfolio would increase much more . . . IF Washington would just make a deal . . . and almost any deal would work.
A "perfect" deal is not necessary and certainly not worth going over the Cliff for.
