“Kee” Points with Jim Kee, Ph.D.


  • Economy
  • Profits (earnings)
  • Interest rates
  • The dollar


Sorry for all of the numbers that follow, but a few numbers are often helpful.


Economy

The Advance Estimate for first quarter GDP growth (annualized) came in at 2.3% (Bureau of Economic Analysis). Expectations were in the 2% plus range, and 2.3% growth is pretty good for a first quarter. There will be subsequent revisions as more data comes in, but recall that the first quarter is on average – not always, but on average – the lowest. Press stories aside, this is not a new phenomenon, and is mentioned in most good macroeconomics textbooks published beforethe current expansion. Since the current expansion began in the summer of 2009, we have had 2 negative quarters, and both occurred during the first quarter of the year (2011 and 2014). The highest growth quarters have been at or near 5%, and they occurred in the same years – 2011 and 2014 – as the lowest quarters! That’s what economists mean when they say that one quarter’s GDP number tells you almost nothing about what the next quarter’s number will look like.


Looking at the last four quarters, the economy is growing close to 3%, which is near its Post-WWII average of 3.2%. The average of quarterly GDP growth rates for the current expansion, which again began in the summer of 2009, is 2.2%. The prior expansion, which lasted from 2001 to 2007, averaged 2.7%. The expansion prior to that, or 1991-2001, was 3.8%. The 1980s expansion was about 4.2%. So expansions have been getting weaker, and it is too early to conclude that the economy is shifting up to a higher growth path.


Profits (Earnings)

Companies are in the midst of reporting their first quarter earnings or profits, with just over half of the S&P 500 companies having reported thus far. Most companies manage expectations somewhat (Financial Times), making it easier for companies’ reported earnings to beat analysts’ forecasted earnings. For example, taking an average of the percent of companies beating quarterly estimates over the past 5 years, you get 70 percent. So far this quarter we’re at 79 percent of companies beating earnings estimates. If that continues through the rest of “earnings season” (after all companies have reported) it will be the highest ‘beat rate’ since FactsSet began tracking the “beat/meet/miss” data in 2008 (FactSet). Perhaps more importantly, 74 percent of companies that have reported their first quarter numbers have beat analysts’ expectations for sales. Sales are coming in 1.7 percent above estimates, and if that continues then ‘sales beats’ will also be the strongest since 2008 as well.


Interest Rates

Market reactions have been rather muted to all of this, partly due to the fact that a lot of it was expected and already priced in (global investors set market prices, while Wall Street firms comprise ‘analyst estimates’). The rather abrupt rise in interest rates this year has probably also played a part, and is certainly responsible for some of the increase in the stock market’s volatility. Here’s a quick picture of interest rates: Treasury yields were around 5% going into the Great Recession (2007-2009). They fell close to 2% by early 2009 but quickly rose to 4% by the end of 2009. That 4% number has turned out to be the high point for this expansion (so far). Since then we’ve had everything from successive quantitative easing programs and a subsequent ‘taper tantrum,’ to unprecedentedly loose international central bank policies (e.g. European Central Bank and Bank of Japan). US rates have fallen below 1.5% twice during this period (in 2012 and 2016), and are currently at 3%. So really, since the expansion began interest rates have ranged from a high of 4 percent (2010) to a low of 1.37% (2016) and are currently in between at 3 percent.


The Dollar

I came across the obituary of one of my former professors last week, Dr. Leland B Yeager. Yeager came to Auburn after retiring from the University of Virginia, and he was a renowned expert on international monetary theory. One of his views that always stuck with me on that subject, at least as a starting point for thinking about it, was that it was somewhat nonsensical to talk about what “equilibrium exchange rates” should be in a world of fiat currencies and fractional reserve banking. (As an aside, equilibrium means “no tendency to change,” fiat means deriving its value from law rather than some underlying commodity backing, and fractional reserve means that banks hold only a fraction of deposits on reserve, loaning the rest out.). Others of Yeager’s caliber, like economist Robert Mundell, dotake a stab at discerning what exchange rates should be. Some years ago Mundell, looking at economy sizes, growth rates, percent invested overseas, etc., concluded that a dollar/euro relationship between $1.20 and $1.30 could be considered normal, or neither to strong nor too weak for either country. I add a little to each side of that and get a “normal” range around $1.10 to $1.40 per euro. Right now the dollar is trading at $1.20 per euro, which seems ok.


Summing it all up: One conclusion that could be drawn from the discussion above would be that the economy, interest rates, and the dollar are “normalizing,” or moving from extremes to more normal levels. That’s a view I hope to see confirmed by future data.