Growth, is it real?

If you pay attention to market news you know there are several different opinions regarding global economic growth. Specifically looking at news in the US it seems to depend on what time you pay attention to the news. Recently there was an announcement of lower than expected manufacturing figures but the next hour announced a lower rate to jobless claims. When this differential in news exists people typically look to FED policy for an indication of actual conditions.

The FED hasn’t changed rates or signaled that a change in rates will occur any time soon. In fact, the board of governors has signaled that a continuance of QE and Operation Twist. All other countries, expect England, seem to have taken this news as a signal that it is ok to artificially lower rates to drive economic growth. I can’t speak with confidence that the moves by foreign countries have worked, although there are indications that inflation is starting to creep up. What is evident, at least by the numbers, is that the moves by the FED have not translated into a sudden increase in monetary supply.

So where are consumers getting the money to spend? Much of the increase is due to a feeling of increased wealth, through appreciation in housing prices, dividend payments, stock repurchases, and positive equity market movement. All of those factors also tie into the positive earnings announcements as companies have increased leverage by issuing debt to pay the dividend and/or repurchase equity. In fact, according to PIMCO, corporate bond issuance for the first quarter was near an all time high, and, according to Invesco, the average payout ratio of S&P 500 companies is around 33%.

In summary, the private sector continues to make moves aimed at boosting the economy while waiting for appropriate government policies to be enacted. Luckily, the majority of the moves taken by the private sector are sustainable for the near term.

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