Following a lot of hyped promises of economic growth after a change of regime and handing over of power to the Trump administration; the US economy has been upbeat with positive sentiments of accelerated economic growth rate. In what economists have termed as the “Trump bump”, the economy is expected to be jolted into a high growth phase once the proposed economic policy changes introduced by the Trump administration are effected. This is however now turning out not to be the case; at least in the short term within the first three months of 2017.
Why the stock market is rising
The performance of the US stock markets has been on a rise going up by an average of 5% since the beginning of the year. Whether the rise in the stock market prices is driven by fundamentals or mere speculative sentiments is the big concern for analysts. On one hand, investors could be foreseeing high growth in business performance in the coming days; if the tax reforms and other business related policies as proposed by the Trump administration are implemented to the letter. This could then be driving up their uptake of stocks in strategic sectors; and hence eventually resulting to the upsurge in the US stock market.
On the other hand the volatility in the market could be attracting stocks speculators and binary options traders who are out to capitalize on the current market fluctuations arising from different investor sentiments; in order to book decent returns before the market cools off. The increased buying and selling of stocks by these speculative traders could be driving the share prices up for their own gain before they exit the market in the medium term. Determining precisely who is influencing the rise in the US stock market between the speculative traders and the investors who are guided by fundamentals is therefore a little bit difficult.
Soft and hard economic data evidence
According to the recently released consumer confidence report by the Conference Board, consumer confidence rose to its highest level ever since December 2000. However, some analysts consider this to be soft data that do not reflect the actual growth within the economy. For the analysts who prefer using hard data, they claim that statistics on personal income and household expenditure patterns are better placed to help tell whether the economy is growing or not.
Giving his views on the current state of the economy, Michael Gapen, chief economist at Barclays said that “Sentiment has gotten stronger but business investment hasn’t accelerated.” He further added that “To get it to translate to hard data, you’d need new policies like tax cuts, tax reform, and a major increase in infrastructure spending.” Michael alludes to the fact that a combination of both the soft data on consumer sentiments and statistics on the actual expenditure are best ways to measure economic growth and development.
Another area to focus on when analyzing economic growth prospects is the investment allocation strategies being adopted by investors. This is a good way to actually measure the investors’ sentiments with regard to short-term to long-term growth of the economy. In the recent past since the beginning of the year, gold price has been rising; which is a sign of investors’ efforts to diversify their portfolios to more secure investments. A run to safe havens is always driven by uncertainty in the markets; and in the current US context that can be attributed to expected policy changes by the Trump administration. On the other hand the investors are still retaining significant proportions of their portfolios in the equities and bond markets; which signify their confidence in the fundamentals of the markets and the growth potential within the economy.
Quarter growth projections
According to the widely followed GDPNow model by the Federal Reserve Bank of Atlanta, growth in quarter one of 2017 is expected to be at an average rate of one percent. This varies widely with the New York Fed’s Nowcasting Report that projects that the growth will be at about 3%. Explaining this difference, Ellen Zentner, chief United States economist at Morgan Stanley said that “The difference is larger than usual and is being driven by the fact that the New York Fed incorporates soft data into its tracking.”
This means that without factoring in the soft data, economic growth for the first quarter of 2017 is about half the 2 percent growth that was recorded during the economic recovery under President Obama. Even after taking an average of between 2 and 2.5% growth for the past three months, the growth rate will still be too far from the 4% growth rate promised by the Trump administration. The almost similar growth rates in the short run for both President Obama and president Trump therefore go a long way in showing how presidential campaigns can lift economic spirits, as opposed to actual growth rates.