Investment is the Key for Markets Over the Medium-Term

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The U.S. manufacturing report has rebounded after a month of contraction; the latest eurozone and emerging markets reports also indicate expansion.

The Q4 GDP report raised some of the key, vexing issues facing the outlook: can the U.S. break out of the low-growth “New Normal” that has afflicted the economy for at least 10 years? As noted last week, the ever skeptical IMF is on the U.S. short-term, tax-cut bandwagon – while implicitly calling for an extension of the cuts – as they upgrade the U.S. outlook to 2.7% in 2018 (was 2.3%) and to 2.5% in 2019 (was 1.9%). The short-term effect on growth is being baked into markets. Noted economist Robert Barro believes that changes to corporate and individual tax rates can increase real GDP by 1% in 2018 and 2019. The path forward is clear: capital investment is the sine qua non of better growth. The Council of Economic Advisors has written that the capital/labor ratio growth (how much capital each worker has available to be put to work) has fallen to zero for the first time in history.
So the keys to follow are confidence measures, new orders, capital goods shipments and other investment measures. A return to historical levels of capital per worker could add a near full percent per annum on the growth rate, per the CEA. So far we seem to be on that track, but one year is not enough to break out of this slow-growth, “New Normal." When considering this landscape, remember that stronger growth will lead to higher interest rates and higher bond yields. Fear not higher interest rates – the risk for markets is that they fall back to 2% due to continued economic underperformance. Please take a look at page 9 of the Global Perspectives™ book for more information on ISM Manufacturing.

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