Bob Stein, deputy chief economist for First Trust, presented a very insightful overview of the US political and economic landscape during the June 15th First Trust event. His impartial analysis of the current political scenario emphasized the key role of future policy decisions and the impact they will have on markets. Reforms to the affordable care act and corporate tax code rank among of the most influential policy changes that will impact markets in the coming months. During the economic analysis Bob focused on many of the current factors making investors fearful. Through an in-depth analysis of many of the macroeconomic indicators Bob highlighted that although some degree of risk exists, many positive signs are also observable. Government debt, household debt, labor market status, new housing growth and the auto sales market are some of the statistics used during the presentation.
Government debt was shown to be at record highs, yet when the interest charge as a percentage of GDP is measured the number compares to historical levels last seen during the 60’s and 70’s. Bob expressed the concern that the average maturity of US debt securities is too short and hopes that this will be extended going forward. The possible issuance of 50 or even 100-year debt securities was mentioned.
Household debt was also shown to be at historically high levels, but as a percentage of debt relative to the assets held by households the number compares to levels observed in the early 90’s. The negative effect of increased consumer debt can be seen from the rising auto-loan and student-loan delinquencies. The severity of higher consumer debt however presents less of a risk when analyzed from the standpoint of the percentage of total income used to service debt. The monthly payment obligation as a percent of after-tax income for households are the lowest in the last 30 years.
In the labor market, part-time hiring has shown some gradual decline, but full-time hiring has been on a steady increase. The concern over the worsening in the labor force participation rate was opposed by explaining that through general population growth the number of individuals not in the labor force should be directly proportional.
The growth in new housing presents a favorable outlook. Bob focused on the recovery that this sector has shown since the financial crisis and highlighted potential for future growth when compared to the historical norm. A similar analysis for the auto sales market showed a less favorable outlook indicated by the swifter recovery in the sector that led to light vehicle sales currently standing at levels well above historical norms.
Overall the presentation delivered the message that given the current scenario some cause for concern can be validated, but that the economic reality also warrants a moderate degree of optimism.
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