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The Economy Is Great. Why’s It So Awkward to Say So



The Economy Is Great
Here are some facts about the American economy.

  • Jobs have grown for 106 consecutive months, the longest streak on record.
  • At 121 months, this is the longest bull market in American history.
  • The unemployment rate has been at 4.0 percent, or under, for 16 consecutive months, the longest such streak in 50 years.
  • Inequality remains a critical problem, but wages are now growing fastest among the lowest-wage industries, thanks to state-by-state increases in the minimum wage and the effects of low unemployment.
  • Consumer sentiment, as measured by the University of Michigan, has hovered over 90.0 for more than four years, something that hasn’t happened since the 1990s.
  • Latino unemployment has fallen to its lowest rate on record.
  • Black unemployment, too, has fallen to its lowest rate on record, and, as the investor and Bloomberg columnist Conor Sen pointed out, the unemployment rate for black teenagers, which peaked at 48.9 percent in 2010, has plunged to yet another record low in 2019.

To list these facts is not to claim “mission accomplished” in labor or racial equality, but rather to mark history, because economic history is being made. By all accounts, this is a strong recovery. A historically strong recovery.

But you’re not going to hear either party say much about why.

For Democrats, the reason is pretty simple: partisans are loath to cheer economic growth for fear of implicitly praising the president. There is far more political advantage in focusing on the (very real!) persistent dark spots of the economy, whether it’s high medical and childcare costs, the burdens of student debt, racial and gender disparities, or the socioeconomic indignity of low-wage and no-wage service sector work.

For the GOP, the situation is slightly more complicated. Both the White House and congressional Republicans claim full credit for the economy all the time—a dubious argument, which elides the role the Obama administration played in setting the economy on its trajectory. Yet Republicans don’t like to admit the biggest policy-based reason why the economy surged in 2018 and into 2019, which is this: President Trump secured the very stimulus that Republicans spent years denying President Obama.

Throughout his term, Obama tried repeatedly to get Republicans to sign on to additional spending and tax cuts for the middle and lower classes, which would have increased the deficit. The GOP repeatedly refused to go along with this, arguing that higher deficits were philosophically unacceptable and financially ruinous. In 2016, with the economy slowing down, the Obama administration again proposed a moderate stimulus plan that would target infrastructure, but congressional Republicans refused to budge.

But under Trump, something odd has happened: the GOP has presided over the largest two-year deficit increase in American history, outside of a recession. The party paired higher spending with a massive corporate tax cut, which sweetened a long-term marginal rate cut on corporate income with a short-term tax benefit for households.

Thanks to this infusion of deficit-financed stimulus, job growth and GDP accelerated throughout 2018, and both continue to grow steadily today, despite the wobbliness of global markets and the president’s imbecilic decision to wage a trade war against the world’s second biggest economy.

The upshot is that neither side has much to gain from speaking frankly about the economy: Partisan Democrats are unlikely to praise its accomplishments, lest they undercut their 2020 nominee; and conservative Republicans are unlikely to explain its basis, lest they sound like hypocrites—or, even worse, closet Keynesians. They’ll talk about the tax cut, while ignoring the indisputable fact that they jump-started the economy with the very stimulus tools that they decried as unacceptable under Obama—even as millions of families struggled with unemployment.

Fiscal policy—that is, how a government taxes and spends—is critically important to the lives of typical workers. It helps determine how many people can get work, what they’re paid, and what they can afford with their income. Nearly 100 years ago, John Maynard Keynes argued that it’s necessary and prudent to fight through a demand-constrained economy with deficit-financed stimulus. The Trump tax cut helped the economy in precisely this way: Government spending went up, federal tax rates went down, deficits rose, households spent the cash, and growth accelerated.

There is no question that the Trump deficits are an unprecedented live experiment with sky-high deficits in a non-recession and non-war economy. Permanent trillion-dollar shortfalls would be an economic gamble. But this is a strange and nervous period in economic history, with the entire developed world experiencing pitifully low inflation, low interest rates, and chilly growth, despite years of dovish monetary policy. It may simply be the case that old-fashioned fears of high deficit spending are no longer appropriate for a global landscape with more aging, automation, and other economic factors that may permanently constrain inflation.

But that’s all speculation. Here’s what we know for sure: The Trump tax cut, despite its extremely poor long-term design, clearly helped the economy in the short run. And neither side will talk honestly about why. This should be a triumphant moment for Keynesianism and its defenders, who were right about the benefits of spending “beyond our means.” They should proclaim their victory from the rooftops. By staying quiet, they may find it harder to defend themselves when a Democrat becomes president, and Republicans suddenly rediscover the sanctity of balanced budgets.

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North America economy is the most resilient against climate change




By 2050, climate change will shrink the US economy by 1.1%, according to a report from the Economist Intelligence Unit. The same holds true for North America’s economy as a whole, according to the report. Natural catastrophes, such as wildfires and droughts, for example, will continue to be a drag on the economy with worsening climate conditions.

Still, the United States is comparably well off. Western Europe’s GDP growth stands to drop 1.7% over the next 30 years, putting it in second place behind North America.

Preparation for climate change is higher in these regions, which is making them more resilient. Wealthier and more developed economies have it easier when it comes to battling the onslaught of climate challenges. But being rich is only part of the deal. The quality of government institutions also matters.

Institutions must be able to adapt to change and put effective mitigation policies in place to remain intact in the face of climate challenges. But being rich is only part of the deal The quality of government institutions also matters.

“Poor institutions, therefore, can simultaneously harm economic growth and exacerbate the negative impacts of climate change,” the report said. This might include investing in flood defense, water storage or public infrastructure.
Global GDP growth will be 3% lower by 2050 thanks to the impact of climate change, and that means the developing world will bear the brunt of the bad news.
Africa is the most vulnerable to negative economic impact, according to the EIU report. The continent’s economy stands to shrink by 4.7% over the next 30 years. It is already at a disadvantage because average temperatures are higher and economic development is lower compared to the United States, for example.
Latin America and the Middle East are rounding out as the top three of the least resilient regions. Asia-Pacific falls in the middle, with an expected hit of 2.6% to its economy thanks to climate change.
“Countries, both developed and developing, will need to make a greater effort on the domestic front to meet their goals on adaptation and mitigation for the economic impacts to be reduced,” said EIU Country Analysis Director John Ferguson.

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Poland sees bigger state role in economy




By Alan Charlish and Alicja Ptak

WARSAW (Reuters) – Poland’s prime minister set out plans on Tuesday to strengthen the state’s role in the economy and deepen an overhaul of the justice system that has put Warsaw on a collision course with its European Union partners.

Mateusz Morawiecki said the ruling Law and Justice (PiS) party would continue increasing welfare spending and the share of Polish capital in domestic companies, underlining its break with the free-market reforms of liberal governments before it.

“Neoliberals have fueled a sense of confusion in our value system. Many people were led to believe that the state is a ball and chain,” he said in a policy speech to parliament after an Oct. 13 election that gave PiS four more years in power. “Extremes are not good. We are building a normal state.”

Morawiecki spoke repeatedly of a return to “normality”, referring both to PiS’s economic policies and its conservative vision of the traditional family which has won over voters but has been criticized by opponents for encouraging homophobia.

He promised new welfare programs to help families with at least three children and the elderly.

In separate comments, PiS leader Jaroslaw Kaczynski said: “Our society… must be based on the Polish family, the family in its traditional sense. A family which takes the form of a relationship between a man and a woman.”

Opposition lawmakers criticized PiS’s vision of normality.

“The desire for normality means the rule of law and economic prudence, and you break those principles day after day,” said Grzegorz Schetyna, leader of the largest opposition party, Civic Platform.

Morawiecki’s government won a vote of confidence in a late-evening session on Tuesday, with 237 deputies out of 454 lending him their support.


Since returning to power in 2015, PiS has introduced changes to how courts are run and altered some of the rules governing the Constitutional Tribunal and the Supreme Court.

The European Commission, the EU executive, responded by launching legal action over reforms which it says threaten the rule of law and the independence of the judiciary.

The European Court of Justice ruled on Tuesday that it was up to Poland’s Supreme Court to decide on the independence of the Disciplinary Chamber and the National Judiciary Council, offering some criteria on adherence to EU law.

Morawiecki gave no details of the next steps PiS plans to take in its reforms of the judiciary. The party says further reforms are intended to make the court system more efficient but opponents say the reforms made so far have politicized it.

PiS has said it will keep a balanced budget in 2020, benefiting from one-off revenues and fast economic growth, although some economists say such plans are too ambitious at a time when the European economy is slowing down.

(Reporting by Agnieszka Barteczko, Alan Charlish, Joanna Plucinska, Anna Koper, Pawel Florkiewicz and Alicja Ptak; Editing by Timothy Heritage)

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Cyclical Stocks That Will Lead as Economy Rebounds




Cyclical stocks are beating the market, and should continue to outperform in 2020 as the U.S. economy rebounds, Goldman Sachs forecasts. Since late August, the S&P 500 is up by 9%, cyclical stocks have advanced by 12%, but defensive stocks have lagged with an 8% gain, per Goldman’s current US Weekly Kickstart report.

“The relative performance of Cyclicals vs. Defensives suggests the equity market is anticipating an acceleration in US economic growth during the coming months,” Goldman says. “Investors who want to capture further cyclical upside can improve risk-reward by narrowing their focus to select cyclical stocks,” they add.

Among the 24 stocks that passed Goldman’s Cyclically-Attractive Risk-Reward screen are these 10, which are expected to post a sharp acceleration in their EPS growth in 2020 compared to the previous year. Goldman for example, forecasts that CommScope Holdings Co. Inc. (COMM) will post 2020 earnings growth that’s 17 percentage points (pp) higher than this year. Other companies include Lincoln National Corp. (LNC), 79 pp higher, Harley-Davidson Inc. (HOG), 38 pp, Urban Outfitters Inc. (URBN), 30 pp, Kohl’s Corp. (KSS), 11 pp, 3M Co. (MMM), 17 pp, MetLife Inc. (MET), 12 pp, Lear Corp. (LEA), 42 pp, Prosperity Bancshares Inc. (PB), 35 pp, and Evercore Inc. (EVR), 18 pp.

Key Takeaways

  • Goldman Sachs forecasts accelerating U.S. GDP growth in 2020.
  • They identified cheap cyclical stocks with significant upside potential.
  • These stocks are highly sensitive to economic data surprises.

Significance For Investors

Goldman screened the Russell 1000 Index for stocks with high historical share price sensitivity to economic data surprises, but whose current valuations, as measured by forward P/E ratios, are significantly below both their own 5-year averages and the average for the index. Goldman excluded energy stocks, based on their forecast of flat oil prices, and semiconductor stocks, given that shipments have recovered to trend. Among the stocks listed above, Urban Outfitters and Prosperity Bancshares are the most economically-sensitive.

The median stock in the basket has a forward P/E of 11 times projected earnings over the next 12 months, versus a 5-year average of 14 times, and a current figure of 19 times for the median Russell 1000 stock. While the median stock in the basket has a projected EPS growth rate in 2020 of 7%, versus 8% for the median Russell 1000 stock, its growth rate is forecast to improve by 9 percentage points from 2019 to 2020, versus an improvement of only 3 percentage points for the median stock in the index.

Goldman sees signs that the U.S. economy is rebounding, which should give cyclical stocks additional upside. They cite recent positives in non-farm payroll growth, home sales, retail sales, the ISM Manufacturing Index, and the ISM Non-Manufacturing Index. They forecast U.S real GDP to grow by 2.1% in 2020, versus the consensus projection of 1.8%.

Motorcycle manufacturer Harley-Davidson appears to have huge upside, according to Goldman’s analysis. It has a forward P/E of 11 times, slightly below its 5-year average of 12 times. The consensus calls for 21% EPS growth in 2020, up 38 percentage points from 2019. While Q3 2019 revenue was down by 5% year-over-year (YOY) and shipments dropped by 6%, Harley beat estimates and the stock surged, Barron’s reported. About 40% of total bikes sold were overseas, with sales in Asia up by nearly 9%.

Insurance company MetLife has a forward P/E of 8 times, slightly below its 5-year average. The consensus calls for 9% EPS growth in 2020, up 12 percentage points from 2019. Revenue and EPS in Q3 2019 were up 15% and 161%, respectively. Revenues from premiums rose by 5.3%, and total revenues beat the consensus estimate by 14%, per The Wall Street Journal. However, more than half the beat was due to a gain on derivatives contracts used to hedge against lower interest rates.

Looking Ahead

To be sure, many of these companies have posted poor results in the past few years. And Goldman’s bullish view depends on an imminent economic rebound seen by few other strategists on Wall Street. If Goldman is wrong and the economy stalls or goes south, these stocks will follow close behind.

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