Escape Velocity

"The U.S. can continue to improve, but can we lift off, can we attain escape velocity when the rest of the world is challenged?" - Mohamed El-Erian

With only 6 trading days left in the year it seems pretty safe to say that we will end the year in positive territory.  With interest rates at just above 2% on the 10-Year Note providing a good support for the market it appears that there is little reason to expect a 12% drop during some of the slowest trading days of the year, so I should be relatively safe in this prediction.  Looking to 2015 the question is can the United States economy blast out of the range of slow growth that it has been stuck in for the past five years?  Can it achieve "escape velocity"?

The term "escape velocity" is a reference to a rocket that is trying to shake the shackles of the earth's gravitational force.  If it has enough fuel and power to boost itself free then traveling through space, or in this case expanding the economy is far easier.  Since 2009 the economy has been sputtering along at sub 2% growth, however with unemployment dipping below 6%, interest rates at historic lows, oil prices 50% off their 2014 highs and with the hoards of cash sitting on company balance sheets it seems as if the rocket is finally primed for lift off.

The main issue is the drag that is the rest of the globe but there are others.  First off is the unemployment numbers which hide the inequality of income and the bulges of unemployment at the youth levels.  Furthermore the anemic growth in hours worked and payroll increases is exacerbating the problem and keeping consumer spending low. These numbers therefore do not accurately reflect the actual conditions of the labor market and explain why Janet Yellen is continuing to keep interest rates low even after the Federal Reserve's target unemployment rate of 6% was exceeded.

This inequality of income is exacerbated by the massive shift in wealth from the middle and lower classes to the top 3% of the country.  This inequality is solidifying the divide between small business and large companies.  The latter has access to capital and opportunities that small businesses are barred from and this is the reason for the slow growth in wages and the stubborn unemployment numbers.  Growth, as I have repeatedly mentioned in this blog, comes from entrepreneurs that create small businesses which in turn hire people creating a burgeoning middle class that buoys the economy.  Recent legislation and Federal Reserve policies have created this lopsided business environment and until the policies change this will result in continued weak growth.

That said the lower price of oil is definitely having a positive impact on the consumer so there is still a hope that growth can exceed 2.50% next year but with the slowing of Europe, Japan and China I would be highly surprised to see United States growth in excess of 2.00%.  While this may not be exactly what the doctor ordered at least there are continued signs of life and from where I sit when you consider the problems around the globe it is nice to be located in an economy that may once again lead the charge.

I wish all of you a very happy, safe and festive holiday season.