This week the Census Bureau released data showing that real median household income grew 5.2 percent between 2014 and 2015 to USD 56,516; this was the fastest pace of annual growth since the data started being reported in 1967. Moreover, there was growth across the different income levels and the number of people living in poverty also fell by 3.5 million. However, while the data, on a redesigned set of income questions since 2013, shows good improvement, this does not escape the fact that income levels are still lower than before the onset of the recession.
As we have noted before, we still see the US growth outlook as anaemic and patchy, indeed the Business Roundtable survey of 144 US CEOs in August designed to give a forward-looking view of the economy gave a subdued outlook. The Business Roundtable CEO Economic Outlook Index, a composite of the CEO projections for business activity and expansion registered 69.6 in Q3, down from 73.5 in Q2, and well below the long-term average of 79.6. The CEOs projected growth of only 2.2 percent for Q4: Doug Oberhelman, the Chairman of the Business Roundtable and CEO of Caterpillar summed up the view saying ‘This reflects the unfortunate new normal — where the U.S. economy is pretty much stuck in neutral rather than moving forward. The continued lack of action on an aggressive pro-growth policy agenda that includes tax reform, trade expansion and a smarter approach to federal regulation contributes to an economy that continues to perform below its potential.’
US business investment still remains woefully weak and a concern. Using FRED data the share of US gross private non-residential fixed investment as a percentage of GDP is languishing at 12.8 percent in 2015 and compares with 13.3 percent in 2007 and 14.5 percent in 2000. Added to this, the revised Q2 US GDP data showed business investment contracting an annualised -0.9 percent while the US CEO roundtable survey for Q3 showed nearly flat plans for capital spending qoq: Oberhelman suggested the election was one reason for the reluctance to undertake greater investment. Indeed, with the Apple tax dispute highlighting the issue of US corporates keeping large cash balances offshore it does beg the question if the US could do more to encourage investment at home by reforming the US tax code. The US taxes overseas income of domestic businesses and with the domestic tax rate at 35 percent estimates suggest US companies have USD 2 trillion parked offshore.
Against this backdrop, regardless of whether the Fed raises rates in September or December, we expect that they will remain ‘ahead of the curve’ and the yield curve will continue to flatten favouring positioning at the long end on a duration weighted basis. US growth has been patchy and uneven since the GFC, investment is weak, productivity gains have been disappointing, inequalities are large and inflationary pressures are benign; on top of this there are negative structural trends such an ageing population and secular stagnation which supports a low neutral interest rate.
For us, the hunt for yield in global markets has further to run making high quality bonds from creditors, particularly those offering positive yields, remain one of the more attractive places to be positioned.