Economy, Part 1: Positive Surprises Are Coming

June 5, 5:00 pm EST

We’ve talked the past couple of days about economic growth and the likelihood that we’re just beginning to see the positive surprises from Trumponomics materialize in the economic data.

The formula for GDP is consumption + investment + government spending + net exports.  So you can see in these components, the direct targeting of economic stimulus in the Trump economic plan to drive growth: tax cuts, deregulation, repatriation, infrastructure and trade negotiations.

Now, consumption makes up about two-thirds of GDP.  Let’s look at consumption today, and we’ll step through the other contributors to GDP over the next few days.

First, what is the key long-term driver of economic growth over time?  Credit creation.  When credit is used to buy productive resources, wealth goes up.  And when wealth goes up consumption tends to go up.  With that in mind, in the chart below you can see the sharp recovery in consumer credit (in orange) since the depths of the economic crisis (this excludes mortgages).  And you can see how closely GDP (the purple line, economic output) tracks credit growth.

And we have well recovered and surpassed pre-crisis levels in household net worth — sitting at record highs now (up another $2 trillion since we last looked at it) …

A large contributor to the state of consumption is the recovery and stability in housing.  We are now back to new highs on the broad housing index …

When we consider this solid backdrop, remember, we’ve yet to have a return of ‘animal spirits’ —  a level of trust and confidence in the economy that fuels more aggressive hiring, spending and investing.
And with that, as we discussed yesterday, while we are in the second longest post-War economic expansion, we’ve yet to have the aggressive bounce back in growth that is characteristic of post-recession recoveries.
But we now have the pieces in place to see the return of animal spirits and a big pop in economic growth.  And that should continue to fuel for much higher stock prices. And there are stocks that will do multiples of what the broader stock market does.
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