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 Insight: The bullish case for the US economy By Abby J.Cohen |
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作者：ceo/cfo 在 海归商务 发贴, 来自【海归网】 http://www.haiguinet.com
Financial Times
Updated: 3:42 p.m. CT May 2, 2007
Last week, Jeremy Siegel, professor of finance at the Wharton School, made the bullish case for equity valuations in this column. No less important is the current state of the US economy, including corporate performance. Simply put, the economy is displaying an improved balance between sectors, ongoing productivity gains, and mild-mannered inflation. Recession seems unlikely and a long period of moderate profit expansion would benefit equities.
The US economy is decelerating but, critically, it is also rotating. This is what economic cycles do. The sources of economic energy are shifting; this has been exacerbated by the earlier dramatic growth in housing. Residential construction is shrinking at a 15 per cent annual rate, contributing heavily to the recent below-trend 1.3 per cent real GDP figure. Yet, weak housing alone is unlikely to derail the economy. Even within housing, there are wide divergences depending on factors such as location and borrowers' balance sheets.
Other sectors keep growing impressively. For example, non-residential construction, now larger than residential construction in the GDP accounts, is growing at 15 per cent, offsetting the decline in new housing. Since the last recession ended in early 2003, the two fastest-growing sectors have been business-fixed investment and exports. Besides construction, capital expenditures for equipment are solid, although they look stronger in volumes than in dollars. Stated differently, purchasers of equipment such as information technology benefit from ongoing deflation in the category, and can bolster their capital stock without paying .
A rule of thumb is that a 20 per cent increase in equipment and functionality can be purchased for an additional 10 per cent. Worker productivity is tied to the equipment they use, not how much their companies paid for it.
Incremental economic energy is coming to the US in the form of revived exports. The dollar is less important than the improved vigour of our trade customers. The US is a significant exporter, and Europe is the leading trade customer outside North America. The US trade balance with Europe deteriorated from a rough equilibrium in the late 1990s to a dramatic $140bn deficit last year. This was largely attributable to the sharp divergence in economic performance, with US expansion often running at double the pace of Europe or Japan.
Consumers also ballast the US economy. Despite housing woes, and concerns about lower-income families, personal consumption continues to grow at roughly 3 per cent, the trend rate. This is linked to the strong labour market and gains in real wages and household income. These gains have had only a mild effect on unit labour costs, which are still declining in some sectors due to ongoing gains in worker productivity. Labour costs account for two-thirds of all business costs in the US, and it is therefore unlikely that core inflation will soon become worrisome.
Corporate performance continues to impress and equity prices seem well supported. After four years of economic expansion, profit comparisons become more difficult and investors seek evidence that returns on capital can remain at attractive levels. Even so, corporate balance sheets are flush, and the companies in the S&P 500 alone have $2,800bn in cash balances, roughly 20 per cent of the average market capitalisation. Returns on equity remain in the 16 per cent to 18 per cent range in many industries. Worries about secular erosion appear ill-founded, except in a small number of industries, such as autos, that have been losing global share for several years.
Our equity valuation model points to higher prices, even though we use more conservative assumptions than we think are likely, such as a sharper deceleration in profit growth and a 75 basis point rise in Treasury yields from current levels. The model suggests price targets of 1,550 for the S&P 500 and 13,500 for the Dow Jones Industrial Average for the end of this year. The outlook for fixed income securities appears less favourable, given low real interest rates and the narrow spreads in credit markets, which offer little margin for disappointment. Like the sector rotation, the divergence of equity and fixed income prices is endemic to economic cycles.
作者：ceo/cfo 在 海归商务 发贴, 来自【海归网】 http://www.haiguinet.com
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 Insight: The bullish case for the US economy By Abby J.Cohen -- ceo/cfo - (4363 Byte) 2007-5-04 周五, 02:41 (939 reads)
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