When the Commerce Department raised its second quarter GDP estimate by 50% late last month, you'd have thought news of the revision would have been heralded far and wide as an economic triumph in otherwise lackluster times.
And yet, the tweak to 2.5% from the 1.7% that was initially reported saw no cheers or shouts of joy since, the updated calculation still falls short of the kind of post-recession growth that investors have expected and sought for over the past four years.
"We're kind of stuck here in this two percent world," says Hank Smith, CIO at Haverford, in the attached video. "The way it's been for the past couple of years, is the way it's probably going to be for the next couple of years."
Of course, Smith's view conflicts with the Fed's current forecast that growth will accelerate to three percent next year. But this Pennsylvania-based investor says there are at least two reasons why the Fed's forecast is probably a bit too optimistic.
First, he says, is the fact that the U.S. consumer and the banking system are still both mired in a lengthy deleveraging process. While he points out that this is a decreasing headwind that gets a little weaker each year, it is still an obstacle to growth.
"We're probably about three-quarters of the way through the process," he says, admitting that he's confident the fabled U.S. consumer will eventually come roaring back once the economy and credit environment are more supportive.
The second reason Smith says we're "stubbornly stuck" in a two-percent growth rut is the ongoing drag of fiscal policy coming out of Washington, specifically from higher taxes and an increased regulatory environment. The good news here is that he expect at least another two or three years of low interest rates, amounting to monetary policy that is still "extraordinarily stimulative," and a partial offset to the not-so-helpful fiscal side of things. An additional factor that Smith did not mention that might warrant attention is the government sequester, resulting in less overall spending that also impacts the U.S. economy.
With this mindset and outlook, it is probably no surprise that Smith thinks defensive, non-cyclical sectors likes consumer staples (XLP) and health care (XLV) will be leaders since "their earnings aren't nearly as dependent on the direction of the economy."
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