Why US economy still outshines Europe and Asia


The last revision for first quarter GDP has been released.  The first quarter GDP growth came in at a negative 0.2%.

The economy seems to be back on track for a modest 2% to 2.5% growth rate currently in my opinion.  As I have mentioned before, the U.S. is “the cleanest dirty shirt in the laundry.”

There are a lot of headwinds keeping the U.S. economy from growing at a more robust rate.

 

USA

 

Headwinds

With the turmoil in Greece, bond problems in Puerto Rico, a slowdown in China, and a very strong U.S. currency, our economy is having trouble breaking out.

Trade has been a drag on the U.S. economy in four of the last five quarters.

We are importing more and exporting less which reduces our GDP.  The economy has failed to grow much more than a 2% annual rate since the recovery began in 2009.

Earlier in the year, the Federal Reserve projected a growth rate of 1.8% to 2.0% for 2015. However, as usual, if you look hard enough there are a few flickers of hope.

 

China Matters

Currently the equity markets and the bond markets are in turmoil over the Greek election.

I believe this will pass; Greece is a very small economy and international buffers are strong enough to prevent contagion.

China is a different story.  Its stock market experienced a strong correction.

Chinese regulators allow more margin trading than the US does and the bubble is bursting.

However the Chinese economy is still growing at a reasonable rate of about 7%, though there is a debate among analysts about the quality of that number.

 

Dollar Power

Last but not least is the strength of our currency.  The dollar has appreciated against just about all major currencies as the Greek and Euro stalemate developed.

This strength has caused oil prices to retreat from the $58 to $62 range it traded in for about three months through mid-June.

Copper and all other commodities have fallen as well due to the strength in the dollar.

 

Energy Sector

Several mid stream companies we follow are building capacity to take advantage of the domestic expansion in production and demand in the Natural Gas Liquid (NGL) space.

Our two favorite names in this space are Enterprise Products Partners (EPD) and Kinder Morgan (KMI).

Enterprise Products has expanded its presence in the EagleFord by acquiring EFS midstream.

They have joined Kinder Morgan in acquiring high-quality mid-stream companies at very reasonable prices.

These companies are also adding pipelines to export natural gas to Mexico.

In the downstream sector of the energy space the refiners are showing improvement.

We are adding to our positions in Phillips Petroleum (PPX) as well a couple smaller, single refinery holdings.
 

Consumer Stocks

Companies that derive income from overseas have been hurt by the strong dollar. However, companies that are domestically orientated have done well.

For this reason, we are adding to our positions in several companies that are showing good growth in the consumer sector.

The names we like are Kroger (KR), Walt Disney (DIS) and Home Depot (HD).

In my opinion, these are companies that will benefit as the consumer starts to reaccelerate their spending after having paid down their debt balances.

We are also starting to acquire small positions in Skyworks Solutions (SWKS), a technology company, Wells Fargo (WFC) in the financial sector and Eli Lilly (LLY) in the pharmaceutical sector.

 

Industrials

We are not adding new money to our industrials positions at this time, but we are not selling out of them either.

These companies are holding up fairly well in spite of the strong dollar.  We will continue to watch the dollar and to listen to their next quarterly reports.

Honeywell (HON), United Technologies (UTX), Emerson Electric (EMR) and Rockwell Automation (ROK) are the ones we like.

 

Chemicals

Chemical demand in the automotive and construction industries is strong.

In my opinion, Westlake Chemicals (WLK) and LyondellBasell (LYB) are showing good profit gains on a year over year basis since last year.

Their capital expansion projects are beginning to come on line allowing them to further reduce their unit costs.

We are adding to these positions.

Photo credit: Neil Kremer via Flickr Creative Commons

Investments discussed are held in client accounts as of July 28, 2015. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.


Ben Dickey

About Ben Dickey

BSG&L is a Texas-based registered investment adviser. Our founding principals, Ben Dickey and Kevin Londergan, have more than 30 years experience in both accounting and financial services.At BSG&L, we believe that greater and consistent returns can only be achieved by identifying long-term tendencies in the investment markets and understanding fundamental shifts in expected investment returns.