KCS told you this 15 months ago

KCS told you this 15 months ago

Mr. Bernanke said recent government spending cuts and tax increases have worked against the Fed’s efforts to encourage more spending, investment and hiring.
“With fiscal and monetary policy working in opposite directions, the recovery is weaker than it otherwise would be,” Mr. Bernanke said, stepping up arguments he has made about recent government efforts to reduce near-term budget deficits.

These comments were taken from the attached WSJ article from January 3, 2014

This article was brought to my attention by my son, Ryan, who also reminded me that KCS had reported nearly 15 months ago that the fiscal drag created by both deficit reduction and tax increases would combine to damp economic activity and the recovery from the great recession.  Economists estimate that the US economy grew in 2013 at roughly 2.1%, which is very modest given this many years into the “recovery”. 

As a reminder, KCS produces a monthly investment article on a variety of topics.  In addition, we occasionally produce a piece titled “Burning Issues”.  In the October 2012 Fireside Chat, and again in the January 2013 Burning Issue, we highlighted the potential drag from fiscal tightening.  Both articles are available on the KCS website at http://www.kampconsultingsolutions.com.

GDP= C+I+G+(X-M), where C=consumption, I=Investment, G=government spend (deficit) and X-M=net exports

The consumer has been, until recently, reworking their balance sheets, and have reduced debt to roughly 92% of earnings. Corporate investment has been tame, but appears to be growing at a faster pace, and this should continue through 2014.  Net exports remain a large drag on GDP, but trade imbalances have improved.  The fiscal deficit has been cut nearly in half through spending cuts and tax increases.  We are unlikely to see greater fiscal cuts in 2014, so the drag on GDP may be lessened.

We, at KCS, are expecting GDP growth to be slightly greater than current forecasts (2.7%).  In fact, it would not surprise us to see GDP growth exceed 3% – 3.5% in 2014. Our hope is that greater investment will continue to strengthen the US labor market, increasing wage growth and spurring demand for goods and services. If this scenario materializes, our GDP forecast may be understated.

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KCS Fireside Chat – 403 (b) Plans: Oldies but Goodies!

KCSThis month’s Fireside Chat was crafted by our partner, Dave Murray, the former plan sponsor for Conrail’s DB and DC plans.  Dave has become a real expert in all things DC.  Dave’s focus this month is on the 403(B) space, and specifically those plan’s dealing with non-profits.  Many of our colleagues, friends and associates volunteer at non-profits, with many holding board or finance positions.  With this great responsibility comes the need to stay on top of legislative changes.  We hope that you find this piece educational.

Washington’s Folly

I have to be careful!  I find myself shaking my head so frequently at what is transpiring in Washington DC, that I might suffer permanent nerve damage.  It is scary how uninformed our politicians are regarding economics, and specifically the role of federal deficits in generating economic activity.

There are four primary sources of profits at the macro level of the US economy including, consumption (consumer spending), corporate investment (plant, equipment and inventory), net exports (exports minus imports) and net government spending (deficit spending minus tax receipts).  Since the great recession, it has really only been the federal spending that has kept corporate profits at all-time highs (averaging > 10% of GDP).  The consumer and corporations have kept spending and investment below normal historical levels, and our net exports are nearly -$500 billion. If it weren’t for the fact that the US fiscal deficit was as great as it has been, the economic recovery would have been far more muted, especially in 2010 and 2011.

Remember, the Federal deficit = private savings! Cut back too much on the federal deficit spending without a commensurate pick up in investment and consumption, and we could teeter on the brink of another recession.  With employment remaining weak, we need corporations to pick up the slack.  We may also benefit by becoming a bigger energy exporter, reducing the negative consequence of being a net importer nation, but that might take years.  Until then, we need Washington to stop focusing on the debt ceiling and expend their energy on creating an economic environment that creates jobs and stimulates demand for goods and services.

Youth unemployment’s second derivative effect

Much has been written about the growing unemployment crisis for those under 30 in the US, with <50% of that cohort working a full-time job, but there is a secondary effect that hasn’t gotten much notice.  With the demise of defined benefit plans as the primary source of retirement income, defined contribution plans are rapidly becoming the only retirement game in town.  However, for DC plans to be effective, employees need to fund as much as they can, as early as they can, in order to build a nest egg that will accumulate the necessary assets for a 20-25 year retirement.  With the younger workers not entering the workforce until they are in their late 20s, they are missing out on several years of contributions and compounding.  Unfortunately, managing a DC plan has proven difficult enough for most of us.  We certainly don’t need further impediments exacerbating an already tough situation.