Lower Oil Prices and Optimism Fueling Consumer Spending

The 4th Quarter saw a slow down of growth from 5 to 2.6% but consumer spending popped up 4.3%. This is good news as 70% of the economy functions from consumers spending. Growth might have slowed in the 4Q but people are more optimistic about their future and this can create positive signs for economic growth in the first half of this year.

According to Sam Bullard a senior economist at Wells Fargo, "Sharply lower oil prices do present downside risk to business investment, but accruing benefits to the consumer in the form of lower gasoline prices should increasingly offset the near-term drag(1)."

As consumers save money at the pump and heat on their homes they are naturally going to spend that extra money somewhere. Americans are not great savers. Nearly 75% of people live pay check to pay check while only 25% have enough to cover 6 months of expenses (2). 

If we aren't going to save that money most likely it is going to be spent somewhere. We love to eat, buy clothes, go to the moves, and take trips. All that extra money will make its way into the market to fuel sales and great economic activity. Watch the restaurant, retail, and beauty markets next quarter.

It isn't all about the money saved from oil as this doesn't consume the largest percentage of American budgets. As optimism rises Americans simply like to spend more money. It is the psychological effect of feeling good about one's life and prospects for the future.

Oil isn't the only thing working in American's favor as hiring is increasing and wages are starting to rise. A few percentage points in income could lead to even more spending. As the economy moves forward we will find that the combination of events coming into play at different times will hopefully keep us happy, optimistic and motivated.

The Importance of Export and Taxes in Economic Growth and Government Budgets

Export and taxation are fundamental aspects of the American economic engine. Exports help create wealth that results in increased employment and tax generation. Government relies on taxation to pay its bills and keep the doors open. When exports wain and job creation slows both the economy and government suffer shortfalls that make their way into government spending crisis. Ignoring exports in the debate on taxes is like ignoring the cow when discussing how to produce milk.

The news is aflutter with the upcoming debates on taxes and budgets. How to cut back, how to spend more wisely, and how to reduce waste are just some of the discussions. These are important debates and questions for a nation that desires to ensure that government is not so top heavy as to suck an unreasonable amount of resources from the economy. Yes...government does cost money and more government costs more money.

Finding the right balance between enough government to ensure proper national management while not impeding future growth is difficult. Leaders have debated this for hundreds of years since the very first tax man came to confiscate chickens to feed the chieftains troops. The argument typically revolves around how to get more taxes and use collected taxes to accomplish certain national objectives; a legitimate function of government.

A few times  the conversation may move to something beyond tax rate and expenditures to how taxes are generated. Tax revenue comes from the economic production of a nation's businesses and people that sell their products on the international market to produce additional revenue. As business revenue grows the dollar amount (not tax rate) should grow as more wealth and new jobs are created.

Beyond the specific taxes a company pays on income are the secondary taxes earned through improved labor markets. As employees are put back to work and their opportunities rise there is a exponential growth in the amount of taxes being paid (not tax rate) due to more gainfully employed individuals paying into the system. Business and employment are two sides of the same coin.

Exportation, and the wealth it generates, is a direct result of the competitiveness of American businesses that manufacturing and producing within the country. You can't have jobs unless you have employers and you can't have taxes unless you have economic activity. You can't sustainably increase taxes unless you increase economic activity. Consider a few important associations of tax and exportation:

Tax as a Revenue Source: Taxes and fees are major sources of revenue for government. Increasing the amount of paying tax members also increases the wealth government can accumulate. Higher taxes generally decrease economic activity while lower taxes generally increase economic activity. Developing a parsimonious tax policy that ensure an appropriate tax rate that encourages growth with the ability to ensure everyone is paying their fair share of taxes is beneficial. 

Employment and Wages: As exports increase the revenue gained from increased sales and improved employment wages can make a big difference to state and federal budgets. Opening up additional international sales helps to encourage growth beyond the consumption patterns of Americans making it possible to create higher levels of wealth generation. A net positive export environment is also a net positive growth market. 

Investment Growth: As regions become export oriented and are able to generate new forms of wealth they will naturally draw interest from investors who also desire to earn profit. Entrepreneurs often attract larger investors that seek to create economies of scale. As investment and exports grow so does the amount of revenues government earns.

International Influence: America wouldn't have the influence today it does unless it was able to generate new wealth through innovation and sell those innovative ideas on the market. As people engage for business across the globe they will begin to adopt certain characteristics of successful nations to emulate in their own countries.

Export activity is an important part of the discussion as it relates to tax generation and balancing the budget. One method of increasing tax revenue is to put in place proper pro-business policies that help create new opportunities through the generation of small business and the enhancement of large businesses to create export oriented local economies. Government has a fiduciary responsibility to use policies in a way that lower transactional costs, improve upon national infrastructure, and create new opportunities to employ Americans. Exportation and taxes are part of the discussion on government budgets and cannot be easily separated.

Improving Consumer Confidence and 3.5% GDP Comes with a Warning

The economy took a jump from July to September as Gross Domestic Product (GDP) calculations rose 3.5%. This is great news for those hoping to finish off the last of the recession and move onto more prosperous times. This improvement is the largest in a single quarter since 2003 and parallels higher levels of consumer enthusiasm. Positive news also comes with a warning to redirect focus to balancing budgets, encouraging long-term economic growth, and reducing income disparity.  

To add to this positive news the University of Michigan’s consumer confidence index also jumped to 86.9 in October when compared to 84.6 in September.  With GDP expanding and consumer confidence rising few can argue that the world’s super power isn’t regaining economic ground. 

Measuring economic growth often rests on imperfect numbers such as GDP that can create improper assumptions among decision-makers. GDP is seen as the total market value of the goods and services produced by a nation over a certain period (Kolb, 2008). That number includes all final goods and services generated by economic resources within a nation. 

GDP product doesn’t consider the production of American citizens but any business or entity that works within a nation. It is an important distinction, as the global world can allow companies to do business within the U.S., but be owned by foreigners that still contributing to local growth.

Despite its wide reaching use GDP is not a perfect measurement. There is a fundamental difference between wealth creation and increased production. According to Strow & Strow (2013) GDP can encourage lawmakers to push for increased government spending but ignore wealth creation as a primary function of economic expansion. 

As an imperfect measurement the improvement of GDP and increasing consumer confidence are positive markers for the potential of future growth. Growth years are also times when the strategies of lawmakers and business leaders should also change to make such growth long lasting. Unfortunately, too many wait until another crisis occurs before refreshing their thinking.  

When the economy improves officials sometimes focus on maximizing additional spending to balance old budgets and encourage pet projects. With the ending of unprecedented government asset purchases, historic low inflation, and a few deficit improvements it is important to focus on reasonable budget reduction plans, improving economic trade conditions, and the reduction of income disparity. The underpinnings that lead to growth should not be ignored for short-term budget advantages.

Kolb, R. (2008). Gross Domestic Product (GDP). Encyclopedia of business ethics and society. 

Strow, B. & Strow, C. (2013). Gross actual product: why GDP fosters increased government spending and should be replaced. The Journal of Private Enterprise, 29 (1).

Can the U.S. Be an Export Nation in a Difficult International Economy?

The IMF says the global economy will grow slower than expected this year while another recent announcement states that China superseded the U.S. in terms of purchasing power this year. Both are game changing events in what appears to be a long played out economic drama. Even though the news is not positive it does provide an opportunity for the U.S. to focus on improving its infrastructure to lower costs and retool for better managing international markets.  

Slower International Economic Growth:

International markets are expected to experience slow growth in the near future according to an October 7th report by the International Monetary Fund (IMF). The IMF initially thought the world economy may grow as high as 3.7% this year but have revised that number down to a weaker 3.3%. The slowing economy could make it more difficult for companies that are trying to export overseas to locations where the economy is lack luster.

Growth in advanced economies and emerging economies are widely different. Advanced economies should experience a 1.8% growth rate this year and a 2.3% growth rate in 2015. Emerging economies are expected to have a higher rate of 4.4% based upon their riskier investment portfolios.   Companies are attracted to the cheaper and more lucrative emerging economies for new investments.

The IMF argues that one of the difficult challenges facing economies is the ability of countries to enact reform and change to improve upon their competitive positions. Countries should select which changes are needed and beneficial and then move down the path of change to make things happen. Political capital and the ability to share objectives will naturally have an impact on the success of reform efforts. 

Chinese Wealth and Influence:

The IMF states that China’s economy is larger than the U.S. in terms of purchasing power (1). China has surpassed the U.S. on purchasing power parity (PPP) meaning that once the Gross Domestic Process (GDP) is adjusted the Chinese have significant purchasing strength in the global market making them more influential than in the past. They have become a direct competitor and market changer.

National wealth creates influence among business stakeholders. When national wealth is high countries are able to better bargain for deals, influence international stakeholders, and obtain the resources needed to adjust and be more innovative. As China rises on the international scene a new alternative takes shape which becomes viable for nations seeking the best deal between two large economic countries (U.S. and China). 

Needed Improvements:

A slower international economy and a more powerful China is not the end of the game. It provides an opportunity for the U.S. to direct its efforts toward implementing its own growth oriented strategies to draw investments and improve the overall economic functioning of the nation. When difficulties arise decision-makers are encouraged to put down petty differences and focus on solutions through collaborative problem-solving.

Economic hubs act similar to emerging markets but have the additional benefit of being within a more stable national economy. Their growth potential as a localized entity is higher than national rates but can also influence those national rates. Emerging technology and manufacturing hubs are prime examples of flush investment and growth opportunities that have not been fully explored. 

Within the U.S. there are examples of hubs that developed organically through like-minded stakeholders. Understand where these hubs are located, encouraging mutual development within these hubs, and creating awareness of investment opportunities has a long-tail impact on the national economy. As hub members become more innovative they will naturally export products and raise their income opportunities by drawing in more investment interest to feed their growth. 

The point between A and Z has many stops and twists along the path. At times we have become our own worst enemies in the sense that other considerations beyond the health of the nation regularly take precedence. We must only look at the political spectrum to see this distraction at work. Americans desire employment opportunities and this comes through building ground-based products and services that have international penetration. Government should move upwards in its development to lower costs, empower local economies (i.e. hubs and clusters), reduce debt, improve infrastructure (i.e. how hubs interact on a national level) and focus on founding fundamental principles that encourage basic human motivation. 

IMF Report