Mellody is President of Ariel investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS News.
TOM: Good morning Mellody. You come bearing more good news this morning?
MELLODY: I do, Tom! We all know this economic recovery has taken its sweet time to really settle in for all of us. But this past week had a flurry of good news on that front which points to a broad-based recovery that is now picking up speed.
TOM: Great! What is the first sign?
MELLODY: The biggest signal of solid stable growth we received last week was the GDP number for the third quarter. We learned on Thursday that the economy outperformed expectations and grew by 3.5% in Q3! That is a great number, and well over the 3.1% that was expected. You might recall that 2014 got off to a rocky start, with the first quarter of the year being very disappointing, as the economy contracted by 2.1%. Now that was largely due to a particularly nasty winter, as well as some other factors including large inventory surpluses. This made the second quarter growth rate of 4.6% less impressive, as many saw the growth as simply a rebound from winter. Now, with a second quarter of robust growth, the economy is showing signs of being on a very positive trajectory.
TOM: That is good news! What is driving the recovery?
MELLODY: The next two signs that our economic future looks bright have a lot to do with why the economy has been growing at a healthy clip: consumer confidence and low fuel costs. The improving job market has helped to lift consumer confidence to its highest level in seven years, something that will be music to the retail sector’s ears as the country prepares for the holiday season. The conference board said its consumer confidence index rose to 94.5 in October from 89 in September, reaching the highest level since October 2007. That was far better than the decline to 86.8 that was projected by observers polled by Bloomberg News. And since consumer spending accounts for 70% of our economy, the fact that people are feeling better about their job prospects – and therefore are opening their wallets – means we should continue to see positive growth barring any negative events.
Additionally, as we discussed last week, lower oil prices have provided a boost to the American economy. Not only have they helped keep more money in consumer pockets, the lower costs of oil and commodities have helped us manufacturers who rely on exports to weather a strong dollar at a time of weak demands overseas. So these two factors are helping. The fourth sign is something we have known was coming for a while, but it is still a positive move. The Fed confirmed last week that they will be ending the quantitative easing – the Fed’s stimulus activities such as bond buying – citing the strength of the country’s economic fundamentals. A move to continue the program would have signaled that the Fed was still worried about weaknesses, so this is great confirmation.
TOM: Do you think that the outlook looks good for the long haul? Are there any potential pitfalls?
MELLODY: There are always potential pitfalls, but things are really looking up. One of the main concerns that many people have has been the state of the European economy, and the potential for it to slide backward. However, we have seen signals in recent days that indicate that at the very least, we won’t see the eurozone economy contract. Specifically, we have see the jobless rate in Germany improve, and signs in places like Spain – among the countries that were hardest hit by the downturn – that growth is picking up speed. The other thing that needs to happen in order for this positive trend to be sustained is continued growth in wages. The key to really seeing a booming economy is that people need to see better numbers on their paychecks. We have seen it start to accelerate in recent months, but if it stagnates again, that could signal trouble.
TOM: Thanks for giving us that economic update, Mellody! Always great to get some good news!
MELLODY: Have a good day, Tom.