U.S. Economy Turns On The Afterburners; Is a Rate Hike Next?
Frank Holmes | Jun 15, 2015 01:58PM ET
Quick, think back nine years ago to June 2006. Can you recall what was happening then?
Let me give you some hints. Shakira’s “Hips Don’t Lie” was blasting from radios, and moviegoers were lining up to see The Da Vinci Code. The U.S. was deeply involved in Iraq, where Saddam Hussein was being held and awaiting trial. And with Windows Vista still in beta testing, Bill Gates announced he would step down as chairman of Microsoft (NASDAQ:MSFT).
That June also marked the last time the Federal Reserve hiked interest rates.
So when will they be raised again? This Wednesday the world will tune in to see if Fed Chair Janet Yellen can answer that question. Though it’s anyone’s guess what she’ll say, there’s no denying that many of the economic indicators the Fed is keeping an eye on have sharply improved lately.
This has huge implications for investors, a topic I touched on during my recent keynote address at the Canadian Investment Conference in Vancouver.
h3 More Jobs + Better Wages = Increased Spending/h3
The U.S. jobs market in May was strong on several fronts, indicating that the economy has indeed turned a new corner. Businesses added 280,000 jobs, beating estimates by more than 50,000, while jobless claims stayed below 300,000 for the fourteenth straight month.
Hourly wages rose 0.3 percent in May, 2.3 percent for the year. This is pulling people back into the labor force and has helped stabilize the still-low participation rate.
Among those finding work are young people, whose employment rate has risen over 10 percent in the last five years to add three million new workers. Investment banking and research firm Evercore ISI estimates that this trend will be sustained for the rest of the decade.
As the firm points out: “This age group drives economic growth.”
To meet supercharged auto demand, Ford plans to reduce the number of days its assembly plants are shut down this summer, from two weeks to one week.
Airlines are also positioned to benefit handsomely from an improved U.S. economy. Last week, the International Air Transport Association (IATA) announced that it expects the industry’s net income to ascend to a record $29.3 billion this year, an increase of 80 percent from 2014. The group also projects that return on capital will exceed borrowing costs, an industry first.
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Airlines are so optimistic of sustained economic momentum that a staggering $5.6 trillion in new aircraft orders are expected to be placed over the course of the next 20 years. That’s according to Boeing (NYSE:BA). In its latest outlook report, the aircraft manufacturer says that commercial jet fleets will more than double over this period, from 21,600 units to 43,560 units. Close to 60 percent of these new aircraft will be to accommodate growth in global air travel demand.
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One last thing to be aware of: After a stellar performance in 2014, munis have traded sideways lately as investors await news from the Fed. The challenging nature of the bond market right now should not change your overall diversification strategy if it has always included fixed income.
Disclosure: Past performance does not guarantee future results.
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