Neil Dutta, Head of U.S. Economics at Renaissance Macro (who Zerohedge “called out” for being bullish in 2010), puts March’s weaker than expected employment results in context and says the U.S. economy is not slipping into a recession. He explains how the dramatic fall in oil prices negatively affected the first quarter, which is unlikely to repeat in the second, and that we should see a bounce back starting this month. That being said, he says the U.S. is not the first place he would put his money, with better investment opportunities overseas, particularly in Europe.
Here's a portion of his recent interview with Financial Sense Newshour on his big picture outlook...
March's poor jobs number has revitalized fears over another U.S. slowdown. What are your thoughts?
"The economy hit a wall in the first quarter... (but) if you look at things like jobless claims, consumer expectations, most indicators suggest that employment growth will probably bounce in April and maintain a range of around 175k to 225k. So I think we're going to continue to be near 200k and the reason that's important...is that's enough to keep pushing the unemployment rate down..."
So you see current economic weakness as temporary?
"The March employment number notwithstanding, the labor market data has been steadily improving—month after month for the last 12 - 18 months...and I think the drivers for that remain in place: household deleveraging is slowing if not completely over, we've seen a more neutral stance from fiscal policy, we've seen accommodative monetary policy—that's going to be the case even as the Fed begins to raise later this year—and of course Europe, which is enjoying a better economic outlook relative to where we were two years ago. So I think for all those reasons growth in the US should remain reasonably close to 3%. I don't think the trend in growth has meaningfully changed."
Why hasn't the fall in oil prices stimulated the economy like many were claiming?
"The initial impact of falling oil prices is actually negative because business tends to respond more quickly to the drop in crude oil prices than consumers do. So what do businesses do? Well, they scale back mining investment. So even though mining investment is only about a percent of GDP, it's going to be responsible for close to a seven-tenths of a decline in GDP just in the first quarter alone; and we know that because crude oil prices are now stabilizing, seemingly, the drag is unlikely to be repeated in the second quarter. This is happening also at a time when it looks like consumers are beginning to pick up spending a little bit."
Given the likelihood of an interest rate hike by the Fed this year and the impact this might have on the market, do you think investors should be cautious?
"I think we know that bear markets in equities ultimately come about by two things... a yield curve inversion and/or recession—or some combination of both. That's not likely for a couple of years at least. So that means the bias for equity prices is I think higher over time in the U.S. That being said, that doesn't mean if I'm a global asset allocator that the U.S. equity market is the best market to be. I think there are probably better opportunities elsewhere. Namely in Europe where growth is picking up and expectations about growth are picking up and the ECB has signaled that it is going to continue to ease policy at least through September of 2016... [So] U.S. equity markets wouldn't be my first choice to put money if I had the option."
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