The Flying Economy

We've written before about how investors latch on to metaphors, often erroneous ones, in order to better understand economic and market concepts. (See our past column: "Metaphors We Invest By.") The brain often understands by association, so seeing abstract concepts in terms we implicitly understand brings fuller comprehension.

One of the problems with relying on metaphors is they necessarily frame the issue: emphasizing some factors while diminishing others. The metaphor dictates how we actually see the issue. Case in point: The Flying Economy.

Will the global economy have a "hard" landing or a "soft" one? Neither. There will be no "landing" at all. The idea of thinking about the global economy as "in flight" is a bad metaphor. Yet, this is the comparison economists regularly use to describe future economic conditions.

What do we commonly associate with flying? Fear, lack of control, peril, danger, something humans were not naturally born to do, that most of the time things should be "grounded", you can't "fight" a natural force like gravity, etc. And most of all…if you're flying, eventually you've got to come back down to solid ground! What goes up must come down, right? Reality couldn't be more contrary.

In truth, the global economy has almost NEVER had a year of negative growth. It's in perpetual flight. Yet this very basic fact, with tons of evidence to support it, is very difficult for people to fathom.

The global economy and corporate earnings are set to continue robust growth. Even as headlines pronounced a slowing US economy in 2006, US real GDP growth in the second half of 2006 will be about the same or higher than 2005. Quarterly growth didn't even really slow down on a year-over-year basis!

Consensus forecasts are calling for a real global GDP increase of around 3.2% in 2007—on par with 3.8% in 2006 and 3.4% in 2005. (And keep in mind actual numbers have consistently beaten consensus forecasts.)

Here's the basic formula for GDP growth:

GDP = Consumption + Investment + Government Spending + Net Exports

Each of these is set to contribute positively to the global economy in 2007. Domestic and foreign consumption is showing no signs of faltering. Business investment is only accelerating as both developed and emerging markets continue their expansions and infrastructure build outs. Tax receipts in many nations are hitting records and bolstering government spending. (Net exports globally by definition are always zero.)

If you've really got to think about the economy as in flight, by now we've hit the stratosphere.

-------------------------------------------------------------------------

Source: Consensus Economics, Inc.