Economist and portfolio manager Guillermo Dominguez believes the "very serious old guy complex" of bearish economists are wrong, and the U.S. economy is on the brink of a rapid expansion led by wage growth and rising consumption.
Mr. Dominguez is a hedge fund manager for Florida-based New River Investments. In a recent blog post, he noted three trends suggesting an inflection point in America's currently anemic job market. One, the labour force is no longer increasing in size. Two, public-sector employment has stabilized after a long period of decline (and shows signs of growth). Three, U.S. wages are growing at a rate seen in previous economic recoveries.
The combination of these factors means "the only plausible answer is wage growth," Mr. Dominguez says.
Rising wages would make an expected decline in U.S. corporate profit margins far more palatable for investors and the broader economy. Remember that most measures of corporate profitability – gross margins, operating margins and return on equity – are within historical norms. What is out of line, is corporate profits as a percentage of gross domestic product – profits currently make up a historically high percentage of the overall U.S. economy.
Wage growth would hurt margins through higher costs of production. But, an improving job market also means revenue growth, which will offset lower profitability. In this scenario, the aberrant ratio of profit as a percentage of GDP declines for bullish reasons – growth in the economy – and profits could potentially remain at current levels.
Most Canadian investors won't have heard of Mr. Dominguez unless, like me, they spend far too much time on Twitter, where he has a significant profile. I'm not sure it matters. His bullish, data-based argument is clear and plausible and should support investor optimism that a U.S. economic recovery is finally under way.
Scott Barlow