5 Factors Strengthening The U.S. Economy

economyDiane Alter: Recent data has silenced some of the loudest U.S. economy bears.

According to a new Bloomberg survey of 69 economists, gross domestic product likely grew at a 3% annualized clip in Q1. That compares with the 2% pace forecast in March and 1.6% in December.

Morgan Stanley (NYSE: MS) Chief U.S. Economist Vincent Reinhart went from an estimate of 0.8% in December to 3%. Brain Kasman of JPMorgan & Chase & Co. (NYSE: JPM) upped his projection from 1% to 3.3%.

“We are surprised that there wasn’t a bigger and more immediate hit to spending” by consumers, Reinhart told Bloomberg. “There is an underlying momentum in spending, which means that sequestration and the tax increase will only lead to a monetary pause.”

Kasman shared that sentiment when he said on an April 5 conference call, “What happened at the beginning of the year was a genuine surprise in terms of how well the economy held up.”

Expansion is expected to slow to 1.5% in the current quarter before picking up to an average 2.4% over the second half of 2013.

Here are five reasons these economists have raised their growth targets.

Five Factors Strengthening the U.S. Economy

    • Strong Consumer Spending:Accounting for 70% of the economy, consumer spending rose at a 3% annualized rate in Q1. That was the best performance since the first quarter of 2011.

“We feel good about the consumer in 2013. Every indication we’re seeing is that he and she are doing fine, still buying,” Macy’s Inc. (MYSE: M) CFO Karen M. Hoguet said at a March 13 investor conference.

    • Payroll Tax’s Impact Has Been Minimal: The Social Security payroll tax holiday was eliminated in January, causing the rate to revert to 6.2% from 4.2%. A worker earning $50,000 annually saw his or her paycheck trimmed about $83 a month. That fueled worries that spending would be curtailed as the result of less take-home pay and the economy would suffer.

But after years of scrimping, saving and doing without, households are spending, thanks to a thriving stock market and rising home prices.

According to the Commerce Department, as consumer confidence grew, the savings rate plummeted from 6.5% in December to 2.2% in January, the lowest level since August 2007.

    • Healthier Housing: New home constructions will total 970,000 this year, up from last year’s 780,000 tally. That’s the most home groundbreakings since just before the Great Recession in 2007.

Meanwhile, existing home prices are on a tear. In the 12 months ending in February, home prices surged 11.6%, the largest year-over-year jump since November 2005, data from the National Association of Realtors reveals.

“House-price appreciation is creating wealth, as in the run-up in stocks. There is a lot of business activity that is tied to housing,” Reinhart said.

    • Low-Cost Energy: The U.S. is quickly becoming totally fuel self-sufficient. The Energy Information Administration reports the country produced 84% of its own energy last year, the most since 1991.

Moreover, production of crude oil in Q4 will surpass imports for the first time since 1995. The North Dakota and Texas fracking boom deserves most of the credit here.

Cheap natural gas, down 73% in price to $4.139 per million British thermal units since reaching a peak in 2005, has spurred investment across myriad sectors raging from steel making to petrochemicals to fertilizers

Businesses have become more willing to spend and expand as consumers grow more confident.

“The fundamentals do looker firmer. The business sector is looking like it’s healthy,” Kasman told Bloomberg.

    • An Increase in Lending: Americans are finding it easier to borrow from banks. This is providing a catalyst for consumer spending, business investment and hiring.

Data from the Federal Reserve shows banks are more willing to lend and their consumers are seeking more credit as both sides gain assurance in the state of the U.S. economy.

“On balance, the pace of economic expansion has picked up since the last report,” the Fed concluded in its latest “Current Economic Conditions” survey.

Related: Dow Jones Industrial Average (INDEXDJX:.DJI), S&P 500 (INDEXSP:.INX).

Money MorningWritten By Diane Alter From Money Morning

We’re in the midst of the greatest investing boom in almost 60 years. And rest assured – this boom is not about to end anytime soon. You see, the flattening of the world continues to spawn new markets worth trillions of dollars; new customers that measure in the billions; an insatiable global demand for basic resources that’s growing exponentially; and a technological revolution even in the most distant markets on the planet.And Money Morning is here to help investors profit handsomely on this seismic shift in the global economy. In fact, we believe this is where the only real fortunes will be made in the months and years to come.

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