Andrew Miller: Revisions don't alter the big picture

This week saw recent US economic history rewritten a little: growth in the first quarter was revised lower

This week saw recent US economic history rewritten a little: growth in the first quarter was revised lower. This helped the second quarter look stronger by comparison, and GDP growth picked up modestly, from 1.1% annualised to 1.7%, in place of an expected slowdown.

Revisions in economic data are not confined to the US or to go in only one direction. The stories told by UK GDP and labour-market data have been remarkably different of late, possibly hinting at a positive rethink to come, for example.

Most of the time, such revisions, though frustrating, do not alter the big investment picture. Indeed, one of our tasks as investment advisers is to be careful when painting that big canvas that we don’t add excessive detail to begin with.

This week’s data is a case in point: we have been emphasising the ongoing nature of US growth, not its quarterly gyrations, and on a trend basis the revisions change little. US private-sector spending was previously shown to have been growing by around 3% on an annualised basis since the recovery began and it still is.

The forward-looking manufacturing ISM survey, published the day after the GDP numbers, suggests that US economic growth may accelerate more meaningfully in the second half of the year.

Business surveys in the UK and eurozone have also suggested again this week – at lower levels – that the wider Western business cycle is moving into a less fragile phase. Accelerating growth in the US means that the Federal Reserve is indeed likely to taper its QE in the months ahead (most likely from September). This is good news, not bad: it may confirm our belief that the US economy is able to stand on its own two feet.

Tapering QE in the context of a cyclical upswing means that bond yields – long-term interest rates – may rise still further and not just in the US but in Europe too.

And if long rates rise far enough, they will continue to pull implied short-term interest rates in 2014 higher – whatever central banks may say in their “forward guidance” about keeping rates on hold. Remember, central banks do not have complete control even over short-term rates – we learned that in the crisis – and their medium-term forecasting ability is no better than anybody else’s.

The normalisation of monetary policy will surely trigger renewed stock market volatility from time to time.

But don’t be intimidated by the taper caper.

Even at today’s levels, we see better long-term value in stocks than bonds.

Andrew Miller is a director of Barclays Wealth and Investment Management in Newcastle


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