Is recovery on the way for U.S. economy?

The U.S. economy had a rough start to 2016, with the slowdown that occurred in Q4 crossing over into this year—at the end of 2015, the U.S. economy only grew by 0.7%.

So, despite the recent rally in Treasuries and gold, investors are nervous, says Michael Orndorff, vice president and portfolio manager at American Century Investments in Kansas City, Missouri. He co-manages the Renaissance U.S. Equity Growth Fund. “One of the areas of concern is the rate of global growth and, more recently, the [rate of] growth in the U.S. has been called into question.”

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For example, “The Russell 3000 Index is the broadest measure of the U.S. market, [and] on a year-to-date basis that index is down 7%.” Looking at the market’s performance, he adds, “Utilities have actually been up 7%, [while] consumer staples have been flat [and] all other sectors have been down anywhere from 4% to 11%.”

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What happened in Q4?

One of the factors that weighed most heavily on the U.S. economy last year was the weak industrial sector, says Orndorff. “The energy space and the companies that touch energy markets continue to experience a slowing of demand. Weather also played a role in depressing industrial production during the final quarter of 2015.”

As a result, many industrial companies were forced to reduce inventory levels. Take Axalta, an auto paint supplier, which told Orndorff and his team during a post-earnings season meeting that it had to destock in both Q3 and Q4 2015.

But now, “[Axalta] says volumes have returned to more normal levels,” says Orndorff. “Like a number of companies, they say the market is weak in Latin America, with Brazil in recession. But the U.S. and European economies continue to be reasonably healthy.”

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The paint supplier has forecasted global auto build rates of around 3%, he adds. “Combined with plans to gain market share and improve profitability, that makes [the company] a very attractive fit for our [portfolio].”

Still, like many other companies, Axalta is building in some level of conservatism as it relates to foreign exchange guidance and potential growth. The company’s forecast for 2016 is based on the U.S. dollar trading at US$1.05 to the euro. The euro is currently worth between US$1.10 and US$1.11, “so you’re seeing some downticks in terms of the overall market’s earnings growth rate.”

As the year progresses, Orndorff predicts the global environment will improve, which will lift revenues and earnings growth. He’ll watch fundamentals and U.S. GDP for hints of “alleviation of the growth anxiety that’s clearly evident in the market.”

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Consumer spending trends

U.S. consumer spending was sluggish in Q4, but rebounded in January, says Orndorff.

Still, many companies are in the midst of recovering. Orndorff points to Discover Financial, which found that consumers held on to cash in Q4. “A number of apparel companies talked about weather impacting their sales.”

MasterCard and Visa also reported sluggishness in consumer spending at the end of 2015, he adds. But since then, both companies have indicated that “consumer spending has rebounded,” with both U.S. retail sales and auto data being fairly strong in January.

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For its part, Discover Financial is anticipating increased consumer spending this year. “They expect receivables to improve from the current 3% growth to [between] 4% and 6%, as they introduce new products and marketing programs.”

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Overall, credit card companies say current delinquency trends are low and will remain that way for the rest of the year. Further, even though markets saw worsening credit in the energy sector at the end of last year, says Orndorff, that trend was “offset by improved credit in states that are benefiting from lower fuel prices.”

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