In November 2012 we published the article "Obama Win Effect: Cash-Rich Companies Will Lead Economic Boom", whereby we predicted that U.S. economic growth will accelerate during Obama's second term, driven by cash-rich companies including top ranked Berkshire Hathaway (BRK.B), Apple, Inc. (AAPL), Microsoft (MSFT), Cisco (CSCO) and Google (GOOG). Naturally, that would also bode well for the performance of the shares of those companies. At such time, many had expressed skepticism about future economic growth during Obama's second term, as economic growth during Obama's first term had averaged +0.7% annually (but ultimately came in at +0.9% once Q4-2012 GDP results were actually published).
With half of Obama's second term behind us now, U.S. real GDP growth rate has averaged about 2.2% annually in 2013 and 2014*, a marked improvement over the first presidential term. Meanwhile, Fitch is now expecting U.S. GDP growth of 3.1% in 2015 and 3% in 2014. Hence, it seems that U.S. GDP growth during Obama's second term will average over 2.6% annually, a substantial improvement over first term, as we have anticipated.
When examining the performance of the U.S. economy during the last two years of the second term of two-term U.S. presidents, real GDP growth rate typically either maintains its momentum or improves, with the exception of the second term of president Georges W. Bush as per below table:
|
U.S. President
|
Term |
Average GDP growth rate for first two years of second term |
Average GDP growth rate for last two years of second term |
| Harry Truman (D) |
1945 - 1953 |
+4.1% |
+6.1% |
| Dwight Eisenhower (R) |
1953 - 1961 |
+0.7% |
+4.7% |
| Ronald Reagan |
1981 - 1989 |
+3.8% |
+3.8% |
| Bill Clinton |
1993 - 2001 |
+4.4% |
+4.4% |
| George W. Bush |
2001 - 2009 |
+3.0% |
+0.7% |
| Barack Obama |
2009 - 2017 |
+2.2%* |
? |
U.S. GDP real growth rate in chained 2009 dollars during the second term of two-term U.S. presidents. Data source: Bureau of Economic Analysis
*Utilizing expected GDP real growth rate for Q4 2014 as actual Q4 data has not been released yet
Since our 2012 article, Apple shares have appreciated by 51.34% on a dividend and split adjusted basis from 11/7/2012 to 12/5/2014, while shares of Microsoft, Berkshire Hathaway, Cisco and Google also appreciated substantially by 77.69%, 76.34%, 69.86% and 58.16% respectively. All such cash rich companies have been major contributors to the U.S. economy and are expected to provide a further boost during the next two years.
Oil Effect
Lower energy prices will also provide additional momentum to growth in U.S. GDP, while also increasing disposable income of U.S. consumers. This will in turn maintain the current employment momentum, as well as consumer spending, which drives two-thirds of the U.S. economy, hence circling around to result in added consumer demand that would benefit such companies.
During the past 6 months, crude oil prices have dropped by over $40 from over $107 per barrel to current levels of about $65 per barrel. It is estimated that every $20 drop in the price of crude results in about $140 billion in savings to oil consumers in the U.S. over a full year according to Ian Shepherdson, chief economist at Pantheon Macroeconomics Inc. Meanwhile, in the Bloomberg article, "Cheap oil means brisk holiday spending in fast boost to U.S. GDP", estimates for the resulting impact of falling oil prices on GDP vary from a boost of 1% to 2% during the next two quarters, to a boost of 0.1% to 0.5% for 2015.
(click to enlarge)
WTI Crude Oil Futures (CLF15) price chart Sep 2013 to Nov 2014 - Source: CME Group
It is important to note that since the publication of the Bloomberg article, crude oil prices have dropped further by over $16 per barrel. Furthermore, as per article, any resulting negative effect on capital spending by the oil & gas industry is expected to diminish GDP by no more than 0.1% during the next year, substantially less than the expected positive effect from lower energy prices. Most importantly, consumer spending is expected to experience a substantial boost, hence providing further benefit to companies with desirable products such as Apple:
Because the decrease has been fairly orderly compared with the volatility of the mid- to late-2000s, "consumers probably deem the drop in oil prices to be fairly permanent," said Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC. "That would mean that a lot of this disposable income tailwind that they felt from lower gasoline prices ultimately gets baked into their expectations of future income, which is therefore good for spending."
Apple, Inc.
It has been estimated by some economists that Apple's iPhone 6 will add as much as 0.3% to U.S. GDP growth. As reported by Forbes:
"The iPhone is having a measurable impact," said Michael Feroli, the chief United States economist for JPMorgan Chase JPM +2.15%. "It's a little gadget, but it costs a lot and it seems that everybody has one. When you do the multiplication, it's going to matter." He estimates that iPhone sales are adding one-quarter to one-third of a percentage point to the annualized growth rate of the gross domestic product.
Apple estimates that it has created or supported almost 600,000 jobs, with about 80,300 (globally) employed directly by Apple as of end of fiscal 2013. Out of such 80,300 direct hires, 50,250 were in the U.S. Meanwhile, it is now reported by Apple that its workforce has actually grown from 80,300 to 92,600, according to its 2014 10-K annual report. Furthermore, Apple's R&D spending increased from to $4.5 billion in 2013 to $6 billion in 2014, while it expects capital expenditures of $13 billion in 2015, up from $11 billion in 2014. Apple's revenues are expected to increase from $183 billion in 2014 to reach $211 billion in 2015 (+15.3%) and $223 billion in 2016.
Given such data, and when combined with the positive effect of a drop in oil prices which may provide a further boost to Apple sales, we believe that the actual contribution by Apple to U.S. GDP growth can actually exceed current estimates of 0.3%. Furthermore, the substantial appreciation in Apple shares has driven its market capitalization to about $675 billion, an increase of about $150 billion from its November 2012 level of $525 billion. Meanwhile, the actual return to investors has been further magnified by dividends paid out as well as share buybacks. It is estimated by the National Bureau of Economic Research that a $1 rise in stock market wealth results in 2 cents increase in consumption. Hence, it can be argued that the "Apple wealth effect" has resulted in further contribution to U.S. GDP growth, whereby Apple itself may have generated an incremental wealth effect consumption adder of $3 billion to $5 billion to the wider economy (beyond expenditure on Apple products).
Most estimates of Apple's impact on U.S. GDP concentrate primarily on the added profits generated from increased sales, as per article published by Forbes. On the other hand, growth in Apple's U.S. employment numbers (direct and indirect hires whose consumption may increase upon landing an Apple job), its increased R&D and capital expenditures, the wealth effect created by Apple shares, as well as the wealth effect created by the appreciation in the shares of its suppliers, are often left out of the equation. We believe that when all such factors are taken into consideration, in addition to the GDP boost provided by falling energy prices, Apple may actually contribute more than the current estimate of 0.3% to GDP growth.
Microsoft, Cisco, Google
Naturally, all above listed factors that would contribute to a boost to GDP by Apple also apply to the other discussed cash rich companies of Microsoft, Cisco and Google, whose market capitalizations have increased by a combined $343 billion since November 7, 2012. Again, this is further magnified by such companies dividend payments as well as stock repurchases. We estimate the wealth effect alone for these three companies to have generated a combined incremental wealth effect consumption adder of $7 billion to $12 billion to the wider economy (beyond expenditure on their products).
Berkshire Hathaway
Some may be skeptical of Berkshire Hathaway's contributions to boosting the U.S. economy, as they view Berkshire primarily as an investment company operating for the benefit of its shareholders. Nevertheless, the wealth effect multiplier associated with share holders of Berkshire would still hold. Furthermore, Berkshire's main contribution can be best summarized by Shawn Allen:
By owning and controlling numerous businesses under Berkshire, Buffett was able to direct profits and cash flows from declining or stable companies towards companies that were both fast-growing and that could derive the most profit from capital investments. Directing scarce capital investments away from less productive uses and towards more productive uses is a benefit to the larger economy.
Conclusion
As we had predicted in November 2012, the U.S. economy has been boosted by cash rich companies Apple, Google, Microsoft, Berkshire and Cisco. We expect such boost to continue into the near future, consistent with past economic performance during the last two years of two-term presidents. Furthermore, the economy will be fueled further by the recent drop we have witnessed in crude oil prices. This will in turn provide further demand for products provided by these companies (or in the case of Berkshire, demand for products provided by companies it owns). Nevertheless, in the case of Apple, as per our article "Apple: $800 done, $1,000 pre-split next", we would not necessarily buy Apple shares at current levels, as current valuations may limit any meaningful appreciation in the near term. Meanwhile, in the case of Microsoft, and despite current elevated valuations, we would favor buying such shares ahead of Windows 10 release, but we would exit such position prior to the release. Finally, we would favor a long position in Berkshire, Cisco, and Google in anticipation of a boost in U.S. GDP.
