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By HaleStewart December 29, 2017 11:36 am
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2018 Is Looking Like Another Solid Economic Year

          Looking forward to 2018, it appears the U.S. economy will continue on its path of modest to moderate growth.  Two long-leading indicators – corporate profits and the BBB corporate bond yield – are signaling continued growth.  Building permits – which, depending on who you ask, are either a long-leading or leading indicator – point towards continued growth.  The 4-week moving average of initial unemployment claims are near their lowest level since the early 1970s while new orders for consumer goods and non-defense capital goods are in a multi-year uptrend.

            Let’s start with corporate profits:

Starting in mid-2014, corporate profits dropped due to the oil market contraction.  But oil market weakness didn’t spread out to other sectors.  Corporate profits started to increase in late 2015 and have since increased at strong Y/Y rates.  According to the latest Factset.com data, 4Q SPY profits are expected to rise 6.2%.  However, the energy sector is responsible for a majority of this increase.

            As I’ve recently noted, the credit markets are in very good shape.  There is little financial stress and corporate spreads are contained, indicating ample liquidity.  On that matter, the BBB yield, which is a good harbinger of potential long-term issues, is at very bullish levels:

            Depending on who you ask, building permits are either a long-leading or leading indicator.  Ultimately, this is a distinction without a difference.  As Edward Leamer has convincingly agued, housing is the business cycle.  Recently, we’ve seen an uptick in 1-unit building structure permits:

 

For most of 2017, 1-unit building permits were printing between 780,000 and 840,000 (left chart).  The number recently increased, largely due to an uptick in Southern activity (right chart) caused by the latest hurricanes. 

            There is no sign that recent good news in the jobs market will abate:

The 4-week moving average of initial jobless claims is very low.

            Finally, orders for durable goods – both consumer and industrial – are rising:'

The top chart shows new orders for consumer goods while the bottom chart shows total orders for non-defense capital goods.  Both are in multi-year uptrends.

The data points to a solid 2018.

 In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors.            

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