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By HaleStewart January 30, 2015 11:11 am
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International Economic Week in Review: Just How Strong Is the US Economy?

While this weekly column usually looks at a number of countries, this week will be different.  The general tenor of economic news from most large OECD countries is at best concerning: the EU is grappling with deflation, Japan’s experiment with Abenomics is struggling, Australia’s transition away from a raw material exporting economy is having problems and now Canada’s reliance on oil exports has led their central bank to cut rates.  The only other major economy to post solid numbers is the UK, but they don’t have the size to absorb world growth.  The only economy that can make that claim is the US, which is 6.6 times the size of the UK and is still the largest economy in the world.  However, despite recent numbers, there is still concern the economy isn’t growing as solidly as it should.  But looking beneath the numbers, there is a tremendous amount of strength apparent.

          First, let’s start by looking to see if the US has solved, at least partially, its basic problem with debt.  Remember that what started the last recession was a debt-deflation scenario: consumers piled on a ton of mortgages, driving up the cost of housing.  But when the housing bubble deflated, the total amount of debt in the system remained high.  On the expansion side of the recession, consumers were more concerned with paying down debt than spending, leading to slower overall growth and creating what Irving Fisher called a “debt-deflation recovery.” 

          However, the data indicates the debt situation has improved.

          The chart above contains two piece of information: the personal debt/GDP ratio and the household obligations ratio, both of which are calculated based on a 100 scale for the last 5 years.  Both of these figures have dropped from a base of 100 to 82.5 (household debt/GDP) and 85 (financial obligations ratio).  What this has done is give US consumers more financial breathing room, allowing them to spend.  And, despite the headwinds, they have continued to spend as shown in this second graph:

          Above are four measures of consumer spending: personal consumption expenditures for durable goods (red), non-durable goods (green) and services (blue) along with real retail sales (purple).  All four are scaled to 100, and all four have been solidly moving higher for the last five years.  Of particular importance is the red durable goods line, which has been rising at a strong rate.  Because these purchases usually require long-term financing, their increase can be seen as a vote of confidence in the future.

          Next, let’s turn to another category of investment:

Above is a chart of the year over year percentage change in gross private domestic investment.  This has also been growing at a decent rate.  There have been some slowdowns (mid-2011 and a few quarters in 2013), but overall, this data series indicates investment is occurring.

          All of this is contributing to a slow but steady rate of YOY GDP growth:

Since 2010, the YOY rate of GDP growth has been fluctuating around the 2% level.  This is not gangbusters growth, but considering the economy was in a period of macro-level deleveraging, this isn’t bad.

          Bolstering the future growth scenario is the strong condition of the four primary coincident economic indicators, as shown in this chart:

Above are a base 100 chart of industrial production (red), total non-farm employees (blue), real manufacturing and trade sales (green) and real income less transfer payments (purple).  These are consisdered the primary coincident economic indicators, and, as with the consumer spending graph, all four are moving higher and have consistently done so.

          And as this chart of the leading economic indicators show, the prospects for future expansion look bright:

          The big concern with the economy is still the jobs market, as shown here:

Above are two measures of unemployment U3 (which is the headline number usually reported) and the far broader U6.  While U3 has been coming down, and is currently at a healthy level, the U6 number is still very high, and is probably a primary reason why wage growth is still paltry:

          Above is a chart of the YOY rate of change in the average hourly earnings of production employees.  I’ve placed this data in historical context to show just how weak wage growth has been relative to other expansions.  A tremendous amount of upside room still exists for this data series. 

          And, finally, the US is primarily driven by consumer consumption rates, with consumer spending accounting for about 2/3s of overall economic growth.  That means that so long as job gains continue, consumers will most likely keep up their current rate of spending.

          The general conclusion regarding the US economy is everything is moving in the right direction.  Consumers are spending and businesses are investing.  This is helping to keep the job market on an improving path.  However, we're still waiting for wage growth to catch-up.  But so long as this overall trend continues, that should occur.  The conclusion is the US economy is pretty darn healthy right now.

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer

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