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By New_Deal_democrat January 27, 2017 10:27 am
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Q4 GDP long leading indicators are positive news for 2017

This morning's release of 4th Quarter 2016 GDP gives us our first look at several long leading indicators for 2017: proprietors' income and real private residential investment.

Let's turn first to proprietors' income.  One of the 4 long leading indicators identified by Prof. Geoffrey Moore was corporate profits.  The only problem with that is, they aren't reported until the second estimate of GDP, which we will see next month -- in other words, 2 to 5 months after the events have actually happened.  Proprietors' income almost but not quite always trends in the same direction as corporate profits, and gets reported with the first estimate, so it is more time.

In the 4th Quarter, proprietor's income (blue), which unlike corporate profits (red), never turned down in the last several years, continued to rise:

This tells us that domestic US businesses with little exposure to foreign exchange issues continue to improve their top lines. Now that the strong 2015 US$ has disspiated, he likelihood is that corporate profits will follow.  Needless to say, this is a positive for the next 12 months.

Now let's turn to real private residential investment.  This is the long leading indicator identified by Prof. Edward E. Leamer of UCLA in his presentation a decade ago, "Housing IS the business cycle."  The most accurate way to measure this is as a share of overall GDP.  This indicator typically turns 5 quarters before the economy as a whole turns.  This morning it was also reported to have increased:

Real private residential investment declined in Q2 and Q3 from its Q1 peak, and whlle Q4 turned up, we still have not made a new high.

As of the end of 2016, housing continued to give us a mixed picture.  Both single family permits and real residential construction, the two least noisy of all of the monthly housing readings, have been rising:

Which is good, because the very leading but very noisy single family home sales did a faceplant as reported yesterday:

With single family home sales, usually these big outlying ups or downs get heavily revised in the next month, so I'm not terribly concerned about the punk December reading at this point.

Put the data together and we see that business income is positive, while the housing market is mixed.  These are important but not decisive factors that I will take into account in my forecast for the second half of 2017 that I will post next week.

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