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By HaleStewart November 12, 2017 7:51 am
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US Economic Week in Review: The Economy is in Good Shape

            There was little economic news this week for the U.S., which makes this an appropriate time to review some leading and coincident indicators to assess the current situation in the U.S. economy.

            Let’s start with corporate profits:


These trended between $1.5 and $1.7 trillion since 4Q11.  There are two reasons why they failed to advance above $1.7 trillion.  In 2011, the world economy slowed due to the possibility of a Greek default.  Large U.S. multi-national companies saw weak international sales during this time.  In 2016, supply constraints caused an oil market contraction.  Although this hurt the energy complex, that weakness didn’t expand into other sectors.  Currenltly, we have synchronous global growth and a healthy energy sector, which is supporting solid earnings growth.  From the last Zacks.com release: “Total earnings for the 327 S&P 500 members that have reported already are up +7.8% from the same period last year on +6.5% higher revenues, with 74.9% beating EPS estimates and 65.7% beating revenue estimates.” Health corporate profits support hiring and potentially capital investment.

            Building permits are trending sideways:

The Census Bureau has reported 1-unit building permits between 779,000-834,000 since the end of last year.  Ideally, we’d like to see this number systematically move higher.  But sideways movement isn’t fatal.  In fact, the bottom chart shows the Y/Y percentage change is growing at a healthy pace.

The riskier components of the credit markets are in good shape:

Baa yields (in blue, left scale) and CCC yields (in red, right scale) are both at low levels.  While both have spiked during this expansion, they have also come in, indicating the credit markets are willing to hold riskier assets.

            Initial claims for unemployment are very strong:

After a post-hurricane spike, this number has returned to very low levels.   

            Let’s now look at the coincidental numbers, starting with establishment job growth:

The 3, 6, and 12-month averages are all slightly above 150,000.  Considering the unemployment rate is 4.1%, this pace of establishment job growth is more than adequate.

            Incomes tell a different story:

Disposable income less transfer payments (top chart) is still growing but at weaker-than-desired levels.  The average hourly income of non-supervisory employees (middle chart) confirms this weakness.  To maintain their consumption pace, US consumers are dipping into savings (bottom chart). This is eventually unsustainable behavior.

            As I’ve noted elsewhere, industrial production is the weakest coincident indicator this expansion:

At the end of last year, it returned to positive Y/Y growth (top chart).  But when compared to the previous two expansions, the Y/Y percentage change has been weak (bottom chart), especially over the last two years.

            Finally, we have retail sales, which are increasing at a consistent pace:

            Putting all of this information together, we get the following picture

            Long-leading/Leading Indicators: there is nothing to indicate a slowdown in these numbers.  Corporate profits are strong, the 4-week moving average of initial unemployment claims is at historically low levels and the credit markets are very liquid.  While there was a sell-off in the CCC markets this week, the level of rates is still low.

            Coincident indicators: the bad news here is in wages.  Real disposable income less transfer payments and wages of non-supervisory employees has been growing, but at very low levels.  To maintain their current pace of consumption, consumers have spent money from their savings.  However, the low level of unemployment may yet lead to wage hikes.  Industrial production is also weak.  While its Y/Y increase is positive, the overall level is very low.  Other coincident indicators are still strong: establishment job growth is at appropriate levels for an expansion that is in its 8th year.  Retail sales are rising at strong rates as well. 

            While it would be nice if all indicators were pointing towards a strong expansion, that’s simply not how an economy works.  Instead, some parts are growing at strong rates, others are weak.  But, there is nothing in the data indicating a recession is on the horizon.

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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