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By HaleStewart March 11, 2018 7:24 am
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US Economic Week in Review: The Economy is Hitting on All Cylinders

            US economic news continues to be very strong.  The Fed observed as much in their latest Beige Book, which reported on an economy clearly in the middle of a broad-based expansion. The latest employment report was amazingly strong.  And the latest ISM sentiment data paint a picture of an economy in the middle of an expansion.

          On Wednesday, the Federal Reserve released the latest beige book.  It contained the following overall assessment of the U.S. economy:

Economic activity expanded at a modest to moderate pace across the 12 Federal Reserve Districts in January and February. Consumer spending was mixed, as non-auto retail sales increased in just over half of the Districts while auto sales declined or were flat in every District. Tourism activity was broadly solid, with Atlanta and Richmond recording robust growth in this sector. On balance, Districts reported modest growth in home sales and construction, with the latter constrained by shortages of labor and materials. Conditions in the nonresidential real estate market improved moderately since the previous report, with robust construction activity noted in three Districts. Commercial rents in and around New York City were up significantly, according to contacts in the area. Increases in production were broad based across manufacturing sectors, with all but one District noting at least modest growth in activity. Loan volumes were generally flat, with a handful of Districts noting a modest decrease in delinquency rates. Among reporting Districts, agricultural sector activity was mixed but flat overall. Contacts in natural resource sectors saw modestly improving industry conditions, except in the Minneapolis District, where energy and mining activity was robust.

The Beige Book contains anecdotal information relayed from local market participants to members of the regional Federal reserve which is conveyed to the central bank.  The following chart of the primary coincidental economic indicators confirms this month’s positive assessment:

The above graph converts industrial production, real retail sales, total payroll employment, average hourly earnings of non-supervisory production workers, and disposable income less transfer payments to a base 100 format, with 100 occurring at the end of the last recession.  All indicators remain in strong uptrends. 

            Friday’s employment report was a shock – but in a good way.  The headline number of 313,000 was one of the largest gains we’ve seen in some time.  Previous months were revised upward by 54,000.  The following chart converts the data to shorter moving averages:

The three and six-month averages are above 200,000 while the 12-month moving average is at 190,000.  Strong growth is occurring in goods-producing and service sectors:

The top chart shows total goods-producing industries on the left; the number is converted to a Y/Y rate on the right.  Both are in strong uptrends.  The service sector numbers in the bottom two charts also show continued strength for this segment of the economy.  Hourly wage growth ticked down a bit to a 2.6% Y/Y pace.  Remember that last month’s increase was just shy of 3%.  It sent the markets lower, creating fear that higher wage growth would increase inflation and lead to more Fed tightening.  This number should allow the markets to relax a bit.

              Finally, the institute for supply management (ISM) has released their complete set of manufacturing and non-manufacturing sector reports for February.  The manufacturing sector is in great shape.  It’s the index rose 1.7% to 60.8.  Survey respondents noted the labor market was tight, supply was strained, and that the recently passed tax cuts were making a strong difference.  New orders and production index is decreased but both are still above a very strong reading of 60.  Employment rose 5.5% and new export orders were up three.  The following chart from the adviser perspectives website places February’s reading into historical context and shows that recent readings are at very high historical levels:

The service sector reading was also impressive.  While it dropped 0.4%, it remains at a very high 59.5 are reading.  Production and new orders increased.  Employment did decline 5.5% but it still remains positive.  The following chart also shows that reason readings are very high in historical context:

          Next week, we have several key pieces of data.  The BLS releases CPI on Tuesday.  Any upside surprise will send treasury’s and stocks lower.  The latest retail sales numbers come out on Wednesday.  Friday, the Census releases building permits – a key leading indicator while the Federal Reserve issues industrial production – an important coincident indicator on the same day.  Rounding out the full day of Friday releases will be the University of Michigan’s consumer sentiment indicator.

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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