Weekly Indicators for March 20 - 24 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

Among the entire array of indicators, only 3 were negatives this week.

Leading housing data continues to be positive

 - by New Deal democrat

We now have all of the February housing sales data.  With the exception of the least important series, the trend in each continues to move in the positive direction.

This post is up at XE.com.

Variations on the Phillips Curve: unemployment and underemployment

 - by New Deal democrat

This is part of a longer post I wanted to write, and if FRED didn't play so poorly with iPad I would put it all up.  But, having finished with my cursing, let me put up a truncated version now and follow up with another one sometime in the next week.

This picks up on my post from several days ago in which I noted that a fuller explanation of the cycle of wage gains should take into account the labor force participation rate for prime age workers.  So I thought I would show the differences in how the Phillips Curve (the tradeoff between wages and unemployment) looks depending on how completely we look at it.

Let's start with the unemployment rate (bottom scale) vs. YoY nonsupervisory wage growth (left scale) since the series started in the 1960s:

It's pretty clear that there are two regimes, higher vs. lower wage growth (top vs. bottom).  And if you were looking for a clean relationship in which lower unemployment equals higher wage growth, it ain't there.

But let's cull out the two big recessions and recoveries 1981-89 and 2007-17.  Here's the 1980s:

and here's the last 10 years:

In each case, once unemployment gets low enough, increased wage growth does kick in.  But before that, we see wage growth falling as unemployment increases during the recession -- and continuing to decrease in the earlier part of the recovery thereafter while unemployment remains relatively high (over 7% or so).

Here's the same scatterplot for the U6 underemployment rate:

The traditional Phillips Curve gained prominence during the post-WW2 era when unemployment remained relatively low for nearly 30 years.  Now we can see that it is only part of the story.  It only holds true when the unemployment and underemployment rates are low enough. At higher un(-der)employment  rates, whether going into or coming out of recessions, wage growth decelerates even if unemployment or underemployment are decreasing.

A look at yield curve compression

 - by New Deal democrat

Since the mid-1950s, an inverted yield curve has been perhaps the single most deadly harbinger of a recession in the next 1-2 years.  The most typical measurement has been the spread between 10 year and 2 year treasuries:

Typically these inversions have happened because the Fed raised interest rates in an effort to tame inflation deemed to high. Thus, because we are in a very low inflation and interest rate environment, I suspect this version of the yield curve is one of the most likely long leading indicators to fail to signal before the next economic downturn.  Most notably, the yield curve between short term and long term bonds never inverted at all between 1931 and 1954, as indicated by calculating the spread of the archival "long term government securities" data with 3 month treasuries:

My suspicion is -- and here unfortunately I do not have any old data to compare with -- that a compression at closer points along the yield curve is likely to be a more accurate signal in this environment.  To show you why, let's take a look at the spread between 30 year and 10 year treasuries (blue in the graphs below), 10 year and 5 year treasuries (red), and 5 year and 2 year treasuries (green).

Here is 1977 to 1997:

and here is 1997 to 2017:

The first thing I want to point out is that in advance of all recessions in the last 40 years, yield curve inversions happened across the board.  All three measures inverted.

Secondly, a compression of all three measures on the order of +0.5% or less was associated with stock market corrections (in the case of 1987, a crash!), but not an outright recession in the near future.  

Finally, the most likely measure to invert, including a number of "false positives" for recessions, was the 30 year minus 10 year measure.

With that in mind, let's focus on the last 5 years:

In this era of very low rates, the shortest term measure (5 year minus 2 year) has crossed the +0.5% threshold to the downside several times. The measure next out in the range (10 year minus 5 year) crossed once -- the middle of last year.  The longest term measure (30 year minus 10 year) has never crossed the threshold.

We can put this information together by calculating the average spread among the three measures, by taking each value, adding them together, and dividing by 3.  When we do so, here's what we get:

No matter how you look at it, at least compared with the last 40 years, no aspect of the yield curve is signaling any danger now.  

But if we suspect that it is not necessary for the yield curve to outright invert before the next recession (noting how little of an inversion there was in 2006 before the 2008 recession), then at least we can raise the caution flag in the event that either one or both of the following two things happens: (1) all three term measures declined below +0.5%; and/or (2) the average of the three term measures declines to +0.3% or less.  

It is certainly not a perfect work-around.  Although the data series are different, no compression at all between long term and 3 month securities occurred before the 1945 demobilization recession, nor before the severe 1938 recession (which appears to have been caused fiscally rather than by Fed action). 

But even so, if we think that this low interest rate and inflation environment will function more like that of the 1920s-early 1950s, then measuring yield curve compression across maturities will at least keep us on our toes.

What's behind stalled nonsupervisory wage growth?

 - by New Deal democrat

Wage growth for nonsupervisory workers nominally has been stuck in the +2.3% to +2.5% range (or worse) for three years.  Why? 

Over the weekend I was cleaning out some old graphs, and came across this one from the Atlanta Fed, suggesting that the Phillips Curve (the tradeoff between unemployment and inflation) is very much alive, with the tweak that the amount of wage growth follows a decline in the unemployment rate with a one year lag:

The red line is the progression of the Phillips Curve since the beginning of 2011. The dotted line indicates that the Altanta Fed's model was calling for a significant acceleration of wage growth between the spring of 2016 and spring this year.  [NOTE: all of the discussion in this post is about nominal, not inflation-adjusted wage growth, which has an awful lot to do with the volatility of gas prices.]

Except when we look at wages for nonsupervisory workers, that really hasn't happened, at least not through February.  The below graph compares the YoY change in the unemployment rate (blue) and YoY wage growth for nonsupervisory workers (red):

As noted above, wage growth has been stuck at between 2.3% YoY and 2.5% YoY with some (mainly negative) exceptions since the end of 2013. 

Using the U6 underemployment rate to capture the broader picture doesn't change the outcome:

So, what's going on?

I suspect that the change in the labor force participation rate (i.e., that portion of the population actually in the job market, whether employed or unemployed) is the answer.

When I use the labor force participation rate for the prime working age population (ages 25-54) (blue) and measure that YoY vs. wage growth, even going all the way back over half a century to 1964, here's what I get:

With the very significant exception of most of the 1980s, the trend in prime age labor force participation appears to lead the trend in wage growth by one to two years.

What is most interesting is that in the era of labor force bargaining power (up until about 1982), a big increase in the labor force lead to a considerably larger amount of wage growth. Once labor's bargaining power was broken during the early part of the Reagan Administration, the big secular  increase in labor force participation did not show up as wage growth inflation, but rather as more job growth with outright *decreases* in the average hourly wage. 

Note further that since the late 1980s, twice an increase of +0.6% YoY in prime age labor force participation has led to nominal wage growth of +4.0 YoY about one year later.

Now let's zoom in on the last 5 years.  The below graph compares the growth in employment (blue) averaged over each half year, with that of the overall labor force participation rate (red) and the prime age participation rate (green):

What is interesting is that over that entire time, average employment gains over each period have not varied that much.  What *has* happened, especially notably with those of prime working age, is a temporary pause in the decline in early 2014 and 2015, coincident with the first stalling and then decline in wage growth, and then a surge of participation in 2016, especially during the first half of the year.

To put this in perspective, the participation among the prime 25 - 54 age group plateaued beginning in 1989 (after the secular rise due to women entering the labor force):

So here is the YoY change in the participation by those in prime age since that time:

The YoY change in participation in the last two quarters of 2016 (the last two bars) averaged +0.65%. That is the biggest such increase in participation in the last 30 years!

Putting this together, it appears that the surge in new participation in the labor force, with no surge of employment growth, showed up in a pause in the decline of the unemployment and underemployment rates.  As shown below, in the year from September 2015 through September 2016, the unemployment rate only fell -0.1%, from 5.0% to 4.9%. The U6 underemployment rate only fell -0.3%, from 10.0% to 9.7%:

  

This surge in competition for new jobs acted to depress wage growth.

If the long-term graph comparing wage growth and the prime age LFPR is correct, however, and particularly if the same pattern of the late 1980s and 1990s is followed, then the surge in the LFPR does portend a significant acceleration in wage growth for nonsupervisory employees -- finally -- later this year.  That the U6 underemployment rate has declined significantly again in the last 3 months is supportive of that suggestion.

We'll find out soon enough.

My Weekly Columns Are Up at XE

US Bond Market Week in Review

US Equity Market Week in Review

International Week in Review

Weekly Indicators for March 13 - 17 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.  This week it is pretty self-explanatory.  Nearly all short leading and coincident indicators are positive.

Housing, production, and JOLTS all good news

 - by New Deal democrat

We've had a good run of economic news this week.

First, in the leading housing sector, both of the most important datapoints made new highs.  Single family permits, which are just as leading as permits overall, but much less volatile, made yet another post-recession high.  Further, the three month rolling average of housing starts, which are more volatile and a little less leading, but represent actual economic activity, also made a new post-recession high:

The headline number for industrial production for February was flat, but once again that was due to the seasonally-adjusted big decline in utility production due to a very warm February (sure glad that global warming is a hoax perpetrated by the international scientific community).  Manufacturing output rose to another new post-recession high (although, to be fair, still below its peak from one decade ago), and mining output continues its big bounce off last year's bottom:

Finally, for once we got a truly good JOLTS report (for January), showing that the quits rate rose to a post-recession high that also equalled its high (save for one month)  during the Bush expansion:

and actual hires (as opposed to the overrated and somewhat fictitious openings) also rose, although not quite to a new post-recession high:

Not perfect, but really good news on a number of fronts representative of the Indian Summer of this expansion.

What is my favorite indicator, real retail sales, forecasting now?

 - by New Deal democrat

Real retails sales carries a lot of information about various other aspects of the economy, which is why it is my favorite single metric.

To find out what it is portending now, click on over to XE.com.

Wage earners tap the housing MAC again as real wages decline

 - by New Deal democrat

Yesterday I wrote about where we stand in the labor market cycle. I noted that I anticipate that nominal wage growth will accelerate at least some.

But that doesn't apply to real wages, as to which today we got some important and depressing information.  Even though consumer inflation only rose a little over +0.1% in February, nominal wages for nonsupervisory workers only rose a little under +0.2%, so real wages remain -0.6% below their peak last July: 

Measured YoY, real wages have actually declined for the second month in a row:

In short, wages haven't been helping out average American workers at all for over half a year.

That doesn't mean that those same workers will cut back on consumption, as we can see when we take the YoY graph back to 1983:

In the 1980s and early 1990s, even though real wages were relentlessly declining, households were able to spend more due to declining interest rates, and the entry of spouses into the labor force.  More significantly, consumption also increased in the 2003-5 period because of the housing bubble, as many people tapped into the rising equity in their houses.  

I had hoped this latter period would have been burned into everyone's psyche -- and the subject of strict regulation -- but apparently not, for as Bill McBride informs us, home equity withdrawals increased again in the first quarter of this year:

Declining interest rates are no longer supporting spending. That the "housing MAC" is being tapped again is dangerous.
 

Where are we in the labor market cycle?

 - by New Deal democrat

In keeping with my big focus on jobs and wages for average Americans, let's take a look at the progression of the labor market over the last few cycles.  In most of the following graphs, the underemployment rate, U6, which was first reported in 1994, is in red, inverted, right scale.

First, while a common mistake is to think that jobs lead consumption, in fact the reverse is true.  Real retail sales (blue, left scale) lead jobs:

Reai retail sales also lead underemployment:

Usually in the past, jobs led the underemployment rate, but in the last few recoveries from recessions, the underemployment rate troughed coincidently or slightly ahead of employment:

As I have shown many times over the last few years, nominal wage growth typically has not begun to accelerate until the underemployment rate falls below about 10%:

Typically the labor force participation rate does not begin to climb until after the underemployment situation has started to abate:

Finally, at least in the last several cycles since the secular surge of women entering the labor force, wages for nonsupervisory workers have started to accelerate before the participation rate for prime age workers turned up:

Since housing and retail sales have continued to rise, I anticipate that uneremployment will continue to decline, and jobs, nominal wages, and the prime age participation rate will continue to increase.

Measures of underemployment continue to show improvement

 - by New Deal democrat

The unemployment rate, at 4.7%, is generally acknowledged to be decent, although not great.  But what of the underemployed?

Typically as an economy expands, the U6 (unemployed + underemployed) rate has declined more than the U3 (unemployed only) rate, as shown on the below graph which subtracts U3 from U6, thus leaving us with just the underemployed:

As the recovery matures, the two move in tandem.  As the economy weakens into a recession, the underemployed tend to feel it fist, as U6 increases more than U3.

So the good news for now is that U6 is still declining more than U3.

Let's take a look at several categories of the "underemployed."  First, here are people who are part-time for economic reasons (i.e., they would like a full-time job):

This last made a new low several months ago.  When we look at the YoY change, we can see that the decline has been decelerating:

This may be just noise, or it may be the first sign of a maturing jobs expansion.

Next, here are those who are not in the labor force at all, but want a job now:

This just made a new low in last week's report.  Note the spike higher following Congress's termination of extended unemployment benefits at the end of 2013.   Here is the YoY change:

Progress here had been decelerating since mid-2015 until several months ago.  Again, whether the recent improvement marks a re-accelerating trend, or is just noise in the decelerating trend remains to be seen.

All in all, this is continuing good news. The number of underemployed continues to improve relative to the unemployed, the sign of an economy that is continuing to improve. There are some signs in deceleration in that improvement, but not of a mature expansion that is on the cusp of rolling over.

A thought for Sunday: for now the economy remains on automatic pilot --and that's good

 - by New Deal democrat

How much, if any, of the economy, has been influenced by the Trump/Ryan GOP government in Washington to date?  With one exception, not much I think.

First of all, while the jobs report was certainly good, was no better than the average report from 2014 or 2015 -- or 4 of the last 8 months, for that matter:

And it wasn't just foreseeable, it was forecast.  For the last 10 years, the nonpartisan Conference Board has published a monthly "Employment Trends Index," an index of leading indicators for jobs.  Here's what it looked like as of Friday:

Notice that there was a jump in the leading index beginning last summer. In the last few months we have seen those leading components feed through into actual job creation.

You know, the leading indicators really do lead, and I've been writing about the economy entering a period of "Indian Summer" for about half a year now.

Secondly, now that the Trump/Ryan regime is halfway through their "first 100 days," what economic policies of any significance have been enacted?  The answer is, none.  All of the Executive Orders have primarily impacted immigration and border controls. No legislation of note has landed on Trump's desk.

The ACA funding repeal hasn't been enacted yet, and may not ever make it through Congress, in particular, the Senate.  Even if it does, while the consequences will be enormous over the next few years, there won't be any immediate economic impact, as increased premiums for older citizens counterbalance the end of the individual mandate, and the unraveling of the marketplace will not only take time, but it won't be until the millions more uninsured start showing up in emergency rooms of  hospitals that the effects are really felt.

So, for now the economy remains on automatic pilot, just as it has been at least since the end of 2014.  And the underlying conditions remain favorable for the next 6 - 12 months.

Finally, there is one exception, where the election appears to have made a difference.  Here is a graph from Bloomberg that confirms what Gallup has been showing since November: while Democrats' economic confidence has declined somewhat -- but only back to it lows for the last couple of years -- GOPers' confidence has surged higher:

That continues to translate into very good readings -- over 10% higher YoY -- in Gallup's daily consumer spending metric (yes, correlation is not causation, but I am unable to think of any other cause):

Given the propensity to save vs. spend, I do not believe that redistribution of income and wealth higher is going to have anything other than bad effects over the longer term as measured by the next few years.  Thousands of people will needlessly die because of the implosion of the health care marketplace. When the next downturn inevitably comes, the Trump/Ryan regime will have no effective palliatives, and no desire to alleviate suffering in any event. And all hell is likely to break loose when the US debt ceiling needs to be raised in a few months.  There are no signs that the House extreme right-wing "Freedom Caucus" is going to change their implacable opposition, and there is no incentive whatsoever for the Democrats to bail the GOP out. 

But that is over the next 2 - 4 years.  For now, automatic pilot means continued job gains and nominal wage growth.

Weekly Indicators for March 6 - 10 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

Unsurprisingly, in addition to the employment report, the big news this week was the jump in long term interest rates.

February jobs report: hitting on all cylinders but wages

- by New Deal democrat

HEADLINES:

• +236,000 jobs added
• U3 unemployment rate down -0.1% from 4.8% to 4.7%
• U6 underemployment rate down -0.2% from 9.4% to 9.2%

Here are the headlines on wages and the chronic heightened underemployment:

Wages and participation rates

• Not in Labor Force, but Want a Job Now:  down -142,000 from 5.739 million to 5.597 million   
• Part time for economic reasons: down -136,000 from 5.840 million to 5.704 million
• Employment/population ratio ages 25-54: up +0.1% from 78.2% to 78.3%
• Average Weekly Earnings for Production and Nonsupervisory Personnel: up $.04 from $21.82 to $21.86,  up +2.5% YoY.  (Note: you may be reading different information about wages elsewhere. They are citing average wages for all private workers. I use wages for nonsupervisory personnel, to come closer to the situation for ordinary workers.)

December was revised downward by -2,000, and January was revised upward by +11,000, for a net change of +9,000. 

The more leading numbers in the report tell us about where the economy is likely to be a few months from now. These were mainly positive.

• the average manufacturing workweek was unchanged at 40.8 hours.  This is one of the 10 components of the LEI.
 
• construction jobs increased by +58,000. YoY construction jobs are up +219,000.  
 
• manufacturing jobs increased by +28,000, and after being down YoY for a year, have now turned the corner again and are up +7,000 YoY

• temporary jobs increased by +3,100.


• the number of people unemployed for 5 weeks or less increased by +98,000 from 2,468,000 to 2,566,000.  The post-recession low was set over 1 year ago at 2,095,000.

Other important coincident indicators help  us paint a more complete picture of the present:

• Overtime rose +0.1 from 3.2 to 3.3 hours.
• Professional and business employment (generally higher- paying jobs) increased by +37,000 and are up +597,000 YoY, an acceleration over the last year's pace.


• the index of aggregate hours worked in the economy rose by 0.2 from  106.4 to 106.6 

•  the index of aggregate payrolls -rose by 0.6 from 132.4 to 133.0. 

Other news included:         

• the alternate jobs number contained  in the more volatile household survey increased by  +447,000 jobs.  This represents an increase  of 1,485,000  jobs YoY vs. 2,,349,000 in the establishment survey.    
   
• Government jobs rose by +8,000.     

• the overall employment  to  population ratio  for all ages 16 and up rose from  59.9%  to 60.0 m/m  and is up +0.2% YoY.    
• The  labor force participation  rate rose  from 62.9% to 63.0%  and is up +0.1%  YoY (remember, this includes droves of retiring Bsoomers).     

 SUMMARY 

This was a very good report in almost all respects, including the end of the manufacturing jobs recession, and a slight acceleration in better-paying professional and business jobs.

The few warts included the fact that none of the broader measures of labor market slack made new lows (although they did decline), and short term unemployment - a leading indicator - has not made a new low in 15 months.

But most of all, aside from some continued slack, the big shortfall in the economy as experienced by most Americans is the seemingly unending paltry wage growth.  Once again, adjusted for inflation, there has likely been no growth whatsoever in real wages YoY.  Nearly 8 years into an expansion, this ought to be totally unacceptable, and should be ringing alarm bells about what might happen to wages when the next recession inevitably hits.

  

A quick primer on interest rates and rate hikes

 - by New Deal democrat

With increasing speculation that the Fed will again raise interest rates this month, I thought I would take a look at how long term rates, and the yield curve, react.

As most everybody who follows this stuff knows, in the last 60 years the yield curve has always inverted before the onset of a recession -- which presumably means that it narrows before it inverts.

But *how* does it narrow?  Do long term interest rates come down, do short term rates go up, or is there some of each?

Let's go to the graphs. Below are the yields on 10 year treasuries (blue), the Fed funds rate (green), and YoY consumer inflation (red), first from 1962 to 1983:

and from 1983 to the present:

There are a few trends that have remained true during both the earlier, inflationary era, and the more recent disinflationary and deflationary era.

First, all three generally move in the same direction, i.e., both long and short term interest rates tend to broadly correlate with the inflation rate.

Second, in terms of volatility:

 - long term interest rates are least volatile

 - the YoY inflation rate is next

 - the Fed funds rate is the most volatile.

Finally, in each case over the last 60 years, before a recession the yield curve has inverted because the Fed funds rate rose to and overtook long term rates. In the inflationary era, both continued to rise into the recession. In the more recent era, long term rates have been flat or declined slightly once there was an inversion.

Contrarily, the few times that long term rates declined to the level of the Fed funds rate (1986, 1994, 1998) it did *not* signal a recession, but rather a correction in a strong economy.

So let's take a look at the last 12 months:

Since the end of June, long term rates have actually risen more than short term rates, and have risen to over 2.5% again this week.  This is the sign of a relatively strong economy, at least over the shorter term 6 - 12 months.  Short rates have a long ways to go before they overtake long term rates.  Of course, if long term rates rise high enough, that will act to choke off the housing market and will set up longer term weakness.  But we're not there yet.

Why the economy looks good for the next 3 - 9 months

 -by New Deal democrat

I take an extended look at the short leading indicators over at XE.com.

International Economic Week in Review: Good News Abounds

   This week’s news continued in a positive trend.  All signs from the EU point to an uptick in overall activity.  Canada continues to grow modestly but is still dealing with negative business investment.  Japanese inflation was positive this month – a very welcome development for a country trying to undo decades of deflation.  And finally, the UK continues to confound those (myself included) who predicted a post-Brexit recession.

   EU news continued its positive trend.  Most important were the Markit numbers: the composite reading was 56, a 70-month high.  The service sector was also near a 5-year high with a 55.5 reading.  New orders and business activity increased, as did employment.  Rising prices were the only negative.  The manufacturing number rose .2 to 55.4; both production and new orders were higher.  But like the service report, prices were a problem, with some commodities described as “sellers markets.  Unemployment was steady at 9.6%; loan growth and money both increased.  Thanks to a 9.2% increase in energy prices, CPI rose 2% Y/Y.  And while retail sales declined .1% M/M, they increased 1.2% Y/Y, which continues this data series near 4-year continuous increase:

EU news turned the corner in 4Q16; nothing since has cast any aspersions on that change in direction and magnitude.

     The Bank of Canada maintained rates at .5%.  Their announcement offered this following brief summation of the Canadian economy:

In Canada, recent consumption and housing indicators suggest growth in the fourth quarter of 2016 may have been slightly stronger than expected. However, exports continue to face the ongoing competitiveness challenges described in the January MPR. The Canadian dollar and bond yields remain near levels observed at that time. While there have been recent gains in employment, subdued growth in wages and hours worked continue to reflect persistent economic slack in Canada, in contrast to the United States.

This week’s released of 4Q Canadian GDP supports this view.  While household spending rose .6%, business investment contracted again, this time by 2.1%.  Non-residential structure spending was off 5.9% while intellectual property investment declined 1.9%.  The 9-quarter contraction in business investment indicates that business sentiment is still muted.  On the plus, the Canadian dollars near five year low relative to the US dollar should help to spur exports in the coming quarters:

     News from Japan was positive.  Most important was the .4% Y/Y increase in CPI.  For a country that has not only suffered from deflation for decades but is also throwing the kitchen sink at the economy to solve the problem, this was welcome news.  While industrial production was off .8%, this was the first decrease in 6 months:

And the 35-month high in the Markit manufacturing number (it rose from 52.7-53.5), indicates industrial activity will increase in the coming months.  Moreover, production rose 3.2% Y/Y.  Unemployment was remarkably low, decreasing .1% to 3%.  And the Japanese consumer continues to spend, helping to raise retail sales 1%.  Finally, the yen’s low levels should help to spur exports over the first half of the year:

     The monthly releases from Markit were the only economic numbers from the UK.  Manufacturing was off slightly, but it still registered a positive 54.6 thanks to an increase in production and new export orders.  The low level of the sterling relative to the dollar and euro is clearly helping.  The UK service sector is still expanding: the headline number decreased from 54.5-53.3.  Activity and new work are still positive, although rising cost pressures are starting to hit bottom lines.

    

     

    

US Equity and Economic Review: Great Fundamentals and Technicals

      On Tuesday, the BEA released the second estimate of 4Q GDP.  While the 1.9% headline number was uninspiring, the 6.6% decline in exports was the primary cause.  Personal consumption expenditures rose 3%, helped by a very impressive 11.5% rise in durable goods purchases. A 9% uptick in residential building along with a 1.9 boost in equipment investment contributed to overall investment increasing 9%.  As this following graph shows, the huge Q/Q drop in exports more than offset the positive contributions from personal spending and investment:

 Also, note that an export decline of this magnitude only occurred in 3 other quarters over the last 5 years.

     The BEA also released personal income numbers this week.  The chained disposable income and personal consumption expenditures both declined.  However, this is only 1 month of data in an otherwise bullish data series.  And the 1-month contraction stands in stark contrast with the Conference Board’s consumer confidence number rising to a 15-year high. 

     Durable goods increased 1.8%, but transport orders were the sole reason for the increase.  The ex-transport number was -.2.  But on the plus side, non-defense capital goods orders rose an impressive 3.6%, which continues this data series’ recent uptick in activity:

However, the durable goods data series continues its move sideways between the 220 and 240 million level, where it’s been for the last 4 years:

     Finally, ISM released their manufacturing and service numbers this month.  The manufacturing number increased 1.7 to 57.7; new orders rose 4.7 while production increased 1.5.  Prices, however, are a still elevated 68.  The service sector headline number increased 1.1 to 57.6 with both new orders and employment growing.  Both data series contain a positive anecdotal comments section.  The combined reading of both numbers is for continued growth and perhaps some acceleration in business activity in the next few months.    

     Economic Conclusion: this weeks’ news was positive.  The ISM manufacturing and service sector readings were the week’s strongest news; they indicate U.S. business is doing well.  Although the 4Q GDP headline number was disappointing, the internals were far less so.  Best of all, U.S. business is spending on investment again, which is a welcome development.  Durable goods orders continue to move sideways – which continues its three year holding-pattern trajectory.  While we’d prefer to see this statistic increase, the 3-year printing between $220 and $240 million still indicates the economy is moderately healthy. 

     Market Overview: the market has performed very well since the election:

The market’s total increase is about 15% -- which would be a great return for an entire year.  Better still, the chart is technically sound.  There’s a first rally from 207-227, following by a multiple month consolidation between 222-230.  This allowed the market to consolidate gains before moving higher in early February.  There are, as always, counter-arguments that the rally is near its end, which are clear on the weekly chart:

The percentage of stocks about the 200 and 50-day EMAs are near multiple year highs while the MACD and RSI are both over-extended. 

     The post-election rally is occurring against a solid and improving economic backdrop.  Business and consumer confidence rose after the election.  Business owners believe the new administration will be very pro-business, with an agenda to lower taxes and regulations.  Consumers also believe Trump will be positive for the economy.  Just as importantly, 4Q corporate earnings – the mother’s milk of stock valuations – were very positive:

As of Wednesday, March 1st, we have seen Q4 results from 484 S&P 500 members or 98.7% of the index’s total membership. Total earnings for these 484 index members are up +7.4% on +4.9% higher revenues, with 68.4% beating EPS estimates and 54.1% coming ahead of top-line expectations. The proportion of companies beating both EPS and revenue estimates is 40.3%.

And while earnings have been positive, the market remains expensive, with a high current and forward PE ratio.

     So – that does this mean going forward?   As we have been for the last 18-24 months, the market is between growing earnings and an expanding economy on one hand and an expensive valuation on the other.