Summary: This post reviews the main economic data from the past month. Highlights:
- Employment: The average monthly gain in employment during the past year was 256,000, the highest since the 1990s. Annual growth in employment is the best in 15 years.
- Wages: Wages have recently started to accelerate. The 1Q15 Employment Cost Index rose 2.7%, the highest since the recession. Hourly earnings growth in May was the highest since the recession.
- Demand: 1Q15 real GDP grew 2.7%, the second highest rate in the past 5 years. Real personal consumption (70% of GDP) grew 3.0% in 1Q15, the highest rate of growth in 5 years.
- Housing: Housing starts in April rose to a new 8 year high. New home sales are near a 7 year high.
- Inflation: However, the core inflation rate remains under 2%. It is near its lowest level in the past 3 years
Bottomline: the trend for the majority of the macro data remains positive.
[Read: Second Quarter GDP Estimate Gets a Lift]
A year ago, we started a recurring monthly review of all the main economic data (prior posts are here).
For most of that time, the consensus view has been that growth in wages and employment would soon accelerate and that this would lead to a meaningful increase in inflation above the Fed's 2% target. Our monthly review of the data has consistently shown this expectation to be premature.
The irony now is that economic data has seemingly turned negative over the past three months, to the point where many talk about a recession or QE4. We think this weakness is temporary, mostly driven by the huge drop in energy prices which has lowered inflation and depressed "nominal" price growth. "Real" growth remains positive.
More importantly, the fact that the consensus swings between extremes underscores how focused too many are on monthly data points, with the effect that underlying trend in the data is missed.
Bottomline: the trend for the majority of the macro data remains positive.
Our key message has so far been that (a) growth is positive but modest, in the range of ~3-4% (nominal), and; (b) current growth is lower than in prior periods of economic expansion and a return to 1980s or 1990s style growth does not appear likely. This is germane to equity markets in that macro growth drives corporate revenue, profit expansion and valuation levels.
Let's review each of these points in turn. We'll focus on four categories: labor market, inflation, end-demand and housing.
Employment and Wages
The April non-farm payroll (280,000 new employees) was the highest so far in 2015. Prior to March (a disappointing 119,000), NFP had been above 200,000 12 months in a row, the longest streak since 1993-95. April and May were therefore a bounce back to trend.
In the past 12 months, the average gain in employment was 256,000, the highest since the 1990s.
Monthly NFP prints are normally volatile. Since 2004, NFP prints near 300,000 have been followed by ones near or under 200,000. That has been a pattern during every bull market. So while the March print of 119,000 was lower than expected, it fits the historical pattern. A low print was long overdue.
Volatility in NFP is not a recent phenomenon. The 1980s and 1990s bull markets were the same, only the range was higher. If anything, the swings were more extreme: NFP was negative in 1995, 1996 and 1997.
For this reason, it's better to look at the trend; in May, trend growth was 2.2% yoy. Annual growth continues to be the highest in 15 years. Employment growth in the past six months has been better than at any time during the 2003-07 bull market.
Released together with NFP is a report on average hourly earnings. In May, this increased to 2.3% yoy, the highest since the end of the recession. This will be very positive if the acceleration in wages is sustained.
The employment cost index shows an improving trend in compensation. For 1Q15, it was 2.7% yoy, the highest since the recession; this is good news, especially as there is a trend of sequential quarterly improvements.
For those who doubt the accuracy of the BLS employment data, federal tax receipts are also accelerating, a sign of better employment and wages (data from Yardeni).
Inflation
Despite improving employment, inflation has been decelerating in recent months and remains below the Fed's target of 2%.
With oil prices collapsing, CPI dropped to minus 0.1% in April. The more important core CPI (excluding more volatile food and energy) grew 1.8%. Consensus expectations are that inflation will accelerate but it hasn't happened...
Related podcast interview:
Urban Carmel on GDP Recalculation Conspiracy Theories; Market Outlook
