We’ve seen some really great economic data lately, and we’ve seen some lousy data as well. Some of it suggests that we’re in the middle of an incredibly strong expansion, while other data shows a sharp decline in key areas such as employment and corporate profits.
As you can probably guess, much of this aberrant data comes as a result of hurricanes Irma and Harvey, which wreaked havoc across the Southeast. Today we’re going to examine some of this data in an attempt to gauge whether the U.S. economy remains on stable footing.
Let’s begin with some of the bad data first.
It’s a bit hard to tell, but if you look at the right side of the chart below, which shows job creation by month, you’ll see the first monthly decline in net jobs added to the economy since 2010.
Last month, according to preliminary estimates, the economy lost 33,000 more jobs than it created. This is rather remarkable, considering that it’s been over seven years (83 months, by my count) since our economy shed more jobs than it added. These were serious weather events indeed.
As an economy approaches and enters recession, we typically see a sharp deceleration in the number of jobs added each month. You can see this on the left side of the chart above, where, during 2007, job creation dwindled until the financial crisis took hold and the real job destruction began.
In contrast, this time around we see little if any deceleration in job creation leading up to last month’s figures. This suggests that September’s data is anomalous, which we would expect.
Another key area of the labor market that requires vigilance is jobless claims. An increasing number of people applying for unemployment insurance is one of the earliest and most telltale signs that the economy may be reaching an inflection point.
In the chart below we do see a major spike in jobless claims, but once again this corresponds to the dates of Irma and Harvey, suggesting there is little to worry about here.
In case your brain is as frazzled as mine due to the never-ending stream of drama coming out of Washington, hurricane Harvey’s “official” time on earth was from August 17th to September 3rd. Irma, on the other hand, toyed with us from August 30th to September 16th. These are the dates we should keep in mind as we sift through the data.
If these weather events were big enough to cause dislocations in our economic data, it should follow that we’re likely to see an impact on corporate profits in Q3.
Obviously, with any type of major disaster there are winners and losers. In this case, the losers were primarily insurance and reinsurance companies (and of course all of those who were personally afflicted), while the winners tend to be any sort of company involved in the rebuilding effort.
So far, analysts have been reworking their profit estimates in the short run and now expect S&P 500 earnings growth to be somewhere in the vicinity of 2.5%, as opposed to the 5% previously anticipated.
This lowering of earnings growth projections is likely to have little effect on overall stock prices, as investors are looking forward to the fruits of rebuilding. While the losses and write-downs are often incurred immediately, the surge in consumption and investment that occurs in the aftermath of these types of events can take years to play out.
We are seeing some immediate positive signs, such as a rise in auto sales as consumers replace their damaged vehicles, but other types of remediation require much more time and planning.
Now that we’ve seen some of the shorter-term negative economic data, let’s shift our focus to the positive.
Last week was rather groundbreaking, in that two of the most widely watched and most reliable leading indicators came in at levels not seen in well over a decade. The ISM Manufacturing Index and the ISM Services Index (also known by the semi-ridiculous name of the ISM Nonmanufacturing Index) blew out expectations, suggesting strong expansion in all segments of our economy.
In the chart below we can see the ISM Manufacturing Index breaching the 60 level. With these indexes, anything above 50 represents expansion, while anything below 50 represents contraction.
The latest reading of 60.8 is the strongest since 2004, and suggests that the outlook for manufacturers remains very healthy. This is further validated by the fact that 17 out of the 18 industries surveyed reported growth in August. That’s an usually high figure.
This report also has a “new orders” component, and that specific sub-index climbed 4.3 points to 64.6%. Another sub-index that tracks manufacturing employment rose to 60.3%, as survey respondents continued to complain about having a hard time finding enough skilled workers.
While the positive manufacturing data paints a nice backdrop for the economy and stock prices, manufacturing in general only represents about 20% of the U.S. economy, according to figures from the Department of Commerce and the CIA’s World Factbook. The rest of our economy (80%) is nonmanufacturing – more conveniently known as service based.
And the service world is looking quite happy as well.
As you can see below, the ISM Services Index also approached the 60 mark last month, coming in at 59.8%. This marks a 12-year high in the outlook for the services sector.
Again, the ISM Services Index has sub-components, and one of those is also new orders. This sub-index rose 5.9 points to 63%. Production climbed 3.8 points to 61.3% and employment rose 0.6% to 56.8%. In this particular survey, 15 of the 17 industries tracked reported that business is expanding.
Without question, much of the uptick in these ISM index figures is due to hurricanes Irma and Harvey. When hundreds of billions of dollars of damage is sustained and rebuilding is needed, it’s only natural that it’s going to stimulate our economy. So as we continue to monitor the data here, we need to recognize that some of the aberrant data is going to be to the upside, and we need to take this with a grain of salt. There is no reason to become overly excited about our economy shifting gears at this point, when much of the surge can be attributed to one-off events.
That being said, our economy has been expanding at a slow but steady clip, and all signs point to the fact that it continues to do so, even in light of the additional economic volatility caused by the hurricanes.
Last Friday’s article talked about the importance of price, and one particular price that we often don’t pay a whole lot of attention to is wages. As you can see in the chart below, wage growth has been steadily increasing from about 2% in 2015 to nearly 3% based on the latest data.
This is a good sign not just for our economy, but also for workers. It suggests that labor dynamics are beginning to shift in favor of the employee, and while this may work against corporate profits, sometimes you have to say, screw corporate profits!
Okay not really, but you know what I mean. If our cash-flush corporations that are making record profits need to share a bit of that wealth with the lower and middle-class workers who actually allow the companies to function, so be it. At least that money will work its way back into the economy.
Alright, what else should we look at?
Seeing as how I only have the opportunity to write once a week these days, and some of those articles are taken up by the monthly options series, allow me to chart-dump today. I think it’s important that you visually see how some of the most important data sets in our economy are trending over the long-term.
First up is factory orders, an important gauge of manufacturing that’s expanding nicely (up 5.7% year-over-year), and has been in an uptrend since mid-2015.
Next up, durable goods orders. Here I’ve included the headline data, as well as “ex-transportation” figures, and of course, core capital goods. The same uptrend is seen here, with core capital goods up 4% yoy, total durable goods up 5.5% yoy, and durable goods ex-transportation up 6.5% yoy.
What about retail sales, the demise of which has been widely reported? Well, according to the Census Bureau, retail sales has seen a slowdown, but is still expanding at a respectable rate (currently 3.2% yoy).
Last one before we get to the consumer-oriented measures is Industrial Production. This, like factory orders, took a major hit when the dollar began its meteoric rise in 2014, but it has since recovered and is back in expansion mode. Industrial Production is currently up 1.5% yoy.
Okay, what about the consumer that is always “tapped out” according to so many analysts?
Here’s a look at personal income. While we’ve seen the growth in personal income slow over the last few years, personal income is currently rising at 2.8% year-over-year. If we factor in inflation, real personal income is up 1.3% over the past year.
And here’s consumer spending. Apparently the consumer can’t be too tapped, because the growth rate in consumer spending currently sits at 3.9% yoy. Not too shabby, eh?
Okay, let me debunk one other myth before I go. Here’s a look at government spending. I’ve read some analysts contend that government spending is really what’s supporting our economy. But as you can see below, government spending is and has been little changed over the past few years. Relatively steady government spending is certainly helping to support our economy, but it’s not responsible for the growth that we’re seeing.
I realize it’s unfair for me to dump all these charts on you without a full explanation of each one, but recently I’ve felt the need to get some of this information out of the databases in which it sits, and out into the public.
I sit and read comments about the markets and economy all day long, every single day, that are frankly bullshit. Please excuse my French. I don’t understand how these people feel comfortable providing their opinions without any reference to actual data, but then again, I don’t understand most of the world. Anyway, thanks for bearing with me and I hope these charts provide an anchor to help you recognize all the spins you’re constantly bombarded with.
The preceding content was an excerpt from Dow Theory Letters. To receive their daily updates and research, click here to subscribe. Matt is also the Chief Investment Strategist at Model Investing. For more information about algorithmic based portfolio management, click here.
