December Update: Housing And Manufacturing Growth At Multi-Year Highs
Urban Carmel | Dec 11, 2017 08:36AM ET
Summary: The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.
The bond market agrees with the macro data. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least a year and in several instances as long as 2-3 years. On this basis, the current expansion will last well into 2018 at a minimum. Enlarge any image by clicking on it.
Unemployment claims are also in a declining trend; historically, claims have started to rise at least 6 months ahead of the next recession. Note that recent hurricanes had a short-term negative impact on economic data. In the past, growth has quickly resumed. Thus, jobless claims recently spiked higher after Harvey/Irma, as it also did after Katrina and Sandy, but recent claims are already at a new 40+ year low.
New home sales made a new 10 year high in October. In the past 50 years, more than a year has lapsed between the expansion's high print in new home sales and the start of the next recession.
There are two main watch outs in the monthly data that bear monitoring closely:
First, employment growth has been decelerating from over 2% last year to 1.4%, even before hurricanes Harvey and Irma. It's not alarming, but it is worth noting that expansions weaken before they end and slowing employment growth is a sign of late-stage maturation in the current expansion.
A second watch out is demand growth. Real retail sales growth (excluding gas) has averaged 1.7% so far in 2017. It's not weak, but growth is clearly decelerating: growth averaged 2.5% in 2016 and 4.8% in 2015. Personal consumption accounts for about 70% of GDP so retail sales has a notable impact on the economy.
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Here are the main macro data headlines from the past month:
Employment: Monthly employment gains have averaged 170,000 during the past year, with annual growth of 1.4% yoy. Employment has been been driven by full-time jobs, which rose to a new all-time high in November.
Compensation: Compensation growth is on an improving trend, growing 2.5% yoy in November. The 3Q17 employment cost index (2.6% yoy) grew at the second fastest pace of the past 9 years.
Demand: Real demand growth has been 2-3%. In October, real personal consumption growth was 2.6%. Real retail sales (including gas) grew 2.5% yoy in October, making a new ATH.
Housing: New home sales grew 19% yoy in October to the highest level in the past 10 years. Housing starts rose to the second highest level of the past 10 years in October. Multi-family units remain a drag on overall development.
Manufacturing: Core durable goods growth rose 8.5% yoy in October, the best annual growth rate in 3 years. The manufacturing component of industrial production grew 2.7% yoy in October, the highest rate of growth in 3-1/4 years.
Inflation: The core inflation rate remains near (but under) the Fed's 2% target.
Our key message over the past 5 years has been that (a) growth is positive but slow, in the range of ~2-3% (real), 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. The simple fact is that equity bear markets almost always take place within the context of an economic decline. Since the end of World War II, there have been 10 bear markets, only 2 of which have occurred outside of an economic recession (read further here ).
The highly misleading saying that "the stock market is not the economy" is true on a day to day or even month to month basis, but over time these two move together. When they diverge, it is normally a function of emotion, whether measured in valuation premiums/discounts or sentiment extremes.
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