Quantitatively the economy is relatively strong compared to periods seen since the end of the Great Recession. Yet, the U.S. markets are volatile to say the least.
There’s softness in the global markets, plus worry about trade wars which is still having little affect at Main Street level. Still the markets, over the years since the end of the Great Recession, have shrugged off bad news. The markets are about business profits – not about economic growth.
Even the good companies are getting punished by Wall Street. This earnings season, many companies that are beating analyst expectations for profit growth are not being rewarded with gains in their stock prices. Stocks typically rally during earnings season because traders see proof of profit growth and the potential for future earnings. Also, companies resume repurchases of their own stock, which helps boost their earnings per share. But since the start of the third quarter season, stocks have fallen 1.7%, according to Binky Chadha, Deutsche Bank’s chief global strategist. If this trend holds, Q3 would be only the third season with negative returns in the last five years, he said in a note.
My position is that the markets advanced over the past five years at a faster rate than the underlying growth of corporate income.
The Dow Jones / corporate profit ratio is elevated – and was ripe for a correction. Stock prices cannot grow forever at a faster rate than profit growth.
Economic Releases This Past Week
The following table summarizes the more significant economic releases this past week. For more detailed analysis – please visit our landing page which provides links to our complete analyses.
|Release||Potential Economic Impact||Comment|
|September Personal Income and Outlays||Little impact on GDP||Although income growth slowed, expenditures continued at the same high pace as the previous month|
|August S&P Case-Shiller Home Price Income||N/A||Although there is little affect on GDP, home price growth is slowing. Likely cause is the increase in mortgage interest pricing more and more potential home buyers out of the market.|
|October Conference Board Consumer Confidence||N/A||Many economists believe consumer confidence looks into the eyes of consumers – and shows their willingness to spend money. CB’s consumer confidence shows continued elevated levels of confidence.|
|October ADP Employment||N/A||ADP’s employment numbers came in at a relatively strong 227,000 – which is on the high end of the range seen in the last 12 months. Still ADP employment numbers do not correlate well with the BLS’ employment numbers.|
|3Q2018 Preliminary Productivity and Costs||Minor||The year-over-year growth of productivity is now just slightly below labor unit cost growth. Still productivity as measured by BLS is growing slower than GDP.|
|September Construction Spending||Slightly stronger||Interesting that the backward revisions to construction spending were all upward – boosting the year-over-year growth. Even though US Census said there was no change month-over-month, the rolling averages significantly improved.|
|September BLS Employment Situation||Confirms current economic strength||Many pay special homage to the BLS employment numbers – as it is their belief it confirms how well the economy is doing. This was a particularly strong report – but consider that there is likely a problem with seasonal adjustment as the previous October was strong also. So this issue is the degree of strongest. But even using the unadjusted data, this was one of the strongest Octobers in the 21st century.|
|September International Trade||Little impact on GDP||The trade balance only marginally worsened, and the rolling averages for imports and exports improved. There was little evidence of a trade war or economic softness in the data.|
|September Factory Orders||N/A||US Census reports manufacturing after the Federal Reserve so their data is old (and anticipated). The rolling averages improved even though the data was not as good as the previous month.|
|Surveys||Negative||Dallas Fed Manufacturing, Chicago PMI, and ISM / Markit October Manufacturing Surveys were released. They followed the same trend of most of the other surveys released this month – all slightly lower or little changed. If the surveys are correct, one would expect weaker manufacturing data for October.|
|Rail||Signs economy is slowing||The rolling averages and the year-over-year growth continues to slow. There is a correlation between rail growth and economic growth – and rail is saying the economy will slow.|
In summary, there was little this week to indicate any real change in economic growth. The economically negative news seems to outweigh the positive developments – but not by enough to be a concern.
Our Economic Forecast for November:
The Econintersect Economic Index for November 2018 continues to show the improvement cycle continues and remains well into territory associated with normal expansions. With the stock market correction, it’s natural to assume that the economy is degrading. And there are several pundits throwing around forecasts of a recession. But our Econintersect Economic Index (EEI) moderately improved and still remains well into territory associated with normal expansions.
Our last forecast showed a significant decline in our economic index. This month there was a slight bounce. Still we are seeing mixed trend lines – which usually happens when there is an overall reversal in trends. Our major worry is the rapid deceleration of growth in rail transport data – a usual flag for a slowing economy.
Our analysis of the employment situation is in my instablog.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.