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.
That said, there are some signs of weakness creeping into the data. Retail sales are at a new all-time high, but overall growth is decelerating and less than 2% real. Employment growth is also decelerating, from over 2% last year to 1.7% now. Housing starts and permits have flattened over the past year. There is nothing alarming in any of this but it is noteworthy that expansions weaken before they end, and these are signs of some weakening that bear monitoring closely.
Read Retail Sales Poised to Suffer on Higher Medical, Rental Inflation
Overall, the main positives from the recent data are in employment, consumption growth and housing:
- Monthly employment gains have averaged 197,000 during the past year, with annual growth of 1.7% yoy. Full-time employment is leading.
- Recent compensation growth isthe highest in more than 7 years: 2.8% yoy in October.
- Most measures of demand show 3-4% nominal growth. Real personal consumption growth in September was 2.4%. Retail sales reached a new all-time high in September.
- Housing sales are near a 9 year high. Starts and permits in August remain near their 8 year highs, but growth has been flattening.
- The core inflation rate has remained near 2% since November 2015.
The main negatives are concentrated in the manufacturing sector (which accounts for just 10% of employment):
- Core durable goods growth fell 2.0% yoy in September. It was weak during the winter of 2015 and it has not rebounded since.
- Industrial production has also been weak, falling -1.0% yoy due to weakness in mining (oil and coal). The manufacturing component grew +0.1% yoy.
Prior macro posts from the past year are here.
Our key message over the past 2 years has been that (a) growth is positive but slow, 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.
Modest growth should not be a surprise. This is the typical pattern in the years following a financial crisis like the one experienced in 2008-09.
This is germane to equity markets in that macro growth drives corporate revenue, profit expansion and valuation levels. The 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 (enlarge any image by clicking on it).
A valuable post on using macro data to improve trend following investment strategies can be found here.
Let's review each of these points in turn. We'll focus on four macro categories: labor market, inflation, end-demand, and housing.
