The following is a summary of our recent FS Insider podcast, which can be accessed on our site here.
Given the surge in leading economic data, those awaiting an imminent recession or economic downturn in the U.S. may have a while longer to wait, said Kurt Kallaus, author of Exec Spec and a frequent guest on our FS Insider podcast.
Mid-Cycle Recovery Underway
Kallaus has made several correct calls, including his prediction in 2015 that the broad U.S. stock market averages, like the Dow Jones Industrial Average and the S&P 500, would still have 2 to 3 years left to run, which has turned out correct. Now that we're coming in on that time, should investors think about changing course?
“Economic trends are not reversed because of time, but because of excesses,” he stated. “There’s not an expiration date on a recovery. You look for either overheating or overcooling, and neither extreme has been on the horizon for years.”
He continues to be optimistic that we’ll see growth over 2 percent, and that we’re probably in the mid-stage of the bull market based on leading indicators.
With Trump’s promises of lower corporate and personal taxes, repatriation of dollars from overseas, infrastructure and fiscal spending in the U.S., boosted job investment and regulation cuts, Kallaus sees the setup for new growth in this bull market.
Small Businesses are Excited
Based on the NFIB Small Business Survey, small business owners are set for boom times. Right now, the survey is showing the strongest rise in sentiment ever recorded.
The spikes we see in this chart all seem to correlate with the early stages of an expanding economy.
“When you go from a very low reading on the small business surveys to a very high reading in a very short order of time, (that has) invariably coincided with the beginning of a new economic trend to the upside,” Kallaus said. “The NFIB shows that pretty clearly with a record rise to levels that are quite historic.”
Small businesses were largely left out of the recovery after 2008-2009—with large multi-national corporations benefiting the most in terms of profit expansion—even though small business are the largest creators of new jobs in the U.S. economy, Kallaus noted.
If record small business optimism can be met by actual policy changes from the Trump administration, Kallaus said an average of 3% economic growth is certainly feasible.
ECRI Signaling a Turn
Traditionally, when we see the Economic Cycle Research Institute’s Weekly Leading Index dip in a big way, it coincided with a stock market bubble or high-interest rates, Kallaus stated. Each time it dips down and we see it rally above, it indicates we’re at the start of an expansion phase.
That's what we see today.
“(For) people looking for a recession around the corner … this certainly has gone the other direction and indicates that we should be seeing more growth in the economy going forward, not contraction,” Kallaus said.
Manufacturing Also Showing Good Signs
Since the election, the real growth numbers have been given a nice tailwind with explosively higher sentiment in the PMI numbers in Europe and the U.S. hitting 2- to 6-year highs, Kallaus noted.
The Markit Eurozone Composite PMI is showing a 67-month high, Kallaus noted, and the ISM Manufacturing PMI Composite Index in the U.S. is also pointing to growth ahead.
What’s most encouraging is that the reading indicates the expansion will have some legs to it because of the inventory and backlog drawdown we’re seeing, Kallaus stated.
“When we see a pickup in new orders and the PMI — the production index in the PMI, the new orders index — jumping up to levels of expansion above 50, towards the 60 level, hitting 2-year, 5-year, 6-year highs, and you still see a contracting backlog of inventory out there in many of these indices, I think it’s very encouraging that there’s some staying power here,” he said.