January Macro Update: Wage Growth at New High

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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. Employment growth is decelerating, from over 2% last year to 1.5% 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.

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Overall, the main positives from the recent data are in employment, consumption growth and housing:

  • Monthly employment gains have averaged 180,000 during the past year, with annual growth of 1.5% yoy. Full-time employment is leading.
  • Recent compensation growth is the highest in 7-1/2 years: 2.9% yoy in December.
  • Most measures of demand show 3-4% nominal growth. Real personal consumption growth in November was 2.8%. Retail sales reached a new all-time high in November, growing 2.0% yoy.
  • Housing sales are near a 9 year high. Starts made a new 9 year high in October.
  • The core inflation rate has remained near 2% since November 2015.

The main negatives are concentrated in the manufacturing sector (which accounts for less than 10% of employment):

  • Core durable goods growth rose 1.8% yoy in November, its best growth since April 2015. It was weak during the winter of 2015 and it has not rebounded since.
  • Industrial production has also been weak, falling -0.6% yoy due to weakness in mining (oil and coal). The manufacturing component grew +0.4% yoy.

Prior macro posts are here.

Our key message over the past 4 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).

retail food services sales

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.

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