No signs of labor market deterioration

Tomorrow's employment report will likely be unimpressive, with gains coming in near the lower end of the range (100-250K) of the past three years—the market is expecting a gain of 150K for private sector jobs, while the ADP estimate points to 140K, and both seem reasonable. But that won't mean that the employment picture is deteriorating. Real deterioration would more likely show up in a rising level of unemployment claims, but there is still no sign of that; claims continue to trend lower.

The first of the above two charts shows the 4-week moving average of unemployment claims. It's approaching relatively low levels. We aren't likely to see claims moving much lower from here; 300K per week is probably what we should expect to see on an ongoing basis if everything were normal (i.e., that would represent normal job turnover). The second chart shows the weekly level of claims and the 52-week moving average of weekly claims. As this demonstrates, claims are still in a declining trend, but the rate of decline is falling. 

Congress has still not reauthorized the emergency unemployment claims program that started in mid-2008 and ended early this year. As a result, there are 37% fewer people receiving unemployment insurance benefits today than there were a year ago (almost 2 million fewer). That's good news, since it means that within the ranks of the unemployed there has been a significant increase on the margin in the incentives to find and accept a job. This makes the labor market more dynamic and more healthy, in my view.

Americans are richer than ever before

This has been the weakest recovery ever, but it nevertheless has managed to make the U.S. richer than ever before on a nominal, real and per capita basis. 

Data released today by the Federal Reserve show that the net worth of U.S. households increased by a staggering $9.8 trillion last year, or by almost 14%. Household net worth is now almost $12 trillion higher than it was before the Great Recession hit. The gains in recent years have come from increased holdings of financial assets (mainly equities, bonds, and savings deposits, which have grown by a total of $21 trillion from their 2009 lows), rising real estate values (up $3.9 trillion in just the past two years), and less debt (down $800 billion from pre-recession highs).

Even after taking into consideration inflation, household net worth has reached a new post-recession high of $80.7 trillion. As the chart above shows, this is very much in line with its 3.7% per year long-term trend growth.

Even after taking into consideration inflation as well as the growth of the population, per capita net worth has reached a new post-recession high of almost $255,000. This figure has been growing by about 2.4% per year for over 60 years. The growth of real per capita net worth hasn't been as smooth in the past several decades as it was in the go-go 50s and 60s, but it has kept up with long-term trends.

Yes, things could be better, but they aren't nearly as bad as you might have been led to believe. The U.S. economy is making a comeback that is fairly impressive.

Service sector mixed

The February ISM service sector report brought no relief from the harsh winter weather, and most likely was downbeat precisely because of the weather. Still, the news is mixed and there is no reason to think that the outlook for economic growth—which probably remains a sluggish 2-3%—has deteriorated. 

The Business Activity portion of the ISM report fell slightly in February, and is probably the most representative of what is going on: conditions haven't deteriorated, but they are hovering around the lower end of their four-year range.  

The overall measure of service sector conditions is shown in the chart above, and it fell significantly, to its lowest level since early 2010. This was offset to a degree by an improvement in the same index for the Eurozone service sector. Both the manufacturing and service sector reports for February showed a bit more strength in the Eurozone relative to the U.S., and weather is the likely culprit.

The employment index fell dramatically, and stands out as clearly weak. Does it portend a recession? It would if there were other indicators suggesting the same thing, but I don't see any; this therefore looks like an outlier. It's not hard to imagine that bad weather has disrupted hiring plans.

Meanwhile, I note that industrial commodity prices (see chart above) have been rising for the past four months, which suggests that global economic activity has firmed somewhat despite the apparent weather-related slowdown in the U.S.. We know that Eurozone activity has firmed up, and it's likely that activity in the Pacific rim has firmed as well. With this as a backdrop, and knowing that swap spreads in the U.S. remain at very low (i.e., very healthy) levels, it's unlikely that the U.S. economy is on the verge of another recession.

Early last week I noted the recent impressive acceleration in bank lending, and it continues, as the chart above shows. Commercial & Industrial Loans outstanding at U.S. banks are now up at a 20% annualized pace over the past three months—the fastest pace yet during the current recovery. Recall that thanks to the Fed's aggressive addition of bank reserves since 2008, banks have a virtually unlimited capacity to generate new loans. The only thing holding them back has been a lack of confidence and its companion, a strong demand for money. (Borrowing money is akin to a negative demand for money—until recently, banks and businesses in aggregate preferred to hold on to money and to pay down debt.) That is now changing, and that's very good news. 

Mutual fund flows update

I haven't updated these charts for several months. What they show is a now-obvious "tipping point" that occurred during June 2013. That was the month that Treasury yields shot higher, ostensibly because of the fear of Fed "tapering." As I've argued, I think it was simply the market coming to the realization that the economy was strong enough to stand on its own and that the tapering and eventual reversal of QE was both justified and necessary. This "tipping point" marked the first time that the market became less concerned with owning equities and more concerned about owning bonds. That month there were relatively large inflows to equity funds and huge outflows from bond funds. Since then the market's aversion to bonds has tapered, and the market's enthusiasm for equities has been mixed (whereas before the market actively shied away from equities). I think this supports the notion that the market has become less concerned about the future, but not yet overly enthusiastic.

$62 trillion and counting

According to Bloomberg's calculations, the current market cap of global equities ($62.5 trillion as of yesterday) now exceeds its pre-recession high. Equities have risen by a staggering $37 trillion since their lows in early March, 2009, in addition to paying about $6.5 trillion in dividends. Investors everywhere were shell-shocked by the collapse, and with good reason: fortunes were wiped out almost overnight. But now, even those who never sold their stocks are about 15% on average better off today than they were just before the 2008 crash, on account of having received more than six years' worth of dividends which, if reinvested, would be worth about $9 trillion today. In other words, a $10,000 investment in global equities at the peak of the market in late 2008 would be worth about $11,500 today. A similar investment in Fidelity's Prime Money Market Fund would be worth about $10,500 today.

Even with the earth-shaking financial market turmoil of recent years, a buy-and-hold strategy has paid off over a period of only 5-6 years.