Sunday, April 3, 2016

A few encouraging developments

We're still in the midst of the weakest recovery ever, and there's a lot of unease among the population, as evidenced by the surprising strength of the unconventional Trump and Sanders campaigns. The economy only grew by a  miserable 1.4% annualized in the fourth quarter, and some forecasts are saying the first quarter just ended was miserably slow as well. The market complained so loudly about the Fed's plan to raise rates two or three more times this that Janet Yellen had to do a mea culpa and back off, at least for the time being. Decent fiscal policy is what has been lacking, but at this point there's no telling how the elections are going to change the future of policy. Trump seems to be losing momentum and the FBI is hot on Hillary's trail. Sanders is so addled he wants to boost the economy by saddling its more productive members with a mountain of new taxes. Cruz is holding his own for now, but not feeling much love (though he's got my vote, that's for sure).

So it seems a bit odd that the stock market has staged a big comeback in the past few months. Could there be something positive brewing beneath the economy's surface? Only time will tell, but I can point to several encouraging developments of late.


The March ISM report was stronger than expected, although still in weak territory. As the chart above suggests, the improvement in the manufacturing sector portends a pickup in first quarter GDP growth, which could come in at  2 - 2 ½%, or about the same as we've seen over the past 6-7 years.


The economy has been pretty resilient of late, and jobs continue to grow at just over a 2% annualized rate. Add to that the miserably weak productivity that the economy has suffered from for the past 5 years, and you get real growth of 2 - 2 ½%, which confirms the message of the ISM index. In other words, the economy's central growth tendency hasn't changed over the past several years. 



The past few months have seen an uptick in both the growth of the labor force and the labor force participation rate (see charts above). The labor force participation rate has now been flat for the past two years, a welcome respite from the almost unprecedented declines we saw over the previous five years. People are re-entering the workforce. Perhaps because they are getting hungry for some extra income, or because they are somewhat more confident they can find a job. Either way, more people working and looking for work means the economy retains its inherent dynamism, and that is what has helped it weather the Eurozone, China, and oil patch slowdowns.

Industrial commodity prices have jumped since last December, ending a multi-year slump. Perhaps it's because the dollar has stopped rising, and/or because the global economy is picking up a bit on the margin. Either way, it's a welcome positive and should help put deflation fears to rest.


Stronger commodity prices have brought a sigh of relief to emerging market economies. Brazil in particular has seen a rather dramatic surge in its stock market and in its currency in recent months, as the chart above shows. There are some encouraging political developments as well that are percolating in Latin American economies today: Brazil may get new, non-corrupt leadership, and Argentina's new president is straight out of central casting. (A friend spotted Macri on a commercial flight out of Buenos Aires just the other day, and tells me he has decommissioned the government's aircraft fleet to help reinforce his message of cutting costs and setting a conservative fiscal course.)


16 comments:

Danyaal Farooqui said...

Scott, aside from Kasich's low probability (not impossible though) of clinching Republican nomination, is there any other reason why you support Cruz over Kasich?

thanks

Scott Grannis said...

Cruz is the most principled of all the candidates, he is the most faithful to the Constitution, and he highly values the ideals of limited government, individual freedom, and free markets. A friend of mine, David Goldman, has written a number of articles praising Cruz which I like:

http://atimes.com/2015/10/spengler-predicts-a-cruz-rubio-ticket/

http://atimes.com/2016/02/iowa-and-the-world/

https://pjmedia.com/spengler/2015/11/24/daves-top-10-reasons-to-vote-for-ted-cruz/

https://pjmedia.com/spengler/2016/1/7/establishment-tribes-beat-drums-against-ted-cruz-the-great-angelo-codevilla/

https://pjmedia.com/spengler/2015/10/12/my-prediction-a-cruz-rubio-ticket/

Cabodog said...

As always Scott, thank you for taking the time to post your thoughts.

For me, going on seven years of reading your posts...

Scott Grannis said...

Cabodog: Thank you!

Pete said...

Scott - Cruz is the best option right now for sure. Market appears to be getting a bit toppy right now, I wish I could share your optimisim.

Matthew Grech said...

Another take on Ted Cruz, this one from the great Andrew Bacevich. (Its focus is on foreign policy, not economic policy.)

http://www.thenation.com/article/ted-cruz-embodies-the-degeneration-of-foreign-policy-conservatism/

Frozen in the North said...

Five words on your blog


Any everyone comments on Cruz...

Just FYI, to the rest of the world (ok most Americans don't care) Cruz is nuts. A smart nut, but a nut nevertheless!

Free markets gave us the banks many market manipulation (I mean do you know of a single market that was not fixed). I get "the road to Serfdom, I get it, but don't buy it.

And Cruz is not the first choice, he's at best a second best solution to the GOP's current horror show that is Trump.

I mean it tells you something about the state of your party when the best they can do is Trump and Cruz (oh yeah and the other guy)

Aside from the political BS I agree with most of what you write -- the one caveat is the labor participation rate. There's just something wrong there. Sure demographics have changed, but not that much.

Benjamin Cole said...

Most years, one has to hold the nose while voting. This year you will have to don a gas mask in the ballot box.

The U.S. Constitution? Our Founding Fathers loated, detested and reviled standing militaries, and sought citizen soldiers who demobilized after successfully defending the nation from attack. The idea of a permanently mobilized professional or mercenary military in a global footprint would be an abomination to the men who wrote the U.S. Constitution.

Benjamin Cole said...

Side quibble:

The weakest recovery ever?

I thought so too--until I looked at your chart on growth of the private-sector labor force. It looks like since 2009, that private-sector labor force growth has done better than the 2002 to 2008 recovery.

Looks like private-sector labor force growth is better post 2009 than 2002-2008. So by that measure, this recovery is not the weakest ever. Call it the send-weakest.

Of course, job growth was even better in the 1990s!

Johnny Bee Dawg said...

Cruz will not flip a single DEM state that Mitt Romney lost. Cutting handouts doesn't work on DEMs. (Trump however appeals to WORKING blue collar DEMs and older black males and legal latinos.) People who don't agree with the Cruz message think he is creepy.

He was for Amnesty and TPP before he was against them. And he gave us the horrible nightmare of a sleeper cell in Justice Roberts.

A globalist with divided loyalties....not a "natural born citizen"...unprecedented in American history. I don't think he's all that Constitutional.

His daddy helped Castro in his revolution and then fled to Canada with his oil heiress wife. Re-emerged as a "Dominion Theology" preacher. Google that term if you don't know it. When they say "Dominion" they mean it. Ted and his daddy told Iowa he is "Anointed".

steve said...

I've already said I'd never vote for Trump but the real question is-why the hell is Kasich still in this thing? does he really believe that he can steal it from cruz or Trump at the convention? This whole primary season has been a joke. I think at this point I'd take another four years of O with a republican congress!

Lawyer in NJ said...

I'm not a fan of Cruz's desire to return to the gold standard, or his social policies.

Lawyer in NJ said...

I do agree that Sanders is addled, moronic, a prisoner of his ideology, and not a Democrat, small or large D.

Lawyer in NJ said...

https://www.washingtonpost.com/opinions/ge-ceo-bernie-sanders-says-were-destroying-the-moral-fabric-of-america-hes-wrong/2016/04/06/8499bc8c-fc23-11e5-80e4-c381214de1a3_story.html

Scott Grannis said...

Sanders is on the lunatic fringe, there's no doubt.

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