Still more encouraging developments

Markets continue to recover from the growth scare that set in beginning around the end of last year. Oil prices were plunging, creditors feared a wave of defaults, commodity prices were plunging, China was thought to be on the verge of a huge slowdown, and central banks appeared powerless to avoid another recession. What a difference a few months make. "Avoiding a recession is all it takes" has been a recurring theme of this blog for more than three years, and it's still relevant. Here are some more charts which suggest that instead of tipping over into a recession, the economy is more likely picking up a bit. Growth is still slow, but slow growth is a lot better than a recession, especially when cash yields almost nothing.

Here are some more charts updated with recent statistics that present an encouraging picture:

The April ISM manufacturing index was a bit lower than expectations (50.8 vs. 51.4), but it is still at levels which are consistent with overall growth in the economy of 2% or better. It's rebounded nicely from the lows of just a few months ago.

The export orders index has also rebounded nicely, and that's especially encouraging since the market has been very worried about slowdowns in overseas markets. 

The chart above shows the price of crude oil futures. Oil prices are no longer declining and have instead rebounded over 70% from their February lows.

With the plunge in oil prices a thing of the past, we see that prices of things other than oil are still rising. (The Core CPI has been rising at an annualized rate of 2% or so for many years.) A majority of companies in April reported paying higher prices, as the chart above shows. Deflation risk is vanishing.

Construction spending in March was up 8% from year-ago levels, and has been exceeding expectations in recent months.

Industrial metals prices are up over 25% in the past three months, a good sign that global manufacturing activity is improving.

Bank lending to small and medium-size businesses has been booming for the past five years. C&I Loans are up 11% in the past year, and have surged at an annualized rate of almost 20% in the past three months. This is an excellent indicator of rising confidence, since banks are evidently more willing to lend and businesses are more willing to borrow. Total Bank Credit outstanding has been rising at a 7-8% annual rate of late as lending has increased by $767 billion in the past year (for perspective, that's equivalent to 4.2% of GDP). 

It's ironic that radically cheaper energy prices in the past year or so have been seen by many to be a source of concern (because they threaten the health of energy producers), when they have been a boon to consumers everywhere. As the chart above shows, energy has never been a smaller part of consumers' budgets than it was last March (3.67%). High and rising energy prices have tended to precede recessions, and falling energy prices have tended to coincide with periods of very healthy economic growth (e.g., the mid-1980s). This is not an ironclad rule, but it's hard to see a recession developing when energy—an essential ingredient to all economic activity—becomes very cheap.

UPDATE: And here is the current menu of yields available on different types of assets:

The chart below shows the difference between the earnings yield on equities (i.e., after-tax profits per share) and the yield on 10-yr Treasuries. Note that the current equity risk premium (i.e., what you would earn if corporate profits were to continue at the same level relative to share prices and corporations paid out all profits in the form of dividends) is still quite a bit higher than its long-term average. You don't often get the chance to pick up so much extra yield on equities. The explanation for why this is so high today is that investors don't believe that corporations will be able to sustain their current level of profitability. In other words, bad news is still priced in: