Growth persists

We're still in the weakest recovery ever, and despite widespread fears that it is running out of gas, the US economy continues to expand. Here are some charts that document the ongoing, modest business cycle expansion:

The ISM May manufacturing index was a bit stronger than expected (51.3 vs. 50.3), but it suggests that the economy is growing at a pace (2% or so) that is the same as we have seen, on average, over the past seven years. It's likely, therefore, that Q2/16 growth will be substantially higher than the 0.8% registered in Q1/16. This won't imply any meaningful acceleration of growth, however, since quarterly growth rates are typically much more volatile than the underlying growth trend.

The export orders subindex of the ISM manufacturing report was mildly positive, since it points to some modest improvement in overseas economies.

With oil prices having risen 50% in the past 4-5 months, it's not surprising to see the prices paid subindex jump to levels not seen for almost 5 years. Deflation is yesterday's news.

The employment subindex of the ISM report is symptomatic of what continues to ail the economy: a lack of investment. Companies are not confident enough about the future to commit to serious expansion and hiring plans.

Manufacturing activity in the Eurozone is about as un-robust as it is in the US.

The chart above suggests that changes in the ISM manufacturing index tend to lead (though not always) changes in 12-mo. trailing revenues per share of the S&P 500 companies. If this relationship holds, we should see a return to rising revenues per share by year end. As it is, revenues per share have only dropped. 1.2% over the past year—a relatively modest slowdown.

I wish it were more pronounced, but the decline in the prices of TIPS and gold over the past month or two suggests that the market has become a bit less worried and pessimistic.

Less worry translates into a modest rise in equity prices, as the chart above shows.

As the chart above shows, the rise in oil prices has coincided with a firming in non-energy commodity prices. Over time, the correlation of the two is strong, but oil prices are far more volatile (note the difference in the scales of the two y-axes).

The chart above shows that commodity prices have risen vis a vis most currencies in recent months. So it's not just a currency phenomenon, it's more likely that global economies have strengthened on the margin. It's worth highlighting here the fact that the Swiss franc has been the most stable—in commodity terms—of the major currencies over the years.

The housing market continues its recovery, with prices approaching their highs of just over 10 years ago. I note the apparent trend for inflation-adjusted (real) housing prices to average just over 1% per year (shown in the second chart), a rate that would be consistent with ongoing improvements in quality, size and amenities. UPDATE: This is bolstered by recent Census Bureau data, as summarized in  Mark Perry's post showing how square footage has increased over the years.

This chart has been one of the most reliable guides to upcoming recessions that I'm aware of. It suggests that recessions typically follow sharp increases in real short-term interest rates and a flattening or inversion of the Treasury yield curve (both conditions being symptomatic of very tight monetary policy). Today we are not even close to those conditions. Real interest rates are still very low, and the slope of the yield curve is a bit above average. In the absence of tight money and in the presence of relatively cheap energy prices, it's likely that the economy will continue to grow.

It's been a sluggish recovery and many millions are still without jobs. But in aggregate, real disposable incomes have been rising and continue to do so. Gains in the past year (3.2%) are in line with historical experience, but the level of disposable income remains significantly less than it might have been had this been a typical recovery. Jobs and income have gone missing, but it is a recovery nonetheless.

All of this makes a strong case for avoiding the very low yields on cash and cash equivalents.