The economy continues to grow, so bring on the taper

Recent statistics clearly reflect an economy that continues to grow. The economy has been growing and improving slowly, but it has been making upward progress for almost four and a half years now. It's hard to see what's keeping the Fed from tapering its QE purchases, and it's easy to see how there is room for short-term interest rates to rise in the not-too-distant future. The health of the economy is just not that bad.

Auto sales in November jumped to a very respectable 16.3 million annualized rate. They've almost fully recovered to pre-recession levels, having risen 13% a year on average since their early 2009 low. That's almost five years of double-digit growth!

People have stopped paying much attention to the ADP estimate of private sector jobs growth, but as the chart above shows, while the ADP number doesn't exactly track the BLS number every month, it's not too far off over time. Between the two surveys, it looks like we are seeing private sector jobs growth of roughly 200K per month on average, with no sign of weakness. Sure, things could be a lot better, but adding 200K jobs every month eventually adds up to something meaningful.  At this rate, private sector jobs will reach a new all-time high by next May.

 

The November ISM service sector surveys were lackluster, but they don't suggest either deterioration or stronger growth. Just more of the same. Nevertheless, that's still progress.

The above chart shows the yield on 10-yr Treasuries. Since the Fed began its third QE program over a year ago, buying some $45 billion of longer maturity Treasuries every month, yields have risen by almost 150 bps. That's not exactly what the Fed was hoping for. Rather, it's a testament to the Fed's inability to manipulate interest rates. Bond yields are up because the bond market is figuring out that the economy is not exactly at risk, the Fed will not be able to keep short-term rates near zero for much longer, and it's probably past time to begin tapering its QE purchases. The stock market periodically worries about the end of QE purchases, but the truth is that higher interest rates go hand in hand with a healthier economy, so concerns about "tapering" are misplaced. Bring on the taper! Let's show some confidence in the future—there is no reason not to.

Calafia Beach sunset

While out for a stroll on the beach this afternoon, I was graced with a magnificent sunset at low tide.

Taken with my iPhone 5s; click to enlarge.

Good news on the manufacturing front

The November ISM manufacturing survey handily beat expectations (57.3 vs. 55.1), posting its strongest reading in over two years. This suggests that the prevailing consensus of economists, which expects GDP growth to be slower this quarter than last quarter, is too pessimistic.  

The relationship between the ISM survey and quarterly economic growth, shown in the chart above, has not been as tight in recent years as it has been in the past (particularly in the 1990s), but the recent rise of the index at the very least suggests that it is unlikely that the economy has slowed in the current quarter—that growth should be at least 2.5% if not more.

UPDATE: I've updated the chart above to reflect the stronger GDP growth reported for Q3/13 (3.5% vs. 2.8% originally). This puts GDP growth more in line with the ISM survey.

The export orders component of the ISM index, shown above, was particularly strong, and suggests that global economic fundamentals are firming. This is an unalloyed good thing for everyone.

A pickup in the employment component, shown above, suggests that firms' confidence in and expectations of future conditions have improved somewhat. It's been a lack of confidence that has kept many firms from reinvesting record-setting profits, so this is very encouraging.

Manufacturing conditions in the Eurozone have improved over the past year, as the region has emerged from a two-year recession, but the Eurozone economy is still lagging that of the U.S. That same reality is reflected in the equity markets of both regions, as shown in the second chart above, with Eurozone equity prices rising but lagging significantly those of the U.S. Further, this suggests that it's not QE that is boosting stocks, but rather a gradual improvement in the underlying economic fundamentals.

The chart above compares Eurozone swap spreads (red, inverted) with the Markit manufacturing survey. If swap spreads continue to be a good leading indicator of overall economic and financial market health, as the chart suggests, then we should see more, albeit gradual, improvement in the Eurozone economy in the months to come. That would be a very welcome development.