Wednesday, August 5, 2015

10 surprisingly strong charts

The world is still in a funk over the recently-downwardly-revised GDP statistics, which doubly confirmed that we are stuck in the midst of the slowest recovery in modern times. For the six years ended last June, the economy grew at an annualized rate of 2.1%, and only 2.3% in the past year. That leaves us with an annual GDP shortfall of some $3 trillion, as I mentioned last week. But the news is not all bad. Lately there have been quite a few economic statistics that were much stronger than expected. Here's a quick recap:

The Service Sector Business Activity Index, shown in the chart above, doesn't usually get much attention (most people focus on the broader Non-Manufacturing Composite Index, shown in the chart below). Regardless, July's reading was much stronger than expected, and it marked a new high for the current recovery. This augurs well for conditions in the economy's largest sector.

The Non-Manufacturing Composite Index, shown above (blue line) was much stronger than expected (60.3 vs. 56.2), and it marked a 10-year high. As the chart above shows, conditions in the service sectors of both the Eurozone and U.S. economies are improving.

The employment sub-index is important because it reflects business' optimism about the future. Here again we saw some surprising strength in the July survey—and a new high for the current recovery. This augurs well for future payroll growth.

The AIA report on architectural billings posted a very strong reading in June, and a new high for the current recovery. This suggests that commercial construction activity is going to be picking up over the next 6-12 months.

Residential building permits, shown in the chart above, surged almost 30% in the three months ended June. That strongly suggests that housing starts will continue to post gains over the next several months.

Housing starts were stagnant for most of the past year, but June starts were 30% higher than February starts, and 27% above their year-ago levels. Meanwhile, builder sentiment has climbed to a new recovery high. The residential housing market looks to be in good shape, with lots of upside potential. 

Prices of commercial real estate have been rising at very strong rates of 12-14% for the past several years. This reflects strong absorption rates, investment and leasing activity. Very impressive.

Unemployment claims have been falling for more than six years, with no let-up in sight. Claims have reached levels not seen since the early 1970s, but relative to the size of the workforce, claims are as low as they have been in recorded history, which goes back to the 1960s. This suggests that businesses are not running into unexpected difficulties, and have trimmed their labor force to very lean levels. More hiring is much more likely than increased firings.

The Baltic Dry Index, shown in the chart above, has been trending down for years, driven early on by a flood of new shipping capacity and more recently by a slowdown in the Asian economies. For most of this year it was at all-time lows. In the past two months, however, it has doubled—quite a surprise considering that the news out of China continues to be gloomy. Maybe things are not so gloomy after all ...

Japanese stocks have almost tripled since their generational lows of early March 2009, and the lion's share of those gains has come since late 2012. The trigger for rising stock prices was a weakening of the yen, which also began in late 2012. The yen had been gaining against almost every currency in the world for decades, and that had created tremendous deflationary pressures in Japan, particularly for exporters, so a reversal of the yen's strength was a welcome development. But it's not all due to currency magic: in dollar terms, the Nikkei 225 is up over 10% in the past year, and up 50% since late 2012. Something very positive is going on in the Japanese economy, and that's good for nearly everyone. Oh, and by the way, Chinese stocks, despite the headlines that scream "Crash!" are up almost 70% in the past year. Arguably, that could rank as the biggest upside surprise of them all.

In short, while it's clear that overall economic activity remains disappointing, there are surprising pockets of strength, and thus there is very little reason to be pessimistic about the near-term prospects for the U.S. economy. A modest increase (aka "normalization") in short-term interest rates does not pose a threat.

1 comment:

Benjamin Cole said...

Haruhiko Kuroda, the Bank of Japan Governor, is showing some resolve.

The US Federal Reserve in contrast has been feeble, directionless, has babbled and constantly raised fears of inflation.

Word counts of FOMC meetings reveal the word "inflation" mentioned hundreds and even thousands of times---some sort of monomaniacal obsession