The U.S. is richer than ever

Yesterday the Fed released its estimate of the balance sheet of U.S. households as of the end of last year. Collectively, our net worth reached a new high in nominal, real, and per capita terms. We can complain all day about the fact that we are living in the weakest recovery ever, and things could and should be a lot better, but it is still the case that today we are better off than ever before. (The stock market has recovered virtually all of its losses year to date, so the significance of the numbers you see here hasn't changed.)

As of Dec. 31, 2015, the net worth of U.S. households (including that of Non-Profit Organizations, which presumably exist for the benefit of all) reached a staggering $86.7 trillion. To put that in perspective, it's about one-third more than the value of all global equity markets, which were worth $64.6 trillion at the end of last year according to Bloomberg.

On a real, per capita basis, the net worth of the average person living in the U.S. reached a record $270,000. This measure of wealth has been rising, on average, about 2.4% per year since records were first kept beginning in 1951. There's nothing unusual going on: life in the U.S. has been getting better and better for generations. If you're hungry for more details of the steady march of progress, check out Human Progress, a worthwhile project of Cato, my favorite think-tank.

And even if it were the case that the entirety of the value of stocks, bonds, deposits and real estate included in these statistics were owned by a handful of people, we all enjoy their benefits. These assets are what provide jobs and the wherewithal to run and maintain our economy.

This ongoing accumulation of wealth is not a house of cards built on a bulging debt bubble either, regardless of what you might hear from the scaremongers. On the contrary, the typical household has undergone a significant deleveraging since the onset of the Great Recession in 2008. Household liabilities today are the same as they were in early 2008 (about $14.5 trillion), but financial assets have increased by one-third, thanks to significant gains in savings deposits, bonds, and equities. Since early 2008, the value of households' real estate holdings has increased by a relatively modest 8%.

Stronger commodity prices trump stable jobs growth

The February jobs report was good (beating expectations plus upward revisions to prior months), but it only marked a continuation of the moderate 2 - 2½% growth trend that has been in place for the past 6-7 years. More impressive, however, is the emerging rally in the commodity markets and, by extension, the emerging market economies. It's looking more and more like the the threat posed by the China slowdown, plunging oil prices and soaring credit spreads is fading away. In its place global growth is likely stabilizing as commodity prices firm up. Against this backdrop, central banks, the majority of which are still deathly afraid of recession and deflation, seem out of step. I think that's why gold has done so well of late: markets are sensing that monetary policy may now be too easy and therefore inflation is more likely to rise than fall. Think of gold as an early-warning indicator of the direction of future inflation. Not always right, of course, but worth paying attention to.

Private sector jobs, the ones that count, have been growing at a fairly steady pace of 2 to 2½% for just over 5 years. This, added to weak productivity of less than 1% per year, is going to give us something in the neighborhood of 2.5% real growth this year. All the monetary "stimulus" in the world is not going to change the fact that this remains the weakest recovery ever. What needs to change is fiscal policy, and that won't change meaningfully until next year, provided we have a new president who understands that the private sector needs better incentives if it is to work and invest more. 

One thing does appear to be changing, however. Labor force growth has been tepid since 2008; the number of people either working or willing to work has been growing at an annualized rate of only 0.4% for the past seven years, until recently. Over the past six months, the labor force grew at an annualized rate of 2.3%. This equates to some stirrings of life in an otherwise sleepy economy. 

As a result, the labor force participation rate looks to have bottomed. It's too early to get excited, however, since new entrants to the labor force don't appear to be fighting for top-paying jobs. But it is an important change on the margin which bodes well for the future, and that's a good reason to remain optimistic.

What's changing today is the outlook for commodity prices. After falling from 2011 through the end of last year, they are turning up. Gold prices are up 20% in just over two months. Industrial scrap metal prices are up 10% since mid-January.

And one of the most important commodities (crude oil, see chart above) is up 37% in just under one month. What this means at the very least is that market forces—prices—have brought commodity supplies back into line with commodity demand. And it's not too hard to imagine that as supplies have been reduced, demand has picked up. Rising commodity prices probably signify that the fundamentals of the global economy are improving on the margin, and that is very good news.

One example: vehicle miles driven last year were up 5% from mid-2014, which is when oil prices started to plunge (see chart above).

After falling 80% from early 2011 through January of this year, Brazil's stock market is up a staggering 45% in dollar terms, thanks to the confluence of stronger commodity prices and promises of a badly-needed change in government. Mexico's stock market is up 15%, and Australia's stock market is up 14% over the same period.

In this last chart we see that gold has shrugged off its 4-year losing streak, jumping 20% since mid-December. TIPS prices have jumped too, as have 5-yr breakeven spreads, which are up from 1.0% a month ago to 1.45% today.

Deflation? That's yesterday's news. Today markets are beginning to worry that inflation might be on the rise while central banks still have their policy pedals to the metal.

Progress report on climbing

The main concern that markets are grappling with these days is the possibility that weakness in China and in the oil patch, coupled with escalating debt defaults, could conspire to produce another recession in the U.S. I've argued that these fears are probably overblown, that the U.S. economy is inherently resilient, that most of the damage so far has been contained to the oil patch, that financial markets are fundamentally healthy, and that therefore all it takes to alleviate the market's concerns is the absence of recession, which is the most likely outcome in any event. I don't expect strong growth, merely a continuation of the modest 2 - 2½% growth we've seen for the past 6-7 years. Here are a few charts which document the progress towards climbing the latest wall of worry:

As the chart above shows, the price of oil has jumped by one-third in the past three weeks. This takes a lot of pressure off the oil patch.

Higher oil prices have helped spreads on HY energy debt to narrow by almost 500 bps! This is a clear sign that panic is receding. 

A major contributing factor to the bounce in oil prices is the huge drop in the number of active drilling rigs in the U.S., which has plunged by 75% in the past 14 months. The cure for low oil prices is low oil prices, which have sent the message to producers to shut down production and exploration.

This same dynamic (supply and demand coming into balance) is playing out in the metals markets. The CRB Metals index (see above chart) is up 10% in the past two months. This suggests that the Chinese and global economies are not going down a black hole. Producers are cutting back and consumers are ramping up demand in response to lower prices. Markets work!

The service sector is also not going down a black hole. Although the readings from the ISM surveys show the service sector is relatively weak, it is still growing. The Business Activity index, shown above, bounced quite a bit from its January low, which suggests that sentiment (e.g., everyone's worried these days, but the worry index is going down of late) could be playing a role in the relatively weak readings. It's also the case that most of the weakness can be traced to the energy sector, which contributed an additional 25K layoffs last month, according to the Challenger survey of announced corporate layoffs.

Weekly claims for unemployment have probably fallen as much as they are going to. The recent uptick is minor, and likely reflects a final round of energy-sector layoffs. 

The ADP estimate of February private sector payrolls (blue line in the chart above) suggests that jobs growth continues at the rate which has prevailed for the past several years. No deterioration, no improvement. Steady as she goes may be boring, but it is good news when the market is worried about a recession.

 With the news coming in better than feared, the market has managed to rally.

But as the chart above suggests, there is still a lot of concern out there. Gold and TIPS prices have jumped as the world worries that central banks will try once more to goose their economies with more QE and negative interest rates.

With the bounce in oil prices, we've also seen a bounce in inflation expectations. Breakeven spreads on 5-yr TIPS have jumped almost 45 bps in the past three weeks. Now at 1.44%, they are a bit below their long-term average of 1.9%, but not seriously below. In essence, the threat of deflation has almost gone up in smoke, according to the bond market.