How Strong is the US Economy Right Now?

Get this for an impressive bunch of stats…

Friday saw the release of the non-farm payrolls report. The US economy created 223,000 jobs in May, compared to expectations of 188,000. The unemployment rate is just 3.9%, which, according to CNBC, is the lowest since April 2000.

Friday also saw the release of the ISM Manufacturing Index. It hit 58.7 in May, higher than expected and the 21st consecutive month of manufacturing sector expansion. A reading above 50 indicates growth, below 50 represents contraction.

But wait, there’s more. I’ll let CNBC take up the story…

U.S. construction spending rebounded more than expected in April as investment in private construction projects notched its biggest gain since 2012, offsetting a drop in public outlays.

The Commerce Department said on Friday construction spending surged 1.8 percent, the largest increase since January 2016, after an unrevised 1.7 percent decline in March.

Economists polled by Reuters had forecast construction spending rebounding 0.8 percent in April. Construction spending accelerated 7.6 percent on a year-on-year basis.

And finally, just a couple more. Thursday saw the release of US consumer spending data, which jumped 0.6% in May, the highest in five months. And car sales are humming too, with a Bloomberg headline declaring: ‘Mighty May Auto Sales Show U.S. Economy Cruising in Sweet Spot’.

It really is all happening over there in the US.

But wait…

If things are really that good, why has it been five months since US stocks reached their peak? Why has such a bevy of obviously strong economic data been met with little more than a yawn from the stock market?

And, perhaps more importantly, why didn’t US bond yields break out to new highs on this torrent of good news, in the expectation that the Fed will continue raising interest rates?

Before trying to answer those questions, let me show you what I mean.

First, a chart of the S&P 500 (below). It doesn’t look all that bad. But it doesn’t look particularly energetic either, considering all the good economic news around at the moment.

S&P 500


Source: Bigcharts
[Click to enlarge]

Ever since peaking in late January, the S&P 500 has displayed considerable volatility. But you can ignore that by looking at the underlying trend, which I have marked as the 50-day (yellow line) and 100-day (blue line) moving averages.

On this front, you can see that the strong upward trend that was in place at the start of the year has slowed right down. But so far, the 50-day MA has not crossed below the 100-day MA, which is a positive sign.

It’s an indication that the upward trend is simply having a breather before resuming. That’s what the bulls hope, anyway. If the index can break higher from here, it opens the way for a rally up to around 2,800, which is the March high.

But you have to ask, if it couldn’t break higher (meaning above the May highs) on last week’s strong data, what will it take?

As much as I’d like to think stocks are getting ready for another run at the highs, I want to be realistic too. And I’m a little concerned that the US 10-year bond yield is well off its highs from a few weeks ago.

Let me explain…

When the US economy is humming along, inflationary pressures build and the Fed raises rates to keep inflation contained. As a result, in a strong economy, bonds yields should rise.

That has indeed been happening and in mid-May, US 10-year bond yields hit multi-year highs of 3.13%, as you can see in the chart below. But then jitters over Italian elections and government debt hit the headlines. This saw a flight to safety and a bid for US treasuries, which in turn saw bond yields fall sharply.

S&P 500


Source: Bigcharts
[Click to enlarge]

Now, falling bond yields aren’t representative of a strong economy. Either the bond market is saying that the US and global economy is weaker than the headlines suggest, or the recent decline in yields is an anomaly based on an overreaction to Italian political turmoil. If this is the case, you should see yields head quickly higher again.

And if this happens, stock prices should follow.

The other scenario to consider is that both stocks and bonds view the strong economic data with trepidation. They know it means the Fed will keep tightening. But it might also be an indication that the US economy will turn down will a few more interest rate rises.

In other words, this is pretty much as good as it gets for the US. That’s what the market was saying back in January when it peaked. It looked ahead and didn’t like the view.

Consider that the unemployment rate is the lowest today since April 2000, as I mentioned earlier. Employment figures are a lagging indicator. The US stock market peaked in March 2000. In April, with the good news still flowing, stocks were heading into a nasty bull market.

That may or may not be the case now, but it’s worth remembering that bull markets end with all-round good news.

Regards,

Greg Canavan,
Editor, Crisis & Opportunity

The above article was originally published in Money Morning.


Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

 


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