Ignore the media cherry pickers, the economy is doing very well

July 6, 5:00 pm EST

The jobs report this morning continued to show an improving economy, operating with the luxury of low inflation.

I say improving because as the unemployment rate ticked higher, it represents people coming back into the work force.  Those people that have been discouraged along the way, through the economic crisis and recovery, and have dropped out of the work force, are coming back, looking for work.

Remember, the missing piece of the recovery puzzle over the past decade has been wage growth.  That has been the telltale sign of the job market, despite the low headline number.  With little leverage in the job market to maximize potential, much less command higher wages, consumers tend not to chase prices in goods and services higher–and they tend not to take much risk.  This tells you something about robustness of the economy.  And that’s precisely why we’ve needed fiscal stimulus and structural reform.  And it’s just in the early stages of feeding through the economy.

The other big news of the day was trade.  The U.S. started implementing duties on $34 billion of Chinese imports today.  On that note, the media has been focused on one specific sentence in the Fed’s minutes yesterday.  After weeding through the long conversation on how well the economy was doing, they picked out this sentence to build stories around “contacts in some Districts indicated that plans for capital spending had been scaled back or postponed as a result of uncertainty over trade policy.”  Plucking this one out and using it to support their scenarios of trade wars and economic implosion has to be good for reeling in readers.

But keep in mind capital goods orders (the chart below) are nearing record highs again.
Add to this: An ISM survey back in December showed that businesses were forecasting just 2.7% growth in capital spending for 2018.  But when they were asked again in May, they had revised that number UP to 10.1% growth.
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Take Your Eyes Off The Fed And Look At These Charts

 

August 22, 2016, 4:30pm EST

As we head into the end of August, people continue to parse every word and move the Fed makes.  Yellen gives a speech later this week at Jackson Hole (at an economic conference hosted by the Kansas City Fed), where her predecessor Bernanke once lit a fire under asset prices by telegraphing another round of QE.

Still, a quarter point hike (or not) from a level that remains near zero, shouldn’t be top on everyone’s mind.  Keep in mind a huge chunk of the developed world’s sovereign bond market is in negative yield territory.  And just two weeks ago Bernanke himself, intimated, not only should the Fed not raise rates soon, but could do everyone a favor — including the economy — by dialing down market expectations of such.

But the point we’ve been focused on is U.S. market and economic performance.  Is the landscape favorable or unfavorable?

The narrative in the media (and for much of Wall Street) would have you think unfavorable.   And given that largely pessimistic view of what lies ahead, expectations are low.  When expectations are low (or skewed either direction) you get the opportunity to surprise.  And positive surprises, with respect to the economy, can be a self-reinforcing events.

The reality is, we have a fundamental backdrop that provides fertile ground for good economic activity.

For perspective, let’s take a look at a few charts.

We have unemployment under 5%.  Relative to history, it’s clearly in territory to fuel solid growth, but still far from a tight labor market.

unem rate

What about the “real” unemployment rate all of the bears often refer to.  When you add in “marginally attached” or discouraged job seekers and those working part-time for economic reasons (working part time but would like full time jobs) the rate is higher. But as you can see in the chart below that rate (the blue line) is returning to pre-crisis levels.

u6

In the next chart, as we know, mortgage rates are at record lows – a 30 year fixed mortgage for about 3.5%.

30 yr mtg

Car loans are near record lows.  This Fed chart shows near record lows.  Take a look at your local credit union or car dealer and you’ll find used car loans going for 2%-3% and new car loans going for 0%-1%.

autos

What about gas?  In the chart below, you can see that gas is cheap relative to the past fifteen years, and after adjusted for inflation it’s near the cheapest levels ever.

gas prices

Add to that, household balance sheets are in the best shape in a very long time.  This chart goes back more than three decades and shows household debt service payments as a percent of disposable personal income.

household

As we’ve discussed before, the central banks have have pinned down interest rates that have warded off a deflationary spiral — and they’ve created the framework of incentives to hire, spend and invest.  You can see a lot of that work reflected in the charts above.

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