The US Economy is Finally Gaining Momentum
FORECASTS & TRENDS E-LETTER
1. Various Economic Indicators Show Improvement
2. Consumer Spending at a Nine-Year High in July
3. Gallup Job Creation Index Back at Record High
6. Fed Minutes Should Provide Clues on Wednesday
7. McCain’s Vote to Kill Healthcare Cuts Defense Spending
The economy sure feels like it is gaining momentum in recent months. Today we’ll look at a slew of economic reports that support such a view. Most notably, consumer confidence and small business optimism have soared since late last year. We’ll also look at several recent Gallup polls which show significant improvement in other economic indicators.
To round-out today’s letter, I will follow-up my discussion last week on the Fed with some additional information on what to expect just ahead from Janet Yellen & Company. There should be some interesting clues tomorrow when we get the minutes from the July 26 policy meeting.
I’ll end today with one of the most interesting stories I read in the last week, which was about Senator John McCain’s deciding vote to kill the GOP healthcare reform bill – at the expense of the Defense Department. All Americans should know about this.
Various Economic Indicators Show Improvement
The widely-followed Consumer Confidence Index has been on a roll since late last year, as has the Small Business Optimism Index, as published by the National Federation of Independent Business (NFIB). Both indexes hit their highest levels in over a decade last month.
The data in the chart below only go through June. In July, the Consumer Confidence Index rose to 121.1 up from 117.3 in June. The NFIB Small Business Optimism Index rose to 105.2 in July up from 103.6 in June. The increases in both indexes last month were driven in part by strong consumer spending and new record highs in the stock markets.
The Bloomberg Consumer Comfort Index measures Americans’ views on the condition of the US economy, personal finances and the overall spending climate. The Index hit a new recent high last week of 51.4, up from 49.6 the previous week.
Consumer Spending at a Nine-Year High in July
Along with rising confidence, Americans have increased spending rather steadily since the Great Recession. This is good because consumer spending makes up apprx. 70% of Gross Domestic Product (ie – the economy).
Each month Gallup surveys over 14,000 Americans to ask how much they spent the day before on normal household expenditures, excluding their mortgage and major purchases like a car. In July, average daily spending reached a nine-year high of $109 per day.
With six consecutive months of average daily spending at or above $100, Americans’ spending levels are back to where they were before the global financial crisis in 2008, and the latest figure is the second-highest average in nearly a decade of Gallup’s tracking. The elevated spending levels are stable among both higher and lower earning Americans.
This is a strong start for the second half of 2017, but given August's propensity for flat or lower spending, Americans’ relatively high spending average in July is not likely to hold this month. Still, the trend has been intact since 2012 and is expected to continue overall.
Gallup Job Creation Index Back at Record High
Gallup’s Job Creation Index (JCI) is based on reports from employed US adults on whether their employer is hiring workers and expanding the size of its workforce, or letting people go and reducing the number of employees. The Job Creation Index is a nearly real-time indicator of the nation’s employment picture across all major industries and business sectors.
In July, 47% of employees said their company was hiring -- the highest for this index component since Gallup began tracking job creation in January 2008. That’s great news! Some 39% of workers said their employer was not changing the size of its workforce. Meanwhile, only 10% of employees said their company was letting workers go.
The Job Creation Index has been on a steady climb since falling to -5 in February 2009 during the Great Recession. Most recently it has averaged +30 or above for the past 17 months and has held steady between 36 and 37 for each of the past five months.
Job creation has been fairly steady by region over the past month. The South retains the strongest JCI score, at +40, just ahead of the Midwest at +39. The West is at +35 and the East is at +31.
Gallup Economic Confidence Index Trending Higher
Gallup’s US Economic Confidence Index is the average of two components: how Americans rate current economic conditions, and whether they believe the economy is improving or getting worse.
Americans’ confidence in the economy was steady last month, with Gallup’s US Economic Confidence Index averaging +4 in July. This score is slightly above the 2017 low of +3 registered in May and June. Still, July marked the ninth consecutive month that Americans rated the economy more positively than negatively -- the longest such streak since Gallup began tracking economic confidence in 2008.
Last month, Americans continued to see current economic conditions positively, with 33% describing the economy as “excellent” or “good,” compared with only 22% describing it as “poor.” This leaves the current conditions component at +11 for the month -- nearly identical to its performance in June (+10).
Gallup “Good Jobs Rate” Continues to Increase
Let’s look at one other chart from Gallup before moving on. The Gallup Good Jobs Rate (GGJ) is the percentage of US adults, aged 18 or older, who are employed on a full-time basis -- at least 30 hours a week.
Not included in the measure are individuals who are self-employed, work fewer than 30 hours a week, or are unemployed or are out of the workforce. The GGJ metric reflects only those who are employed on a full-time basis for an employer and does not include measures of job satisfaction or compensation.
The Gallup Good Jobs Rate rose nearly a percentage point to 47.0% in July, from 46.3% in June. The GGJ rate now ties the highest point for the measure since 2010. If the GGJ included self-employed Americans who work full-time, the rate would climb to more than half of all working age adults.
The increase in the July GGJ rate was not unexpected, as the measure typically rises between the spring and summer months, usually peaking in June or July. The measure has risen each year, from the onset of spring in March to July, since Gallup began tracking the measure in 2010.
At 47.0%, the July GGJ rate is more than five percentage points higher than the all-time low for the measure, at 41.7% in February 2011. That low point occurred as the economy was still recovering from the effects of the Great Recession.
July Retail Sales Better Than Expected + Upward Revisions
The Commerce Department reported this morning that retail sales in July rose by a better than expected 0.6% to the highest level this year, and a healthy 4.2% over the past 12 months. The government also revised previous sales estimates for May and June. They now say that retail sales actually rose 0.3% in June instead of falling 0.2%, and sales in May were flat instead of slightly lower.
Sales over the Internet drove last month’s increase, with spending at web-based retailers growing 1.3%, the most since December. One big factor: Amazon’s Prime Day, a popular day of discounts at the site.
The retail sales report can be quite volatile, especially the initial estimate, and subject to large revisions. Yet despite the frequent revisions, the retail sales report continues to confirm that consumers remain the key driver of the US economy.
Steady hiring, the lowest unemployment rate in 16 years and gently rising incomes have all buoyed spending in 2017, keeping the economy on a modest growth path more than eight years after the recovery took hold.
Fed Minutes Should Provide Clues on Wednesday
Tomorrow we will see the minutes from the Fed’s July 25-26 policy meeting. Specifically, Fed-watchers are hoping those minutes will reveal some details on the FOMC’s plans to reduce the size of its massive $4.5 trillion balance sheet starting this year.
The current thinking is that the minutes from the July meeting will include some hint that balance sheet reduction could be voted on at the September 19-20 meeting and would begin shortly thereafter.
If that is the case, I would not expect a hike in the Fed Funds rate at the same meeting -- in which case the next rate increase would likely come at the December 12-13 FOMC meeting. However, there is increasing speculation that the Fed may choose to hold-off on further rate hikes until next year. In fact, Fed Funds futures now put the odds of a December rate hike below 50%.
Fed-watchers continue to emphasize that inflation reports of late have surprised on the downside. The Consumer Price Index rose only 0.1% in July after being unchanged in June. For the 12 months ended July, the CPI rose only 1.7%, still comfortably below the Fed’s 2% target.
The Fed’s favorite inflation indicator, the Personal Consumption Expenditures Index (PCE), has been stuck well below 2% this year. The June PCE (latest data available) rose only 0.02% and is only up 1.42% year-over-year.
The Fed has maintained for months that the sub-2% inflation rate is only temporary, and the PCE rate will climb back to its 2% target before long. The strengthening economy and the jobs market at or near full employment should be the perfect combination for higher inflation, but that is simply not happening.
The members of the FOMC are all too aware of this fact, and this is the reason the Committee might decide to hold off on another rate hike until next year. But keep in mind that the policy statement released on June 26 was quite clear that balance sheet reduction should begin “relatively soon” if the economy continues as expected.
McCain’s Vote to Kill Healthcare Cuts Defense Spending
I’ll end today with one of the most interesting topics I ran across in the last week. Senator John McCain’s surprising vote against the GOP healthcare reform bill insured its demise -- rather than sending it to a House/Senate conference committee for further revision. But one wonders if Senator McCain realized that his deciding vote on the healthcare bill means that increases in defense spending will continue to be cut for years to come.
Normally, Senator McCain is a passionate advocate for greater military spending, so one wonders if he realized that he voted to guarantee weaker defense spending in the years to come when he voted against the healthcare bill.
His deciding vote to kill health reform means that federally mandated spending increases in entitlements like Medicaid will continue to squeeze the Pentagon like an ever-tightening vise long after he has retired.
This is a really interesting story that you need to understand, but I don’t have the space to flesh it out today. The article I’m referring to, entitled John McCain’s Defense Cut,” appeared in THE WALL STREET JOURNAL last Thursday, August 10. Try to read it if you can – the implications are huge!
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All the best,
Gary D. Halbert
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