Economy seems to be heading towards normal
Key fundamental indicators affirm hunch of solid recovery
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By Ken Weise  May 30, 2014 12:00 am

The stock market may be up and down this year, but America’s economic recovery seems to be proceeding at a decent pace. Anyone who wants some evidence of that can find it in some key fundamental indicators.

Pessimists may counter: didn’t the economy grow just 0.1 percent in the first quarter? Indeed, that was the federal government’s initial estimate – but the initial estimate of quarterly Gross Domestic Product (GDP) is twice revised, and often drastically so. Other key indicators point to a healthier economy, and some suggest that March and April were better than presumed.

 

• Jobless claims reached a seven-year low this month: They decreased to pre-recession levels at last, with a seasonally adjusted 297,000 applications received in the week of May 3-10, the fewest in any week since May 2007. Economists Reuters polled thought 320,000 claims would appear.

 

• Hiring has picked up: April saw employers hire 288,000 people, with gains in the manufacturing, construction, and professional/technical sectors. Even state and local governments hired.

From November to April, non-farm payrolls grew by an average of 203,000 jobs per month. From January through April, the gain averaged 214,000 jobs per month. That is the kind of steady growth that pulls an economy out of the doldrums.

Yes, the jobless rate hit a 5½-year low in April partly due to fewer jobseekers – but when fewer people look for work, it often translates to an indirect benefit for those in the hunt. That benefit is higher pay. Analysts think noticeable wage growth might be the next step in the labor market recovery.

 

• Consumer spending also gains speed: With a 0.9 percent increase (0.7 percent in inflation-adjusted terms), March was the strongest month for personal spending since August 2009. 

While the gain on April retail sales was just 0.1 percent, the March advance was just revised up to 1.5 percent, representing the best month for retail purchases in four years.

 

• The sequester is in the rear-view mirror: Major federal spending cuts probably exerted a significant drag on the economy in 2013. In 2014, they are gone.

 

• The manufacturing and service sectors keep growing: The Institute for Supply Management’s globally respected monthly Purchasing Managers Index (PMI) monitors these sectors. ISM recorded economic activity in the U.S. manufacturing sector expanding for an 11th straight month in April; its service sector index has recorded growth for 51 straight months.

 

• Inflation is normalizing: In the big picture, inflation is not necessarily a negative. At the turn of the decade, our economy faced notable deflation risk. The euro area is still facing it today – as of April, consumer prices there had risen just 0.7 percent in a year. A return to moderate inflation is expected as the economy recovers. Interest rates should move higher, and in the long run, higher interest rates should lend a helping hand to the savings efforts of many households and the incomes of many retirees.

• Pending home sales went positive again in March: Before the 3.4 percent gain in that month, this leading indicator of housing market demand had been negative since last June. An increase in contracts to buy homes speaks to a pickup in residential real estate. The gain brought the National Association of Realtors’ pending home sales index to a reading of 97.4 in March, close to its origination (or “normal”) mark of 100.

 

• Some analysts think Q2 should bring solid expansion: Economists surveyed by MarketWatch expect GDP to hit 3.5 percent this quarter, and in the Wall Street Journal’s May poll of 48 economists, the consensus was for 3.3 percent growth in Q2.

 

• More inflation pressure, tightening by the Federal Reserve...how can that be good?: In the short term, it will likely hamper the stock market and the housing market. In fact, the Mortgage Bankers Association has been tracking a reduction in demand for home loans, and that and any wavering in consumer spending may lead the Fed to ease a little longer or less gradually than planned (news Wall Street might welcome).

 

• Normal is good: Over the past several years, we have witnessed some extreme and aberrational times with regard to market behavior and monetary policy. 

A little equilibrium may not be so bad.

 

Ken Weise, an LPL Financial Advisor, provided this article. He can be reached at 707-584-6690. Securities offered through LPL Financial. Member FINRA/SIPC. The opinions of this material are for information purposes only.

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