A title like this can be pretty dangerous, but it really is the truth so we’re going with it. For those who have been watching, there has been a stream of data released lately confirming that the economy continues to grow, perhaps even at a slightly accelerated pace. All of it is good news, and all of it should dispel any concerns that we are on the cusp of a second recession or economic dislocation of any type. There is always the political risk, which we’ll cover at the end of this commentary, but from a macroeconomic perspective, the data looks solid.
Personal Income Increased 0.2% In July
Personal income was up 0.2%, slightly less than the consensus expected. But income increased 0.3% including upward revisions for prior months and is up at a 4.5% annual rate in the past three months, slightly faster than the 4.3% gain in the past year. In other words, there is no problem with consumer income, which has grown every month so far this year. Nor is there a problem with consumer spending, despite the 0.1% decline in July. Consumer spending is still up 3.6% from a year ago, which is in the same 3% to 4% range it’s been in since early 2012.
Real GDP was Revised to a 4.2% Annual Rate In The 2nd Quarter
Real GDP is at an all-time record high. It already was before the August 28th upward revision, having been originally reported at “just” 4.0% growth. Furthermore, the composition of the 2nd quarter growth is also slightly better, with more business investment and net exports, while inventories were revised down, leaving more room for future growth. Most importantly, after declining in the 1st quarter, nominal GDP (real growth plus inflation) snapped back at a 6.4% rate in the 2nd quarter, the fastest pace for any quarter since 2006. Combine the two quarters together, and nominal GDP is now up 4.2% from a year ago and up at a 3.7% annual rate in the past two years.
New Orders For Durable Goods Boomed 22.6% In July
Durable goods boomed 22.6% in July, the biggest increase on record going back to 1958. The entire gain in durable goods orders was due to the very volatile transportation sector, which rose 74.2% in July. In particular, civilian aircraft orders rose 318% as Boeing received 324 orders for new planes in July. Excluding the transportation sector, new orders are still up 6.6% versus a year ago. The best news was that shipments of “core” capital goods, which exclude defense and aircraft – a good proxy for business equipment investment – rose 1.5% in July and June shipments were revised up to a 0.9% gain (versus a prior estimate of -0.3%). These shipments are now up 7.6% versus a year ago, a major acceleration from the 0.4% decline in the year ending in July 2013.
New Single-Family Home Sales Declined 2.4% In July
O.K., a negative indicator amidst the other positives, but this is not bad news. New single-family home sales declined 2.4% in July, but this comes on the back of an upwardly revised June number. The recent slowdown in new home sales does not mean we are back in a housing recession; home construction remains in an upward trend and new homes sales are still up 12.3% from a year ago. On the pricing front, the median sales price for a new home fell 3.7% in July to $269,800, but this number is not seasonally-adjusted. That seasonal adjustment will likely bleed off much of the “decline”. Looking beyond the seasonality, prices are still up 2.9% versus a year ago, and we still expect a similar gain in the year ahead. Once again, the housing recovery remains intact, despite the fits and starts which are to be expected when the overall economy is in slow growth mode.
The Political Risk (The Fed)
World monetary policy leaders (including Fed Chair Janet Yellen and ECB President Mario Draghi) met and spoke in Jackson Hole, WY last week. This year’s annual meeting was supposed to present the Fed, and other central banks, in a more transparent light, but, in the end, the techno-speak they used keeps everything pretty opaque. So, let’s cut through it.
The Fed, like it did in the 1970s, will continue to run policies that are looser than necessary. It will do this because it is trying to fix under-utilized labor markets by using monetary policy despite a slew of data over the decades (almost a century now) indicating that monetary policy cannot substantively influence labor utilization. Nonetheless, the Fed will keep rates lower than they should be and eventually (probably next year) begin to lift them.
This is the political risk, but at this point it is not overwhelming. If the Fed raises rates at the pace the market expects, the market will react positively. It is only if the Fed raises rates more quickly, or sharply, than expected that there would be a negative market reaction. Even at that, the market would soon recover and adjust to whatever the real growth rate in the real economy is at that moment in time. In other words, Fed action may give us a surprise, which may give us a hiccup, but it will not negatively impact equity returns over the long-term.
Bottom Line: The economy and markets look solid. Markets will always be volatile, but they should always be the provenance of the long-term minded, not of those planning for the short-term.
