U.S. federal agencies release tons of economic data every month. As an investor, you need to sort out the important data from the unimportant data. Right now, all of the the important data show that the U.S. economy is growing nicely. This means that the U.S. stock market will go higher in the medium-long run. This matches our model, which states that the U.S. stock market is still in a rally within a bull market.
*You must focus on the multi-month TREND in the data and not the month-to-month reports. There is inevitably a lot of statistical noise in each month’s reports. This statistical noise is random and meaningless.
Private employment growth
The following 10 year chart is private employment growth in the U.S. per month. We use private employment growth instead of total employment growth because government hiring can be erratic and makes the data series more random. History shows that public sector is not important to the U.S. economy.
As you can see, private employment is growing at a fairly steady pace, averaging 100k to 250k per month. This shows that businesses are hiring more workers because they’re optimistic about the future of the economy.
The most recent month’s (March 2017) report saw 89k private jobs growth, far below the previous month’s 221k growth. However, this should not worry investors. It’s most likely due to weather related reasons. The jobs report tends to be “weak” (according to the media) every year in January – March, usually because of bad weather. However, February was abnormally warm this year, which means that a lot of employers brought March hiring forward into February. That’s why February’s data was strong while March’s was weak.
The overall trend shows that employment growth is solid.
The unemployment rate is still going down (currently at 4.5%). Based on growth in the working age population, the economy only needs 60k-80k new jobs every month to maintain the present unemployment rate. Any additional new jobs will push the unemployment rate down.
The following is a 10 year chart and then a 70 year chart.
Less unemployed workers means that people have more money to spend on consumption. Consumption is the primary driver of the U.S. economy.
Some bearish investors argue that unemployment is too low. “Unemployment has almost reached the lows right before the 2001 and 2008 recession. This means that unemployment will go higher, the economy will enter into a recession and stocks will fall”.
This is wrong. Unemployment can go below 4%, and the rate tends to be flat for a year before it starts to rise. So even if unemployment has bottomed, it will still go flat for a year before it can rise. This is not a concern.
Initial jobless claims in the U.S. just keep falling. Unlike the monthly jobs report, initial claims focuses more on the short term employment picture. Initial claims reinforces what the Employment Report is saying – that the U.S. economy is experience robust growth and that more and more workers are finding jobs. More jobs are needed to get the U.S. out of this sluggish economic expansion.
Below is the 10 year and the 50 year chart for initial claims.
New Home Sales
Housing is a very important part of the U.S. economy. Although it is a small part of GDP, it is a very volatile component. This means that a small change in housing will have a disproportionate impact on the whole U.S. economy.
New home sales is growing rapidly right now. It almost made a new high last month, which shows that the demand in the U.S. real estate market is on fire right now. Here is the 10 year chart.
Construction is how the real estate market impacts GDP. Like New Home Sales, Housing Starts is hovering around the highs of this economic expansion. On a 6 month moving average basis, Housing Starts is rising consistently. This is very bullish for the economy.
Below is the 10 year chart of Housing Starts.
Retail sales is not a very good leading indicator. Rather, it is a timely indicator for recessions. Retail Sales shows the current state of consumption in the U.S.. Consumption is the biggest part of U.S. GDP.
Retail Sales tends to go flat for many months before every recession. As you can see in the following 10 year chart, retail sales growth year-over-year has actually picked up since the beginning of 2016!
The rate of growth in Retail Sales has experienced a slight dip in the past few months. This is because gasoline prices have flattened after rising significantly in 2016 (gas sales is a small but volatile part of Retail Sales).
Although the U.S. is not a manufacturing based economy like China, manufacturing still plays a significant role in the U.S.
Industrial production year-over-year was contracting up until late 2015. Since then, year-over-year growth has picked up. As of December 2016, Industrial Production is growing again.
The rate of growth in Industrial Production has actually been increasing over the past 2 months!
The following is a 10 year chart.
Year-over-year inflation rate
In 2015 there was a fear that the U.S. would enter into a deflationary phase, which is usually a sign of an imminent recession. These fears did not come to fruition because inflation has risen significantly since early 2016.
The rate of inflation is flat right now at around 2% because oil and agriculture (food) prices are flat.
The following is a 10 year chart for the year-over-year inflation rate.