Washington is often compared to a swamp, especially by the current occupant of the White House. After Election Day, the US economy was getting compared to a zoo where the animals had been let out of their cages. So-called “animal spirits” were running wild.
To keep track of all the commotion, Debbie and I compiled a chart publication of all the “soft,” survey-based data showing a remarkable and widespread surge in consumer and business confidence. That was also reflected in the post-election rally in the stock market.
Trump has occupied the White House now for 118 days. The swamp waters seem to be rising rather than receding. Apparently, there are many more swamp people than he ever imagined. He alienated them from Inauguration Day when he promised to drain the swamp. Now they are doing their utmost to drown him in the swamp. Having been a real estate tycoon in NYC most of his adult life hasn’t prepared Trump for surviving in the swamp, let alone for draining it.
Surprisingly, most of the soft data remain elevated, though they’ve lost their post-election mojo. So far, there hasn’t been strong evidence that the initial surge in confidence has boosted economic growth (i.e., the hard data) much.
Consider the following:
(1) Business surveys mixed. On the weak side is the May regional business survey conducted by the FRB-NY (Fig. 1). The general business conditions index is down from a recent peak of 18.7 during February to -1.0 during May, the lowest since October. At the start of this month, we learned that the national M-PMI dropped during April to 54.8 from a recent peak of 57.7 during February (Fig. 2).
(2) Consumer confidence upbeat. Measures of consumer confidence are holding up relatively well. That might have more to do with the tightness of the labor market than the election results. Our Consumer Optimism Index, which is the average of the Consumer Sentiment Index and the Consumer Confidence Index, edged down in April to 108.7 from the previous month’s cyclical high of 110.9 (Fig. 3).
The strong demand for labor is certainly boosting confidence. During April, more than 30% of small business owners said they have positions they can’t fill (Fig. 4). Last month, 19.1% of consumers said that jobs are hard to get, barely budging from March’s 19.0%, which was the lowest such reading since July 2007.
(3) Surprise index freefalling. The Citigroup Economic Surprise Index continues to fall (Fig. 5). It recently peaked at 57.9 on March 15. Yesterday, it was down to -37.6, the lowest since May 12, 2016.
(4) Railcars not so loaded. Transportation indicators have stalled recently. Debbie and I track the 26-week moving average of railcar loadings of intermodal containers (Fig. 6). We do so to smooth out this volatile series. This is the time of year when it usually increases as retailers stock up for summer sales. Instead, it has been edging down in recent weeks. This series is also highly correlated with the ATA Truck Tonnage Index, which is seasonally adjusted, but can still be volatile from month to month. Nevertheless, it has clearly been stalled at a record high for the past 14 months.
We also track the 26-week moving average of railcar loadings of motor vehicles, which is highly correlated with monthly auto sales (Fig. 7). The former series rose to a cyclical peak during the week of July 2, 2016, and has been on a slight downward trend since then.
(5) Business loans at record high. The bad news is that the y/y growth rate in commercial and industrial (C&I) loans plus nonfinancial commercial paper dropped to 1.9% in mid-April, the weakest since early March 2011, and held around that rate through early May (Fig. 8). The good news is that the actual level of this series rose to a new record high that same week (Fig. 9)! This suggests that some of the anxiety about its recent slowdown might have been overdone.
(6) Industrial production is up. As Debbie reports below, despite the slowdown in short-term business borrowing and April’s decline in the M-PMI, industrial production rose by a better-than-expected gain of 1.0% m/m in April, with factory output also up 1.0%. The gains were widespread. Production gains were solid for both consumer- and business-related goods.
(7) S&P earnings continue record run. Most importantly for the stock market, industry analysts remain upbeat about the outlook for earnings. During the week of May 11, the forward earnings of the S&P 500/400/600 remained in record-high territory and on solid uptrends (Fig. 10). For the S&P 500, consensus earnings estimates remain remarkably stable around $147 per share for 2018 (Fig. 11). That’s 11.8% above the current estimate of $131.57 for this year, which is up 11.5% from last year’s result.
The Q1-2017 earnings season is ending with a whimper as many retailers posted disappointing results. Nevertheless, thanks to upside surprises in other industries, there were solid upside hooks in actual earnings compared to estimates at the beginning of the latest season (Fig. 12).
(8) Stocks treading swamp water. So why are stocks holding up so well in record territory if Trump is either struggling or drowning in the swamp? The widespread view has been that the post-election Trump bump discounted his tax-cutting agenda, which might take longer to achieve if it happens at all. That’s true, but it also discounted that a very pro-business group of people would be running the executive branch for the next four years. That branch of government includes all the regulatory agencies, which will either eliminate or simply not enforce lots of regulations that business managers deem unnecessary, onerous, burdensome, and costly.
Besides, earnings are growing, and industry analysts remain optimistic about the outlook through 2018, though they may be assuming some boost from tax cuts. The stock market rallies overseas suggest that global investors are turning more optimistic on global economic growth. Adding to the animal spirits in the global stock markets may be a sense that inflation and interest rates may stay subdued for a long time, so the economic expansion might last a long time as well.
Also bullish in this “Seinfeld market” is that bad things aren’t happening. The Eurozone isn’t on the verge of disintegrating now that populists have been defeated in recent elections. The Eurozone’s economic performance is improving. China’s recent credit tightening hasn’t rattled global markets, while its Silk Road mega-project is attracting lots of interest from companies that want a piece of the action. The Fed will probably hike the federal funds rate at the June meeting of the FOMC, and probably nothing bad will happen.
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.
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