Zoology 102: Still Roaring.
A year ago, we all noticed a remarkable heightening of “animal spirits.” Surveys of consumer and business confidence soared during November and December of 2016 and continued to do so during January 2017.
It was hard to deny that Trump’s victory in the presidential election had a lot to do with the euphoria.
The latest readings show that the animals are either as euphoric or more so than they were a year ago.
A year ago, we all noticed that the euphoria—widespread except among Hillary’s supporters, of course—wasn’t showing up in the “hard” data. Economic indicators were signaling lackluster growth. Last year, the Citigroup Economic Surprise Index (CESI) fell to a low of -78.6 on June 16 (Fig. 1). Real GDP rose just 1.2% (saar) during Q1 (Fig. 2). However, since last year’s low, the CESI soared to a recent high of 84.5. It was 73.9 on Monday. Real GDP rose 3.1% during Q2 and 3.2% during Q3 last year, and the Atlanta Fed’s GDPNow is estimating Q4 growth of 2.7%, down from 3.2% on January 3. (The next estimate is due out today.)
Interestingly, consumer and business surveys remained upbeat even last spring and summer when Trump’s economic agenda seemed to be sinking in Washington’s swamp. His success in passing a major tax reform plan at the end of last year is likely to keep sentiment elevated, and it could also stimulate more economic growth this year. Debbie and I aren’t ready to join the 4-percenters, but we are solidly in the 3-percent camp.
Did you notice that since Trump was elected, there is much less chatter about the “new normal” and about “secular stagnation?” It is looking more and more like the old normal, with the economy showing signs of a late-cycle boom. The big difference so far is that there are almost no signs of a late-cycle rebound in inflation. No wonder that spirits and prices in the stock market are soaring so.
Without any further ado, let’s revisit the zoo to gauge the sentiment among the various inhabitants:
(1) Consumer sentiment. During December, both the Consumer Sentiment Index (CSI) and the Consumer Confidence Index (CCI) were well above their year-ago levels. Debbie and I derive our Consumer Optimism Index (COI) by averaging the two (Fig. 3). Our index was 109.0 during December vs 105.8 a year ago. The current conditions component of the COI rose to a cyclical peak of 135.2, the highest since March 2001.
Debbie and I like the CCI more than the CSI because the former is more sensitive to labor market conditions. We are particularly fond of the CCI survey’s series on whether respondents believe that jobs are plentiful, available, or hard to get (Fig. 4). The latter fell last month to just 15.2%, the lowest reading since July 2001. The jobs-are-hard-to-get series is highly correlated with the unemployment rate, which was 4.1% last month, at the lowest level since December 2000 (Fig. 5). Both are signaling that the labor market is very tight.
(2) Small business optimism. The monthly NFIB survey of small business owners confirms that they are having a tough time finding workers. The December survey found that the percent reporting that there are few or no qualified applicants for job openings rose to 54.0%, the highest in the history of the series going back to April 1993 (Fig. 6). The monthly survey asks respondents to indicate their biggest problem (Fig. 7). During December 2015, government regulation and taxes tied for first place at 21.2%. At the end of last year, the former was down to 15.7%, while the latter was still high and number one at 21.0%. Undoubtedly, that response will come down significantly now that tax rates have been cut for corporations and sole proprietorships. So while the NFIB survey doesn’t include “workers are hard to get” as a response, that may very well be the only significant problem facing small businesses!
(3) CEO survey. The CEO economic outlook index compiled by the Business Roundtable rose to 96.8 during Q4-2017 from 74.2 the year before (Fig. 8). This index is highly correlated with the growth rate in capital spending in real GDP on a y/y basis. Sure enough, the latter rose to 4.6% during Q3-2017, up from a recent low of -1.2% during Q1-2016.
(4) Purchasing managers indexes. Purchasing managers also are displaying signs of elevated exuberance, particularly in the manufacturing sector, where the M-PMI rose to 59.7 during December, up from 54.5 a year ago (Fig. 9). Even more impressive is the new orders component of the M-PMI, which rose from 60.3 a year ago to 69.4 during December.
(5) Forward earnings and revenues. Industry analysts have been increasingly upbeat about the prospects for revenues for the S&P 500, and so too for earnings, especially now that the corporate tax rate has been cut by the Tax Cut and Jobs Act (TCJA) (Fig. 10 and Fig. 11). Even our very own mild-mannered Joe is getting excited about what he is seeing in the latest numbers: “Since the passage of the TCJA, the pace of change in the forward earnings estimate has accelerated. Even better, consensus annual earnings forecasts are rising on an absolute basis instead of posting declines as they typically did in past years. The three-week change (since the TCJA) in forward earnings is 1.8% for LargeCap, 1.4% for MidCap, and 2.3% for SmallCap. That marks LargeCap’s biggest three-week change in forward earnings since May 2011.”
(6) Forward P/Es and LTEG. Forward P/Es are rising, but not as fast as stocks because earnings estimates are on the rise. Valuation multiples are determined by investors, while consensus earnings estimates are determined by analysts. Analysts have also turned more bullish about the prospects for S&P 500 earnings growth over the next five years. During December, they projected an average annual growth rate of 12.9%, up from 12.0% from a year ago.
Last year, in our 11/7 commentary, I wrote: “It may be time to consider the possibility that the US economy is finally entering a boom phase. We aren’t there yet, but there is evidence that the pace of real economic activity is quickening. …. The test of my boom hypothesis might be the performance of the economy during Q1-2018. The first quarter has been a clunker since the start of the current expansion. …. There’s definitely a strange pattern of weakness during Q1 even though the data are seasonally adjusted. Debbie and I will be monitoring the hard data during Q1 to see whether the first-quarter curse disappears, as we expect it might given the mounting signs of an economic boom.” We will keep you posted.
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.
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