Welcome back. I hope you had a good summer and took some time off to recharge your batteries.
It certainly was a good summer for stock and bond investors. From the end of May through the end of August, the S&P 500 rose 2.5%, while the bond yield remained relatively flat around 2.20%, earning the coupon.
On the other hand, the trade-weighted dollar fell 3.5% over this period, but that helped to boost commodity prices as the CRB raw industrials spot price index rose 2.0%. It was a good summer for global investors too, with a solid gain in the All Country-World ex US MSCI stock price index (in local currencies), up 1.3%, led by the MSCI stock price indexes for Emerging Markets (7.6%) as Europe fell 2.1%.
It may be rougher going during the rest of the year as domestic political tensions heat up over the debt ceiling and tax reform, while geopolitical tensions with North Korea could come to a boil.
The good news is that the US and global economic outlooks remain relatively calm.
In case you were on the beach over the past couple of weeks, here is a quick refresher course on the US economy:
(1) GDP & profits. The growth rate in real GDP was revised higher last week, from 2.6% to 3.0% (saar) for Q2. On a y/y basis, real GDP was up 2.2%. It has been fluctuating around 2.0% since mid-2010 (Fig. 1). Excluding government spending, which has been relatively weak during the current expansion, it was up 2.7%. Nothing new here, so let’s move along. The Atlanta Fed’s GDPNow estimate for Q3 is currently 3.2%.
Inflation-adjusted consumer spending in real GDP rose 2.7% y/y during July (Fig. 2). Capital spending rose 4.4% y/y to a new record high during Q2, confirming the post-election strength in the CEO confidence index (Fig. 3). Leading the way are record-high capital outlays on information processing equipment (up 7.0% y/y) and industrial equipment (6.8%) (Fig. 4).
Released along with the first revision of GDP were data on corporate profits during Q2 (Fig. 5). On an after-tax basis, both profits reported to the IRS and adjusted to a cash-flow basis continued to meander at record highs, recovering this year from their energy-related dips last year.
Nothing new here either.
(2) Inflation. So far, inflation remains MIA. The GDP implicit price deflator rose just 1.6% y/y during Q2. Leading the way to nowhere new was the PCED, which edged down on a y/y basis during July to 1.4% for both the headline and core readings (Fig. 6). Also going nowhere special is wage inflation. The average hourly earnings (AHE) measure rose 2.5% y/y for all workers in the private sector. It has been hovering around this pace since fall 2015.
(3) Employment & income. While wage inflation remains subdued, it continues to outpace the PCED headline inflation rate. So real AHE for production and nonsupervisory workers, who currently account for 70% of all private-sector workers, rose to yet another record high during July (Fig. 7). This measure is up 17.5% since the start of 2000, contrary to the widespread myth that real wages have stagnated since then.
On the other hand, as Debbie reports below, our current-dollar Earned Income Proxy for private-sector wages and salaries stagnated during August (Fig. 8). But it remains in record-high territory. While private-sector payrolls disappointed during August with a gain of 165,000, the comparable ADP series showed a solid increase of 237,000 (Fig. 9).
(4) Car sales & manufacturing. Debbie and I weren’t surprised to see August’s auto sales fall to 16.1 million units (saar), the lowest since February 2014 and down from a cyclical peak of 18.2 million units during December (Fig. 10). That’s because this series is highly correlated with weekly railcar loadings of motor vehicles, which also has been weak over the past year.
We are surprised by how well the M-PMI has been doing, having risen from 56.3 during July to 58.8 last month, with solid readings for New Orders (60.3), Production (61.0), and Employment (59.9) (Fig. 11). Confirming this strength are the regional business surveys, which are available with August data for the following Fed districts: New York, Philadelphia, Richmond, Kansas City, and Dallas. Debbie and I average the indexes for overall business activity, new orders, and employment (Fig. 12). They all rose to solid levels last month.
Global Economy: More Growth. The global economy is running on all six cylinders. It may not be a global synchronized boom, but it is the most synchronized expansion of economic activity that the global economy has had since the recovery from the 2008/2009 recession. The direction of change can be seen in the titles of the past four issues of the International Monetary Fund’s World Economic Outlook: “Subdued Demand: Symptoms and Remedies” (Oct. 2016), “A Shifting Global Economic Landscape” (Jan. 2017), “Gaining Momentum?” (Apr. 2017), and “A Firming Recovery” (Jul. 2017).
Why is this happening now? The global synchronized expansion may be attributable to the plunge in the price of a barrel of Brent crude oil from a 2014 peak of $115.06 on June 19 to a low of $27.88 on January 20, 2016 followed by the recovery to $52.75 last week. Over this same period, Debbie and I calculate that global crude oil revenues dropped from an annualized $3.2 trillion during June 2014 to $952 billion in early 2016, back to $1.5 trillion currently (Fig. 13).
The initial freefall in revenues depressed the global energy industry, which slashed capital spending rapidly around the world. The rebound in oil revenues has given a lift to this industry, but surely not enough to explain the global synchronized expansion. The flip side of crude oil revenues is outlays by users of crude oil. The drop in the cost to users of oil is like a 50% cut in the global “oil tax” on consumers. Now that the downside of the energy price shock is over, the benefits to the global economy are rising to the surface of the barrel.
Let’s review some of the recent more buoyant global data:
(1) Europe. The Eurozone’s Economic Sentiment Index rose to 111.9 during August, the highest since July 2007 (Fig. 14). It is highly correlated with the region’s real GDP growth rate on a y/y basis, which was 2.2% during Q2, the best pace since Q1-2011. The Eurozone’s M-PMI rose to 57.4 last month, matching June’s reading, which was the highest since April 2011.
(2) China. China’s official M-PMI edged up to 51.7 during August, the 11th consecutive reading above 51.0. However, its NM-PMI declined from 54.5 during July to a 15-month low of 53.4 last month.
(3) Japan. Japan’s real GDP rose 4.0% (saar) during Q2, the fastest such pace since Q1-2015.
(4) Global manufacturing. Last month, the global M-PMI rose to 53.1, the highest since May 2011 (Fig. 15). Solid increases were registered for both the developed economies and the emerging ones (Fig. 16).
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.
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