Via ConvergEx's Nicholas Colas,
This last Morning Markets Briefing of 2016 is our quarterly look at “Off the Grid” economic indicators.
Out key takeaway: the U.S. economy is still growing but in the late stages of the current cycle. Workers are quitting their jobs like it’s the peak of labor market cycle. Also, consumers register confidence more typical of peaks than troughs for this measure. Full sized pickup truck sales are running in line with prior periods of high demand. Used car prices are stable, but have not increased in 5 years. Food stamp enrollment hasn’t declined since May 2016. Gallup’s take on consumers’ daily cash spend is modestly higher than last year, but largely in line with the average of the last 3 years.
Bottom line: this data explains why markets are so enthusiastic about the novelty of Trump presidency, for the current expansion feels very much like it is out of gas.
“After all, the chief business of the American people is business.” That quote is not from President-Elect Donald Trump, but rather former President Calvin Coolidge. It is certainly his best known public statement and still cited to this day, a rare acknowledgment of a man whose nickname was “Silent Cal”.
Given that U.S. equity markets have rallied since Election Day on the hopes that Donald Trump will channel Coolidge’s sentiment (if not his moniker), let’s take a quick look at the origins and background of this hallmark observation and how some interpret it today:
It comes from a 1925 speech to the American Society of Newspaper Editors in Washington DC. Unlike now, however, the newspaper business of that day was extremely profitable. Coolidge opined that such commercial success contributes to the quality of the news industry, because “a press which maintains an intimate touch with the business currents of the nation is likely to be more reliable than it would be if it were a stranger to these influences.” That, in fact, is the line right before “After all, the chief business…”
You can read the entire speech here (and see that politicians used to speak quite eloquently)
Business conditions in 1920s America were generally very good. Real GDP growth from 1922 – 1926 (the period around Coolidge’s speech) averaged 4.5%. Income taxes fell throughout the decade, having peaked at the end of World War I. Radio set production (the smartphones of their day) went from zero in 1922 to 40 million in 1929. The percent of US households with electricity went from 34% in 1920 to close to 70% by the end of the decade.
If you are thinking “Sure, but then you had the 1929 stock market crash”, here’s a great piece with a lot of historical data that shows the growth of the 1920s had little to do with the Crash (speculative securities lending leading to overvaluation was more to blame)
In the June 2013 edition of the Harvard Business Review, historian Niall Ferguson asked “Is the Business of America Still Business?” His answer was “No”. Regulation and a dysfunctional legal system means companies routinely choose other countries when making investment decisions. You can see his note (and the links to several studies that prove his point) here: https://hbr.org/2013/06/is-the-business-of-america-still-business
When we started crafting our “Off the grid” economic indicators in 2011, the “Business of America” was not exactly clear (beyond perhaps just not falling into a post-Financial Crisis depression). A few of the things we included:
The auto industry is always a useful “Tell” about the state of the U.S. economy, so we included used car prices and large pickup trucks sales.
At the same time, government assistance post-Great Recession gave a unique insight into the true state of the American economy, so we also included Supplemental Nutrition Assistance Program (a.k.a. food stamps) program data.
Gun sales took off after the Financial Crisis due to a combination of fears over incremental regulation and general societal uncertainty. FBI background checks for gun sales have more than tripled from pre- to post- Great Recession, from 8 million/year to +24 million/year now.
Google autofills (which offer up the most commonly entered completion for a partial search entry) were a useful proxy for what Americans want to “Buy” and “Sell”.
You can see the full gamut of indicators below, but since I am probably keeping you from last-minute Holiday shopping let me give you a brief summary here:
Our most reliable cyclical indicators – those from the domestic auto industry – show a U.S. economy operating at a healthy level but with very little room for further growth. Large pickup trucks, the workhorses of small businesses, are no long selling in greater numbers than the prior year. Used vehicle prices, a critical if underused indicator of future car and truck sales generally, have not moved higher since 2011.
Employment levels are very good, and workers feel confident enough in their job prospects to quit far more often than employers choose to fire them. That data comes from the monthly JOLTS report and shows 61-62% of all workplace “Separations” are the worker’s idea, not the company’s. These are cyclical peaks; the trough levels are closer to 40%.
Food stamp participation, at 43.5 million Americans, seems to have stopped declining. Yes, we are thankfully off the peaks set in late 2012 at 47.8 million. But since March of this year that downward trend has stopped.
Lower gasoline prices over the past year seem to have made consumers a little more free with their discretionary daily cash spend. Gallup polls consumers on what they spend “Out of pocket”, and the current $98/day is better than last year’s $92/day. At the same time, it is not substantially different from the $91/day and $95/day of 2013 and 2014 (when gas prices were higher).
Food deflation, which we measure with our Bacon Cheeseburger Index, is still with us. The CPI-measure price of ground beef, cheese and bacon is down 5.7% year over year. Great for lactose-tolerant carnivores, of course… But bad for a Federal Reserve still worried about consumer perceptions of current and future inflation.
The upshot of these data points is that the U.S. economy may be humming along, but it could really use a new catalyst to assure investors that we aren’t at the peak of the current cycle. That nicely explains why equity markets have been so warm to the idea of a Donald Trump presidency. And while investors may not feel comfortable that the future will be as predictable as the recent past, that’s actually a feature of the incoming administration rather than a bug.
In summary, markets like the sentiment that “The business of America is business”. And for now, sentiment is enough. Come the New Year, the new administration will have to deliver.