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Evidence for an Accelerating Economy

| March 12, 2018

The big news last week was an employment report that can only be described as stunning. Nonfarm payrolls increased a broad-based 313,000 in February, the biggest gain since July 2016 and well above the consensus of 205,000. Additionally, the prior two months (January 2018 and December 2017) were revised up by a total of 54,000 jobs. The average workweek rose 0.1 hour from an upwardly revised January reading to return back to December’s 34.5 hours.

In the “good news is not too hot or cold” category, wage growth was modest, which cheered investors fearful of overheating inflation and an aggressive Fed interest rate hike response. The year-over-year change of average hourly earnings eased off a bit to 2.6%, below the consensus of 2.8%. There was good news for working folks as well, as average weekly earnings continued to trend higher.

The unemployment rate remained at 4.1% for the fifth straight month, the lowest level since December 2000, and slightly above the consensus of 4.0%. Basically, what this means is that there is still a bit of slack in the domestic labor market, and that the Fed can continue on its slow and steady path to normalized interest rates. Most expect a rate hike at the March meeting, followed by two more later in the year, until the Fed sees more conclusive evidence of widespread inflation.

For the sake of historical context, the current economic expansion began in June 2009, making it the third longest in U.S. history. The longest, a decade-long recovery in the 1990s, saw real GDP expand at an annual average of 3.6%. By way of comparison, the current recovery has experienced a subpar 2.2% average annual growth rate.

Led by a labor market that is gathering strength, those slow-growth days may be behind us. As noted above, February nonfarm payrolls rose 313,000, while civilian employment, an alternative measure of jobs that includes small-business start-ups, rose 785,000. Meanwhile, average hourly earnings are up at a solid 2.6% annual rate, and total number of hours worked is up nicely as well. Total earnings are up at 5.4% annual rate in the past six months, which is faster than the trend in nominal GDP growth the past few years.

We could go on, but time (and reader attention spans) argue against that. Suffice to say that additional strength can be found in new orders for and shipments of core capital goods, sales of heavy trucks, homebuilding and many other segments of the economy. The homebuilding is particularly impressive, coming in spite of higher interest rates and the new tax law limiting mortgage and property tax deductions. In the fourth quarter of 2017, there were 1.3 million new housing permits issued, the highest quarterly total since 2007.

Finally, in the past two months, both the Manufacturing and Services ISM (Institute for Supply Management) surveys have beaten consensus expectations. While few expect the US economy to grow at a 3% pace every quarter, it is becoming increasingly clear that growth is accelerating, which implies that the likelihood of recession any time soon is basically zero. With healthy corporate earnings growth and rising forecasts for future earnings, selected exposure to risk assets continues to make sense for the time being.