Economic Insights - September 2016

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The Pouting Pundits of Pessimism, were shocked by the July employment report.  Jobs, wages, and hours all beat expectations and even the labor force showed healthy growth.  The labor force was up 400,000 in July and 2.2 million in the year ending July 31.

They were even more dismayed when the Atlanta Fed crunched its numbers and upped its forecast for third quarter real GDP growth to a 3.8 percent annual rate.    The Atlanta Fed updates its quarterly estimate of GDP as new data arrive.  So, the current forecast for the third quarter includes the most recent data.  Real GDP rose at an annual rate of 0.8 percent in the first quarter and 1.2 percent in the second quarter.   

That 3.8 percent real GDP growth forecast assumes a strong rebound in inventories and further strong growth in consumer spending.  So far, we don’t have much actual data to confirm this, so the best anyone can do with inventories, is make an educated guess.  Meanwhile, early data on consumer spending shows strength.   

Payrolls rose 255,000 in July, overwhelming consensus expectations.   Civilian employment, another measure of jobs that includes small-business start-ups, rose 420,000.  Both of these measures are up more than 200,000 per month in the past year.  Furthermore, the labor force grew 180,000 per month in the past year and average hourly earnings were up 2.6 percent in spite of the retirement of relatively high-wage Baby Boomers.

No wonder all the major equity indices are at all-time highs and bearish hedge funds have taken a beating.  

Meanwhile, the argument which says, “five consecutive quarters of declining earnings means a bear market recession,” is now looking pretty weak.  In the second quarter, non-energy earnings were up 1.3 percent on a share-weighted basis and 8.1 percent on a market-cap weighted basis from a year earlier.  So, the declining earnings story is entirely driven by energy company earnings.

As of mid-August, 434 S&P 500 companies had reported second quarter earnings; 71.1 percent beat estimates, while 11.3 percent matched.  That means only 17.6 percent have missed.  

Obviously, the economy could be doing much better.  Big government is a burden that entrepreneurs fight...

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