Wednesday, November 27, 2019

The Business Segment Of The Economy Is Improving Too

My last few posts have focused on the strength of the consumer with a part of this strength a result of the strong labor market. Today's jobless claims of 213,000 beat consensus of 218,000 and beat the low end of the range of expectations which equaled 215,000. Now, after a couple more economic reports today it seems the business sector may be in an upswing as well.

The Chicago Purchasing Managers' Barometer was reported at 46.3, up from 43.2 in October and exceeding consensus expectations of 46.0. In the report, New Orders and Order Backlog saw the largest improvement. Not unlike the ISM Purchasing Manager's Index, the Chicago Barometer has been below 50 for several months, a contractionary level. On the other hand, the Markit PMI for the U.S. has remained above 50. There are differences in the calculation methodologies between ISM and Markit. In short, the Markit PMI calculation has more of a U.S. focus.

Also reported today was the the U.S. Census Bureau's Durable Goods report showing New Orders for durable goods up .6% in October. This was the fourth increase in five months as noted by the blue bars in the below chart. Non Defense New Orders ex aircraft is up 1.2%.

The second reading for GDP was released this morning as well and was reported at 2.1% versus the first reading of 1.9%. A strength cited in the report was consumer spending up 2.9%, exceeding the 2.8% consensus estimate.

Earlier in November reports on Productivity and the Employment Situation report were released. One can look at productivity and growth in the labor force as a gauge of potential growth for GDP. I reported on this measure in a post in early 2017 that included a link to a Fidelity Research report on this data point. The below chart that combines the growth in these variables, and a potential proxy for GDP, is trending higher; thus following a similar pattern that unfolded in the mid 1990's period that also included mid cycle rate cuts.

In evaluating recent reports on the consumer and today's highlights on some business data points, it seems an improved economic environment is before investors. The stock market's performance this year seems to have anticipated this improved environment too. Certainly unforeseen events can alter this viewpoint, but all else being equal, the economy seems to be on pretty sound footing.

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