• • • April Macro Update: Employment Growth Continues to Decelerate • • • By Urban Carmel | April 7, 2017
Summary: The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.
One concern in recent months had been housing, but revised data shows housing starts breaking above the flattening level that has existed over the past two years. A resumption in growth appears to be starting.
That leaves employment growth as the main watch out: employment growth is decelerating, from over 2% last year to 1.5% now. It's not alarming but it is noteworthy that expansions weaken before they end, and slowing employment growth is a sign of some weakening that bears monitoring.
A second watch out is demand growth. Real retail sales excluding gas is in a decelerating trend. In February, growth was just 1.8%. Personal consumption accounts for about 70% of GDP so weakening retail sales bears watching closely.
Overall, the main positives from the recent data are in employment, consumption growth and housing:
• Monthly employment gains have averaged 178,000 during the past year, with annual growth of 1.5% yoy. Full-time employment is leading. • Recent compensation growth is among the highest in the past 8 years: 2.7% yoy in March. • Most measures of demand show 2-3% real growth. Real personal consumption growth in February was 2.6%. Real retail sales (including gas) grew 2.8% yoy in February. • Housing sales grew 13% yoy in February. Starts grew 6% over the past year. • The core inflation rate is ticking higher but remains near the Fed's 2% target.
The main negatives are concentrated in the manufacturing sector (which accounts for less than 10% of employment):
• Core durable goods growth rose 3.4% yoy in February. It was weak during the winter of 2015-16 and is slowly rebounding in recent months. • Industrial production has also been weak; it's flat yoy due to weakness in mining (oil and coal). The manufacturing component grew 1.4% yoy in February.
Prior macro posts are here.
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Our key message over the past 4 years has been that (a) growth is positive but slow, in the range of ~2-3% (real), and; (b) current growth is lower than in prior periods of economic expansion and a return to 1980s or 1990s style growth does not appear likely.
Modest growth should not be a surprise. This is the typical pattern in the years following a financial crisis like the one experienced in 2008-09.
This is germane to equity markets in that macro growth drives corporate revenue, profit expansion and valuation levels. The saying that "the stock market is not the economy" is true on a day to day or even month to month basis, but over time these two move together. When they diverge, it is normally a function of emotion, whether measured in valuation premiums/discounts or sentiment extremes (enlarge any image by clicking on it).
A valuable post on using macro data to improve trend following investment strategies can be found here.
Let's review each of these points in turn. We'll focus on four macro categories: labor market, inflation, end-demand and housing. . .
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