The Great Transcendentalist Ralph Waldo Emerson once said, “before we acquire great power we must acquire wisdom to use it well”. Those words have never rang louder and more true these last two decades regarding our fearless leadership and omnipotent Global Central Bankers. The breadth and enormity of these powers have never been on greater display by both.  When both were faced with cataclysmic events they responded with overwhelming force. George W. unleashed our military might with his “shock and awe” plan. Harry Paulson broke out the “bazooka”. Chairman Bernanke birthed “quantitative easing”. I’m sure all actions will be the debates for the century. In short, just because you can, doesn’t mean you should.    

America continues to repair from the bruising of the great recession and corresponding responses which still leaves us at war in three countries and an economy stumbling along at a 2% + or – rate of growth. Or is it? Let’s do our own fact check. Only this fact check is truly unbiased. The figures please:

Gross Domestic Product-GDP.  Second quarter GDP bounced back to +1.2% as reported in the initial reading. This figure is subject to two additional revisions. This GDP reading was a bit lumpy. The US consumer spending grew at a fairly healthy +4.2% clip adding +2.83% to the headline figure.  That relative strength was swamped by the drop in residential investment which dropped -6.1% and government spending which dipped -.9%. There was also a big draw down in inventories. This drawdown was a drag on this 2^nd quarter figure but, sets up the current quarter for a restocking period and positive backdrop for third quarter growth. 

ISM Purchasing Managers Manufacturing Index-PMMI. July’s PMMI tallied +52.6% which is healthy but down slightly from June’s  +53.2%. This was the fifth consecutive expansionary reading. The New Orders Index remained solid at +56.9% as did the Production Index +55.4%. One negative was the Employment Index which dipped below the 50% neutral line to 49.4%. 

Unemployment Claims-UC. Weekly UC for the week ending 7/23 clocked in at 268,000 up 14,000 but solidly below the 300,000 healthy situation marker. The four week moving average is now parked at a still comforting 278,000 which suggests we should see a fairly positive reading of the Non-Farm Payroll figure released this upcoming Friday. Consensus has data point coming out at +175,000 jobs created. We look for an upside surprise closer to the 200,000 level. 

Housing. Housing has been a consistent contributor to growth. Existing home sales rose +1.1% to a 5.57 million annual run rate the best since 2007. This growth was likely restrained by an undersupplied market as the inventory of unsold homes stood at 4.9 months. New home sales were also healthy at +3.5% to a 592,000 annual run rate and up +25.4% year over year. This area too was likely held back, this time by a lack of skilled workers. 

Retail Sales. Retail sales provides a sign of the health and confidence of the consumer, registered in at +.6% to $457 billion. Total sales were up +2.6% year over year. This continued strength is vital to any continuation in this current economic recovery and stock market rally as the consumer commands a hefty 70% of domestic demand and growth. 

Where we are going:

The current investing environment continues to paralyze some, scare many and confuse all. The equity markets continue to post record highs while consequently various economic indicators are losing steam and/or plateauing. How can this be?  Take GDP at +1.2% growth would never seem to accompany a raging bull market. Perhaps we need to consider this well followed gauge is no longer capturing total US output. For one the services sector continues to perform very well. This sector of our economy continues to be one of our most innovative, inclusive and expansionary.   Productivity for this sector of service providers and software developers is quite robust. The old GDP gauge may not be capturing this appropriately econometrically. Take UBER. Not all UBER drivers are part time workers. Many enjoy the flexibility of scheduling and workweeks. Same with Amazon’s growing fleet of drivers for its same day delivery service. Software and app development and investments increase worker productivity as well. There are many areas of the service sector that certainly contribute to overall productivity ,employment and expansion but the current static GDP figure may not fully capture these engines of growth. The Bureau of Economic Analysis is currently working to revise their methodology to rectify this oversight. Granted we are not anywhere near an environment of +3.5%-4% growth however, tightness in the labor market, rising incomes along with robust home and auto sales all suggest we’re not in a near recessionary +1.2% slog either. 

The US economy appears to be leveling off around an all too familiar +2%-+2.5% range. We are feeling the effects of some pressure from weakness in the global economy though progress is being made and importantly with a total lack of fiscal response both domestically and globally. Our fearless leadership must finally put party aside and address our overly complicated and bloated tax code.  They must address and implement a responsible immigration policy. One in which we allow and encourage foreign students to access some of our best schools followed immediately by the demand they return home. Finally, a broad based infrastructure spending bill should be passed immediately. Committing to reform even two of these three anchors could be the defibrillator that jump starts heart of our economy back toward that elusive +3%-+3.5% rate we’re accustomed to historically.  Unfortunately, our current leadership which certainly has the powers to execute, it appears we’d be better off seeking out the Screech Owl for the other necessary skill set. 

Earnings season has been broadly positive and the markets have responded accordingly. We maintain our aggressive posture to the markets with a keen view to signs of froth or the indices we follow rolling over for signals to trim our sales. 

Thank you again for your patience in these very challenging markets. 

Yours in pursuit of the KWAN!