From MarketWatch:
1. The economy is merely “trudging along” at stall speed, so stocks are vulnerable
This misperception is forgivable, given that U.S. GDP growth came in at around 1% for the first and second quarters.
But to really understand the economy, you have to drill down on a lot more numbers than just GDP. And when you do so, the weak GDP numbers seem fishy. They just don’t jibe with many other bullish reads on the economy.
“There are a number of things that just seem odd,” says Jim Paulsen, the chief investment strategist and economist at Wells Capital Management.
Let’s start with an alternative economic yardstick, called gross domestic income(GDI). Instead of measuring production (which is the job of GDP), GDI measures national income. It does so by summing wages, rents, interest and profits. Over the long haul, GDI tends to track GDP.
But during the “weak” first quarter — the weak quarter that energized the gloom-and-doom crowd — those two measures diverged sharply. Real GDP (after inflation) was a mere 1.1%. But real GDI was a much more solid 2.9%.
Which one is right? Given the preponderance of other robust economic indicators out there, I’m betting that GDI at nearly 3% is the right one.
After all, 1% GDP growth in the first and second quarters just doesn’t line up with the following, much more bullish, reads on the economy.
* Auto sales are at record levels — 17.7 million expected this year, according to Center for Automotive Research chief economist Sean McAlinden, and 17.5 million in 2015, both records.
* Employment growth is strong — 255,000-292,000 new jobs in June-July, and 204,000 a month on average over the past 12 months.
* Loan growth is robust — 8.2%-8.6% growth in the first half of the year, following 9% growth in the fourth quarter of last year.
* Wage growth is solid.
* Consumer spending is strong — see below for details on these last two.
The upshot? “Concern over the economy’s performance is running high, but it is misplaced,” says Moody’s Analytics chief economist Mark Zandi. He predicts 3% GDP growth in the next 12 months.
Given this outlook, the economic mirage created by the weak headline GDP numbers matters “because it affects people’s confidence and their expectations and ultimately their behavior,” says Paulsen.
“Just imagine how different the world would be if the published numbers for GDP were 3%. If that were the case, would this be the most hated bull market ever?” asks Paulsen. “Would there be such vitriol to established political candidates? Would there be chronic worries about a global slowdown?”
To be sure, investors need to worry that September and October are looming. These are months that often bring trouble for stocks. But “trudging” economic growth would be the wrong reason to doubt this rally and take profits now. The economy is actually pretty strong when you look beyond the headline GDP numbers.
2. No one has gotten a raise in several decades
Donald Trump loves this one. Bernie Sanders did too, before he dropped out. This makes sense tactically since Hillary Clinton is seen as an extension of President Barack Obama, rightly or wrongly. So by attacking the current state of the economy, one attacks Clinton and the status quo. This makes change look more attractive.
But there’s just one little problem here. The “stagnant wage” claim is just not true. Wage gains in this recovery have been some of the biggest in the past 50 years.
There are many ways to gauge wage trends. Just about all of them point to robust gains.
* One of the cleanest ways to measure wage growth is to track workers in the same jobs over time. This technique is used in the ADP Workforce Vitality Report from Automatic Data Processing (ADP), a company that handles payroll processing for a huge number of U.S. companies. It shows wages rose 4.6% in the first quarter. This “same job” technique is useful, because it eliminates the downward drift in overall workforce wages that can show up in government numbers as more older employees (making lots of money) retire relative to the number of younger employees (earning far less) coming in.
* But even government numbers show decent gains. Disposable personal income increased 3.1% in the second quarter, according to the Bureau of Economic Analysis.
* An earned-income proxy tracked by Ed Yardeni at Yardeni Research (the equation: average hours times average hourly earnings) shows earnings jumped 4.3% in July to yet another record. Income gains are higher still over the past several decades, if you throw in the value of government benefits.
But if wage growth is so strong, how do Trump and Sanders get away with saying otherwise? Well, politicians lie, of course. But here they are misleading by telling a selective truth. They are citing the wrong data (deliberately or otherwise). They’re citing household-income analysis produced by the Census Bureau. These numbers do show that median household income has been virtually flat for the past 20 years. But a big problem here is that the number of households with one person has increased sharply. This puts downward pressure on household income.
The bottom line for investors here? Decent wage gains support growth. This could be a two-edged sword, if the gains spark inflation and speed up Federal Reserve interest-rate hikes. That can hurt stocks.