State Of Play
I watch the yr/yr % change in a combine of four key measures -- real retail sales, production,
civilian employment and real take home pay. The economy is normally progressing at
a good rate when the yr/yr % for this quartet is 3.0%. Latest, the US ran at 1.1% for the year
through May. From an economic perspective, that is the equivalent of going 25 mph in a
60 mph zone. Economic growth momentum is at its lowest point since late 2009 when the
economy was first coming out of deep recession. Only real retail sales has shown some zip
this year, helped along by rising consumer credit and a falling savings rate. Normally,
large QE and a 0% short rate policy by the Fed would provide powerful positive impetus
to the economy. Not so this year as substantial fiscal drag and conservative, cautious
business and banking sectors retard progress. Forward looking indicators do not signal
growth acceleration ahead.
Corporate Profits Indicators
the macro measures for top line or sales growth are running about 2 - 3% yr/yr through
May. Profit margin indicators do not make for happy reading, either. The business operating
rate is in decline as real output growth trails capacity growth by 0.4%. The selling price vs.
cost ratio is at 0.6% in favor of higher cost. And, as a general rule, it is not easy for
businesses to expand operating profit margin when annual sales growth momentum falls
below 5%. Companies can offset the margin pressures to a certain extent by increasing asset
turn via tight inventory management and by reducing employee compensation and benefits by
various measures. Then of course, there is the gambit of increasing net per share profits
by diverting cash flow and / or leveraging up to buy in shares.
Cycle Pressure Gauges And the Capital Markets
I use upwards of five distinct gauges to measure cyclical pressures in the economy. The
bottom line here is that the economy is running slow and cool and is quite a ways away from
even approaching the amber or overheating zone. The indicators in summary have not
supported an increase in Treasury bond yields or stock price / earnings ratios this year.
Rather, investors have been heavily caught up with the QE program by the Fed in ways
that are transcendent of the realities on the ground. Let's leave it said in this polite manner.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!