Coincident Activity Indicator
Measured yr/yr, my coincident economic indicator has moved from 1.0% in Jul. to 1.6%
through Nov. That says the economy is now operating a little better than one half speed before
inventory investment. A review of the indicators that make up the composite shows that
low wage and employment growth have retarded sales and production growth and have
increased the volatility of both of the latter. Thus, faster sales and production growth
may prove sporadic without faster employment and real wage growth. Businesses, prideful
of cost cutting to raise profit margins, are thus contributing to a suppression of future sales
and production growth via the steady hammering of a still weak labor market. Smart on a
company by company level, but damaging in the aggregate.
As the year has progressed, my measure of US business sales growth has moved up to 4.3%
yr/yr compared to a low 3.0% level seen this spring. Pricing power has been eroding,
so the price / cost ratio has been tilting in favor of costs at the expense of profitability.
Productivity has started to edge higher again on faster volume gains and operating rates
have been moving up with both helping to at least partially offset the effects of rising
costs. Looking top down, capacity utilization is not quite yet high enough to trigger a
round of more aggressive capacity expansion. Thus even though business cash flow growth
has been modest, there have been plenty of funds on hand to buy back shares.
Forward indicators suggest profits should continue rising going into next year, but the US
will need faster household income growth to underwrite moderate sales and production
growth through the year.
- 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 !!!