Economic & Profits Indicators

Coincident Economic Indicator (CEI)
My CEI is an amalgam of four measures -- production, real retail sales, civilian employment
and real earnings and is presented on a yr/yr % change basis. A reading of +3% implies
reasonable and balanced economic growth. Through March, the CEI ran 2.1% or at two thirds
speed. Output vs. income showed decent balance and the full measure was far better than the
stall speed interim low of 1% set in Jul. '13. The 2.1% reading for Mar. represents a positive
break from a downtrend which had been in place since early 2011. With a very strong liquidity
tailwind still in place, the CEI should eventually recover further up to 3% yr/yr sometime this
year.

I also follow export sales and construction spending carefully. Export sales are recovering
from a flat period over 2012 -- early 2013 and construction spending is relatively strong
with the exception of the public sector where much larger infrastructure investment is
sorely needed.

The US economy has benefited substantially from the winding down of fiscal restraints
which dogged late 2012 and all of 2013.

Profits Model 
Measured yr/yr, top line business growth was 4.5% for the first Q of this year, down slightly
from the final Q of 2013 on tough winter weather. Normally, it is not easy to maintain
profit margin when business growth drops below 5% yr/yr. Moreover, costs grew more
than did pricing power. There was a positive offset in that hiring trailed real output growth
by a moderate degree. Excluding share buybacks, operating earnings were tame.

Although I think it is fair to be concerned about the economic effects of the eventual
elimination of QE, I am still looking for top line growth in the US to reach 6 - 6.5% yr/yr
by late 2014. So far this year, the shortfall shows primarily in very modest pricing power.