Economic Indicators

Coincident Economic Indicator -- August, 2014
Measured yr/yr, my version of the CEI rose by 2.3%. This represents the strongest improvement
in two years, but remains shy of what would count as vigorous, well-balanced economic growth.
The sales / production side of the indicator rose a solid 3.7%, but the income side increased by
only 1.9%. Within the income portion, civilian employment growth rose by 1.5% and the real
wage by 0.4%. The real wage has started to benefit form a slight increase in wage rates as well
as  from a recent deceleration of the inflation rate. With the benefits of productivity gains
continuing to accrue primarily to capital and not to labor, households must expand borrowing
to finance an increased level of spending. Scrooge lives on and so does widening income inequality.

Business Profits Model
Top line growth was about 6% for the year through Aug. Looking back at my projections for
2014, unit volume growth has been faster than I expected, but pricing power has lagged and
broadly so. Progress in advancing profit margin from productivity gains has been partially
offset by slower growth in pricing with my price / cost ratio now under some pressure. Without
stronger pricing power, a number of businesses may step back from more full blooded hiring.

Liquidity Situation
Over the past few months, liquidity generated by the private sector has matched the progress
of business sales. There has been excess liquidity in the system generated by the Fed's QE 3
program and this has helped power the stock market to some some extent in 2014. However,
with QE expected to wind down to zero later this year, investors are likely to find themselves
in stronger competition with the demands of the real economy if business sales growth can
hold around or exceed 6%.