Beware The Bears
For more than seven years now (since March 2009), the bears of the stock market have utilized any and all negative economic data to prop up their positions on the market.
And it’s happening again. Recently, they were pontificating about the Q1 real gross domestic product (GDP) growth estimates.
The Atlanta Fed’s GDPNow Model recently showed, after an inventory data, that annualized growth will be just 0.1 percent in Q1. There is also a possibility It could be zero, or perhaps even negative.
But there is no need to panic. Remember that “zero” employment report released in August, 2011? A firestorm erupted around it for nothing.
Because… a payroll report was revised to allow the original report to “gain” 107,000 jobs instead of a goose egg. Since this time, the job market hasn’t come close to zero. In fact, unemployment has continued to fall, with the stock market making significant gains within the same timeframe.
More importantly though, there have been two times in the last seven years which saw real GDP growth that was actually negative. These two times were in Q1 2011 and Q1 2014. This drives the point that there seems to be something not right with the seasonal factors in Q1, especially due to the fact Q1 2015 was weak also. Every time this has happened in Q1, the economy recovered and growth data improved over the remaining course of the year.
Frankly put, the GDP is the broadest measure of economic activity, not necessarily the leading or lagging indicator, as it does come out late. But more recent, real-time data does not reflect anything like the weakness we are likely to witness in GDP.
For example, last year when energy and commodity prices were falling, drilling and mining activity collapsed. Everything associated with it (think pipes, pumps, rigs, railcars, and a big chunk of manufacturing activity) was impacted. So much so that the Institute of Supply Management (ISM) manufacturing index dropped below 50 for nearly six months. However, it popped up to 51.8 back in March, with the new orders component of the index rising to 58.3 for the month.
The ISM non-manufacturing activity index (which measures services), fell to 53.9 in January, but has now zoomed back up to 59.8 in March 2016.
Right now, job growth remains robust and wage growth is surpassing inflation. Initial unemployment claims, the real leading indicator, currently reflects no sign of rising and have been under 300,000 for more than 55 consecutive weeks. In addition, the labor force has grown stronger, while job openings continue to rise.
In digging deeper, the more than likely cause of any recession is monetary policy, because the Fed is tight.
However, there are some key points that point to no real evidence of money really being tight. The most obvious is the 0.5% federal funds rate, which is below the rates of growth in both inflation and spending growth.
In addition, the current M2 money supply has grown 10.2% at an annual rate in the past three months, while commercial and industrial loans are up 16.6% at an annual rate in the same period. In addition, there are still roughly $2 trillion in excess reserves in the system.
Saying all of this really points to the bottom line being we’ve seen this before with weak data, really weak Q1 data, and GDP growth. But, there’s no real reason to fret. We’ve seen it before and the market has corrected itself. So, ignore the bears.
* – All data and numbers courtesy Brian Westbury, http://bit.ly/1Ol4Tjw.