The Young Woman/Old Woman Economy

6/16/2014


Depending on your personal gestalt, the GDP data paint different pictures:

• The "steady" case — GDP has grown in seven of the eight quarters. And the 1% decline in the first quarter of 2014 can be explained away by horrible winter weather. In short, the economy shows steady progress.

• The "stagnant" case — GDP growth in the last eight quarters has been fairly anemic. In fact, only one quarter in the last eight saw growth above the long-run average of 3.2% dating back to 1947. And the last three quarters — growth of 4.1% and 2.6%, followed by a 1.0% decline — show an economy at the very least in stagnation and seemingly in decline.

GDP is not the only ambiguous economic data set. Over the last two years, monthly growth has been consistent in the 140,000 to 240,000 range, with an occasional outlier on the upside or downside. The stagnant crowd would argue that employment growth, when judged against previous recoveries, is weak. For example, it took until May 2014 — more than six years — for employment to return to prerecession levels, almost double the length of the jobs rebound that began in 2001. And the share of Americans participating in the labor force, 62.8% in May, is near its lowest level since the late 1970s.

Personal income growth also contributes to the gestalt. While income rose year-over-year in 23 of the last 24 quarters, monthly growth rates have been minimal, in the 0.1% to 0.3% range.

In the stock market, the steady-versus-stagnant debate rages. Bulls point toward the steady, albeit tortoise-like, progression of the economy as a positive for stocks. Such modest growth affords an environment for corporate earnings growth without putting upward pressure on interest rates and inflation. Bears argue that today's tepid pace of economic expansion cannot sustain the revenue growth needed to generate the profit growth investors seek.

Looking overseas does not clear up the picture. Ten-year sovereign bonds in such enclaves as Germany and France yield below 1.8%, less than 10-year Treasurys in the U.S. and symptomatic of Europe's halting recovery and chronically low inflation. Further east, the China growth "miracle" looks a bit more pedestrian; GDP in China expanded 7.4% in the first quarter of 2014, the lowest quarterly growth rate since the third quarter of 2012.

Unfortunately, analysis of the economy is by nature backward-looking, with the lazy forecaster simply extrapolating the present into the future. The good news? One of the most economically sensitive barometers in the world suggests the steady/stagnant growth pattern is probably a worst-case scenario going forward, and economic growth is more likely to accelerate.

The Forecasts has written often about the predictive power of the Dow Jones Transportation Average. This index of 20 trucking, airline, shipping, and railroad stocks is sensitive to a host of economic factors — labor costs, fuel prices, interest rates, and industrial, commercial, and consumer demand in the U.S. and abroad. Thus, the Transports' performance represents an important harbinger for future economic activity. The average has made a series of all-time highs in recent weeks and risen more than 10% in 2014, outperforming nearly every major market index.

To be sure, no economic indicator is infallible. Still, if you seek a tie-breaker for the steady/stagnant debate, do not ignore the Transports, which have given the economy a vote of confidence.


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