HomeBudget & Tax NewsUpward Path for Economy Continues

Upward Path for Economy Continues

Economic news continues to point to a rapid rate of growth. Friday’s report on spending and incomes is confusing because of the timing of government payments. However, there is significant underlying strength in April and May that will likely carry over into the months ahead.

The Week That Was

Economic data continues to show explosive growth.

Many components of last Friday’s report on spending and incomes in April were distorted by the effects of government benefits.

One number that is fairly reliable is wages and salaries. In April, they rose by 1 percent (a 13 percent annual rate) to 4.4 percent above their pre-Covid peak. This suggests the economy has fully recovered from the lockdown and is hitting new highs.

Also significant is that inflation rates in April were at double-digit annual rates from the first quarter, bringing them to 3 percent to 4 percent above the levels of a year ago.

Durable goods orders were down slightly in April. However, durable goods orders other than the volatile transportation and defense orders soared to new highs, rising 15 percent above their prior peak.

Weekly initial claims for unemployment insurance continue to plummet. For the third week in May, claims fell to 400,000, down from 500,000 the previous four weeks.

Explosive growth was also confirmed by the Markit surveys, which reported record growth in business activity in May.

Things to Come

The positive economic news on the economy will continue this week. The news will include ISM reports on business activity in May. Today’s ISM survey of manufacturing companies and Thursday’s report on service companies are likely to match the strong reports from Markit.

Friday’s employment report is also likely to be very strong as the sharp decline in initial unemployment claims boosts payroll numbers.

Market Forces

Stocks were mostly higher again last week. Small cap ETFs led with gains of almost 3 percent for the week. The major indexes were all up by 1 percent to 1½ percent.

With the S&P500 finding support at its rising 50-day average, it now faces resistance at 4,200. If the S&P500 can break through on higher volume, it will further improve the market’s technical position.

Both the economic news and the earnings news have been extremely positive. Business activity is surging in the second quarter. First-quarter reported earnings for the S&P500 companies were well above the longer-term trend.

Even though the S&P500 is back to 26 percent above its fundamental value, the outlook for stocks remains positive. With business activity soaring and the Fed pumping gobs of money into the economy, the upward momentum for both stocks and the economy should continue through the summer and into autumn.

The surprising decline in longer-term interest rates has continued. Ups and downs in bond rates are normal. It is also normal for rates to move dramatically higher when they finally
respond to signs of higher inflation. This can happen at any time
.

Outlook

Economic Fundamentals: positive

Stock Valuation: S&P500 overvalued by 26 percent

Monetary Policy: highly expansive

Robert Genetski
Robert Genetski, Ph.D., one of the nation’s leading economists and financial advisors, has spent more than 35 years promoting the use of classical economic and investment principles for sound financial decisions. He heads ClassicalPrinciples.

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