Today’s report on September spending and wages shows only a slight pickup in real growth compared to the 2 percent rate this past summer. Government regulations are adding to supply chain problems and slowing what would otherwise be a faster rate of growth.
The Week That Was
This week’s economic news was mixed.
Initial estimates of real growth this past summer indicate an increase at only a 2 percent annual rate. Current dollar spending and inflation rose at rapid annual rates of 8 percent rate and 6 percent, respectively.
The slowdown in real growth indicates supply chain problems were serious this summer.
Truckers explain how laws in California contribute to bottlenecks by preventing independent truck drivers from operating in the state and by prohibiting trucks built before 2005 due to environmental issues.
Today’s data for September spending and incomes point to only a slight pickup in real growth going into the fourth quarter.
Although September spending and wages rose at annual rates of 7 percent and 10 percent, real gains were 3 percent and 6 percent, respectively.
As for more current indicators, the October Markit business surveys showed an improvement from September.
This provides a reason to believe growth is speeding up going into the fourth quarter.
Weekly unemployment data continue their favorable trend.
Over the past four weeks initial claims were slightly below 300,000 compared to September’s 341,000. The number of people receiving government unemployment payments in mid-October was 2.2 million, compared to 2.7 million in September.
Was third quarter real growth only 2 percent?
I continue to suspect real growth was stronger than a 2 percent annual rate in the third quarter.
Payroll employment increased at a 6 percent annual rate, and wages and salaries rose at a 9 percent annual rate. Both indicate the economy should have grown by at least at a 4 percent rate. Business surveys also continue to point to stronger growth.
Something is amiss. I suspect the problem is due to a large reliance on consumer spending for the advance estimate of GDP.
Things to Come
The week ahead is an important one for economic news.
On Monday and Wednesday, the ISM will report its October business surveys for manufacturing and service companies. The September ISM surveys were strong. And last week’s Markit surveys reported an improvement in October business conditions.
Look for the ISM surveys to continue to be in the vicinity of 60, indicating strong support for growth.
On Wednesday the Fed is likely to announce its decision to taper its purchases of securities.
I expect they will announce purchases of $100 billion a month, down from $120 billion. This should not come as a surprise; the Fed has prepared markets for the cutback.
In spite of strong inflationary pressures, the Fed is likely to reaffirm its intention to keep interest rates at current levels well into next year.
On Friday, the employment data will likely continue to show gains of about 300,000 in private jobs. The strong gains of 3 percent at an annual rate reflect declines in both unemployment payments and initial unemployment claims.
Market Forces
Stocks moved sharply higher again this past week.
The Nasdaq, QQQs, and S&P500 hit new all-time highs. Small cap ETFs were mostly unchanged.
There were three sources of good news during the week.
First, there was a sharp reversal in longer-term interest rates.
Second, corporate earnings continue to surprise on the upside.
Third, the latest version of what started out as a $5 trillion bill to raise spending and taxes is down to $1.85 trillion. As with the original, there are gimmicks to hide the true costs, such as ending programs early and assuming Congress will continue them. There are also many details still to be finalized.
The latest surge in stock prices places the S&P500 31 percent above its fundamental value. However, in October liquidity improved by $187 billion as banks began drawing down their balances with the Fed. So long as money keeps flowing into the economy, stock prices can go still higher.
Even so, with the S&P500 more than 30 percent overvalued, I’m recommending raising cash to 20 percent in equity portfolios.
Outlook
Economic Fundamentals: neutral
Stock Valuation: S&P500 overvalued by 31 percent
Monetary Policy: expansive
