|By Marco The Editor|
November 16, 2016
This article will briefly look at the largest key indicators of the economy, and begins a small series of articles that will look at the overall health of the U.S. economy. Then, the individual sectors of the equity markets will be evaluated to determine how each will perform overall, and which sectors will outperform one another. Once the individual sectors are analyzed then more focused analysis will begin on equities within each sector.
Where is the economy and what will happen to the economy from here
In order to get a feel for the overall U.S. economy the best place to start is the very largest segment of the overall economy. The services sector accounts for nearly 80% of the entire economy.
This begs to question: how is the services sector?
Services are largely a factor of individuals throughout the country buying and selling services. The biggest driver of that is American's incomes. Simply, without income, no one can go out and purchase anything. If Americans are earning increasingly larger and larger incomes, then there purchases follow suit. Any look at savings rates in the United States will substantiate that statement.
At the same time this is not a static rule. We live in a dynamic world; increased incomes do not necessarily equate to increased purchases on a linear basis. Perception plays a deep role as well. If Americans feel that their disposition will either improve or debase, then their spending typically follows suit. Consumer sentiment indicators go hand-in-hand with income and will oftentimes precede spending patterns one way or the other.
Incomes in the United States have been increasing on a year-over-year basis. The latest indicators from the Bureau of Economic Analysis stated that incomes improved by 0.3% for the month of September versus August. The year-over-year increase was 1.7%. Overall this is modest. But, the trend is increasing which bodes well for the overall economy. In the same breath, Consumer Confidence from the University of Michigan Consumer Index came in for the same month at a very healthy 91.6. This indicator is improving suggesting that the U.S. consumer's appetite to spend is improving. Retail sales in the United States are also improving. The Census Bureau reported a 3.9% year-over-year increase for retail sales, seasonally adjusted. That is strong. Americans have a healthy appetite for spending and at least several indicators confirm that trend.
The Economy and Equity Markets
If the largest sector of the economy is showing significant strength, then lagging indicators will begin to improve as well. Two lagging indicators are the unemployment rate and the equity markets. Any spending by consumers takes a couple of months to work its way through inventories before a company decides to ramp up, or decrease, supplies. Likewise, profits and losses from these companies take some time before they work their way into the equity markets through reporting mechanisms.
Since consumers are beginning to spend more and more this will equate to larger profits for certain sectors. And, as these company's profits continue to improve, and by coincidence the overall equity market, then a company's ability to increase its payrolls overall, and its ability to increase bonuses to current employees. It serves as a feedback loop. More Americans are likely to enter the job market that have been out of the market for extended periods. Those already on the payrolls will begin to look for better jobs looking for even better paychecks. This is evidenced in several indicators already. Equity markets will follow suit. More profits to companies will drive equity prices higher. And, despite the Dow closing at record highs just yesterday (November 14th) the Dow will continue much higher. Based on economic landscape from the past, a move over the next 2 – 3 years of some 20 – 25% higher in the Dow is likely.
An Improved Outlook
As mentioned, this article begins a small series of other articles. Overall, the health of the U.S. economy is improving. I will be writing on each individual sector over the course of the next several months regarding how the consumer's activity will drive certain segments as well as sectors and individual equites. However, this is not panacea. The Federal Reserve is in the process of adjusting interest rates. Any moves higher in interest rates will have a balanced effect on consumers and equity markets as well. Increased interest rates affect certain industries differently, such as the financial and energy industries.