Not much wrong with the US economy

Profit margins in the US are contracting, with the second quarter showing a 6.0% decine in profit per unit of real gross value added (Nonfinancial). Contraction of greater than 10% would be cause for concern, but we need to dig a little deeper.

Declining US Profit Per Unit of Real Gross Value Added (Nonfinancial)

Earnings per share for the S&P 500 Index declined for the last two quarters and is projected to decline for the next two quarters as well (Q2 which is 98.6% complete and Q3 2015).

S&P 500 Earnings Per Share

The sharp fall in index earnings is primarily caused by losses in the Energy sector. Other sectors are reasonably healthy.

S&P 500 Energy Sector - Earnings Per Share

Another cause for concern is bellwether transport stock Fedex. Commencement of a primary down-trend normally warns that economic activity is contracting. Freight revenue for the fiscal fourth quarter increased by only 1%, while ground revenue increased by 19%. Slower earnings growth due to a lag in fuel surcharges and integration challenges with the acquisition of TNT may both be weighing on the stock.

Fedex

The Freight Transportation Services Index, however, has turned upwards.

Freight Transportation Services Index

And the LoDI Index continues to climb.

LoDI Index

The LoDI Index uses linear regression analysis to combine cargo volume data from rail, barge, air, and truck transit, along with various economic factors. The resulting indicator is designed to predict upcoming changes in the level of logistics and distribution activity in the US and is represented by a value between 1 and 100. An index at or above 50 represents a healthy level of activity in the industry.

Spending on durables remains promising, with light motor vehicle sales rising.

Light Motor Vehicle Sales

And construction spending (adjusted for core CPI) climbing steeply.

Construction Spending

The ISM Manufacturing PMI Composite Index remains above 50, indicating expansion, but is softer than it has been for a while.

ISM Manufacturing: PMI Composite Index

The Leading Index from the Philadelphia Fed, however, at a healthy 1.57%, continues to project a healthy economic outlook.

Philadelphia Fed Leading Index

Despite the falling Fedex stock price and softer PMI, there does not appear to be much wrong with the US economy. The positives outweigh the negatives. Analysts’ optimism about an fourth quarter upturn may be a little premature, but does not appear far off-track.

10 thoughts on “Not much wrong with the US economy

  1. […] Not much wrong with the US economy […]

  2. Graham says:

    Hi and thanks for the charts.

    Some charts appear to – on a trend basis – back up the view that “Not much wrong with the US economy”. Some, however, may be seen to be ‘at the edge of a cliff” = refer Eps and Fedex chart series above.

    As for the stock market, however, the ‘trend’ appears to be down now = refer 50 week moving averages of Dow, S&P, FT, DAX and Shanghai have turned down These ‘trends’ has have been very reliable leading indicators of the stock market’s direction.

    May it pay therefore to give the aforementioned stock market ‘trends’ – rather than the economic – more weight in managing current investment risks?

    • ColinTwiggs says:

      The weekly chart of the S&P 500 for the period 1997 to 2000 shows why we should not rely on MA crossovers to predict a market down-turn (or up-turn).

      S&P 500 1997-2000

      The 50-week Weighted MA gives 15 crossovers but only one down-turn — in Nov 2000.

      Markets are obviously worried about China at present. But there is not much economic data to back this up.
      The decline in EPS is primarily due to the Energy sector.
      I have always used Fedex as a bellwether, so I am watching for any down-turn in freight activity that would support this. None yet.
      I also take comfort from the rising spending on durables. And the low value of exports to China relative to imports (chart posted earlier).

      If the markets decide to panic, however, they will do so. Reason will not stand in their way.
      Our measures of volatility remain high and it would be prudent to limit exposure until this settles.

      • Graham says:

        Thanks Colin,
        However, I refer to trends ‘turned down’ ….. not the ‘crossover’ mentioned in your reply.
        The MA trends have “turned down” in all the indices I printed in my earlier comment. These “turned down” MA trends predict well = refer late 2000 in your graph.

      • ColinTwiggs says:

        With exponential MAs, the direction changes every time price crosses the MA. That would be every weekly close that crosses the weekly EMA. More than 20 on the chart below. Which is why I prefer to use weighted MAs. That reduces the number of down-turns signaled to just 5.

  3. zzpat says:

    There was talk of a bear market a few weeks ago. Has anything changed? Are you a bull when it comes to US equities?

  4. Scott Pieper says:

    Great article A clear summary of what going on in U.S economy.
    Thanks….Scott

  5. rudydumas says:

    Hi Colin, I would be very interested to get your opinion on the U.S. national debt. I cannot recall you ever discussing it.

    • ColinTwiggs says:

      Hi Rudy, I am concerned about the 34% of the national debt held by foreign countries. Not the 41% held by various branches of the Federal government, including the Federal Reserve (12%). Nor the balance of 25% held by domestic investors. These are 2014 figures from Forbes. A Debt/GDP ratio of 100% is still manageable – provided it is denominated in USD issued by the Fed.

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