No, the U.S. economy isn't "weak"

A lot of investors have been talking about the recent “weakness” in U.S. economic data. Over the past 2 months, a lot of major and minor economic indicators have been missing expectations.
Yesterday we said:

The economic data’s recent deterioration should not concern bullish investors. Historically, the economic data does not impact the stock market unless the economy deteriorates SIGNIFICANTLY. We are nowhere close to significant deterioration right now. The slowdown isn’t enough to impact the S&P 500 in the medium and long term. Historically speaking, transitory weakness in the data can disappear in a heartbeat.

Investors should focus on the overall trend in the data and not “is the data beating/missing analysts’ expectations”. On balance, the data continues to improve and the U.S. economy continues to grow at a healthy rate. Let’s start with the most important economic indicators and then work our way down to the least important ones.


Last week, Initial Claims rose and growth in Nonfarm Private Payrolls shrank. (We focus on Private Payrolls because the U.S. is a private sector driven economy).

However, the overall data shows that the jobs market continues to improve. Yes, employment growth will not be as high in 2017 as it was in 2016 and 2015. We explained this in a post last Friday. It’s normal for jobs growth to shrink as the economic expansion ages. However, this is still a long term bull market in stocks because the unemployment rate and initial claims are going down. Initial claims almost always rise significantly before a bear market and recession begin.

Industrial Production

Manufacturing isn’t the biggest part of the U.S. economy, but it still is important. Industrial Production continues to grow strongly after dipping in 2015 and 2016. Here’s a close up view and then a zoomed out view.


This is another indicator for the U.S. manufacturing sector. Any number above 50 signals expansion while any number below 50 signals contraction.
Despite a tiny dip in the data, ISM is still above 50 by a decent margin. Historically, ISM has not been a great indicator. It has been very noisy, dipping below 50 during many strong economic booms.
Here’s a close up look and then a zoomed out look.

Retail Sales Year-over-Year growth

The U.S. is a consumption driven economy, so Retail Sales is an important indicator.
Retail Sales Y-o-Y growth is still positive and has dipped a little from multi-year highs. Here’s a close up chart and then a zoomed out chart.

Although Retail Sales is an important indicator, it is not a good leading indicator for the U.S. economy. It lags the real-time state of the economy. Consumers adjust their spending after finding out that they have more/less money than they thought. American consumers live on credit.


Housing is a great leading indicator for the U.S. economy. Despite a dip in housing-related indicators last month, the U.S. housing market is still growing strongly. Based on demographics, housing should continue to grow. (As millennials set up families, home builders will need to build more entry-level homes. Entry-level homes are cheaper but more numerous, so indicators like Building Permits and New Home Sales should rise).
Here’s a close up look and then a zoomed out look at Building Permits.

Here’s a close up and then a zoomed out look at New Home Sales.

Over the next few years, New Home Sales should rise while Existing Home Sales should flatten. That is the typical pattern for the final quarter of an economic expansion cycle. In fact, we are already seeing flattening growth in Existing Home Sales.

Useless indicators

Durable goods fell 0.7% last month. However, historically Durable Goods has been an extremely noisy indicator. Its wild fluctuations make this indicator useless for predicting the future state of the economy.

Factory orders fell 0.2% last month. Like Durable Goods, Factory Orders is extremely noisy. Ignore this indicator.

The Manufacturing PMI by Markit fell for the 4th consecutive month. Statements like that make for flashy headlines, but in reality don’t mean much.

  1. Markit’s Manufacturing PMI is only a few years old. We don’t have enough data to gauge its effectiveness.
  2. Markit’s Manufacturing PMI tanked in 2013 when the U.S. economy was on fire. This was a false signal.
  3. The PMI is still above 50, which signals expansion.

Bottom line

Long term bull and bear markets in stocks are determined by the U.S. economy. The economy continues to grow, which is why this bull market still has at least 1-2 years left.

2 comments add yours

  1. Hi Troy , I think your blog is a hidden treasury . Please keep posting it . I love your deep study on one subject .
    I have read somewhere else that the ISM is good leading indicator very much correlated with the SP performance (YoY).

Leave a Comment