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Positive Reports Continue from the U.S. Economy

Last update on: Jul 28 2016

I appreciate the many kind comments from readers about the second edition of “The New Rules of Retirement.” It is the most comprehensive and up-to-date guide to the financial decisions you have to make regarding retirement. The book is almost a complete rewrite of the first edition and is essential to planning your retirement, or the rest of your retirement if you’re already in the post-career years. Order your copy today.

If you want your copy signed, you can find me at the MoneyShow San Francisco. I’ll be making presentations, as will several of my colleagues from Eagle Financial Publications. We’ll be at the Marriott Marquis, Aug. 23-25. Free registration is available by calling 800-970-4355 (please mention priority code 041205) or go online to robertcarlson.sanfranciscomoneyshow.com.

Despite all of the worries people have about Brexit, China and more, the U.S. economy continues to perk along at its slow, steady rate. The economy isn’t setting any records, but it’s looking good relative to what it has done since the financial crisis and relative to the rest of the world.

Make no mistake. There is a lot for investors to worry about. Not the least of which is that central banks might be out of ammunition or close to it when the next financial crisis or economic downturn hits. For now, though, the economy is humming.

In fact, there are indications that growth might be ready to increase a bit. Manufacturing’s been in a steep decline for about 18 months. The data from the last few months shows that at least parts of the manufacturing sector are finding bottoms. It is not going to have a strong rebound, but manufacturing is likely soon to stop being a negative contributor to growth.

Housing continues to do well. It has ups and downs from month-to-month. But overall, both new and existing homes are selling well, and prices are increasing. New home starts and permits also increase steadily. An important shift in housing is that single-family homes are leading the starts instead of apartment houses. Single-family homes contribute more to overall growth than apartments do. The main things holding back housing right now are a shortage of first-time home buyers and a limited inventory of homes for sale.

The rest of the economy also seems to be springing back from a pause taken early in 2016. The rebound likely is fragile, and we have to see how the Brexit vote affects economic behavior. But so far, the bulk of the non-manufacturing economy continues to grow.

A good barometer of economic health is household and consumer behavior. Recent surveys indicate consumers generally are optimistic about the future. Household income is increasing at a decent rate. Consumer spending growth also is healthy.

The markets have priced a very negative outlook into asset prices. Given the recent economic data, there’s a good chance markets will be surprised by better-than-expected results, and that would result in a re-pricing of many assets.

The Data

Manufacturing continues to stumble along the bottom, according to several reports issued in the last week. The PMI Manufacturing Index remained in growth mode, with a reading above 50. But 51.3 is only slightly above 50 and a small improvement from last month. The ISM Manufacturing Index was stronger, rising to 53.2 from 51.3. That’s a sizeable increase and much better than expectations. In the last few years, this index was consistently more positive than other manufacturing data. It is now at the highest level since February 2015.

Factory Orders, on the other hand, declined 1% after rising 1.8% last month. Core business investment remains weak, which indicates business managers aren’t optimistic enough to expand much.

Two surveys show the non-manufacturing part of the economy is doing well. The PMI Services Index increased slightly to 51.4. This indicates expansion but nothing outstanding.

The ISM Non-Manufacturing Index, which is based on a broader survey, is more positive. It registered a strong increase to 56.5 and is at its best level of the year. The components of the index also were very strong.

The caution to consider is that the surveys behind these indexes were taken mostly before the Brexit vote.

The labor market data leading into tomorrow’s Employment Situation reports is positive. New unemployment claims again declined sharply — by 16,000. This brings them close to the historic lows of the spring. The ADP Employment Report showed a solid increase in new jobs that was above expectations at 172,000. Historically. this report tracks well with the government’s data issued on the following day. But during the last two months, the ADP report hasn’t reflected turns in the government’s data.

The Markets

Despite ups and downs and a lot of worries, the week ended with Wednesday’s close was positive for many assets. The S&P 500 gained 1.45%. The Dow Jones Industrial Average returned 1.32%. The Russell 2000 returned 1.44%. The All-Country World Index gained 0.47%. Emerging markets lagged with a 0.47% decline.

Long-term treasury bonds surged with a 3.2% gain. Investment-grade bonds returned 1.40%. Treasury Inflation-Protected Securities (TIPS) gained 1.37%. High-yield bonds returned 0.74%. Plus, the dollar gained 0.28%.

Energy-related commodities declined 2.93%. Broad-based commodities lost 1.90%. Gold gained 3.62%.

Some Reading for You

This article argues that the United Kingdom really won’t leave the European Union, despite the Brexit vote.

This article explores reasons why wrong ideas often seem to retain a following.

First-time home buyers might be sparse because of misinformation about mortgages, reports this article.

I comment and link to these and other items on my public blog at http://www.bobcarlson.net.

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