Wednesday, January 18, 2017

Earnings: Yes They Can Grow

A week after his election victory, I concluded that incoming President Donald Trump could succeed in stimulating economic growth, so I raised my real GDP forecast for 2017 from 2.5% to 3.0%. Since then, I’ve been keeping track of all the signs showing a revival of “animal spirits” in surveys of consumer and business confidence.

On Monday, the IMF raised its economic growth forecasts for the US, saying output could grow nearly a half-percentage-point faster than previously thought over this year and next, thanks to Trump’s plans to cut taxes and boost infrastructure spending. That would put US real GDP growth at 2.3% this year and 2.5% next year. The IMF’s move follows similar revisions by the World Bank last week.

If so, then the outlooks for the growth rates of S&P 500 revenues and earnings are improving. Both have recovered from the energy-led recession that started during the summer of 2014 and ended early last year, when the price of oil rebounded. Consider the following:

(1) Forward revenues and forward earnings of the S&P 500 have been rising rapidly since last spring into record-high territory. They are both good harbingers of actual revenues and earnings.

(2) Business sales are recovering from the energy recession. Manufacturing and trade sales rose 2.3% y/y during November, the best growth rate since October 2014. This series is highly correlated with the growth in S&P 500 aggregate revenues, which was 0.6% y/y during Q3-2016. It probably rose to about 2.0% during Q4-2016. Joe and I think the growth rate for revenues this year could be around 4%-5%.

Interestingly, the US M-PMI tends to be a leading indicator for the growth rate in S&P 500 aggregate revenues. During December of last year, the M-PMI rose to 54.7, the highest reading since December 2014.

(3) Retail sales rose 0.6% m/m during December. Chronic pessimists noted that it was essentially unchanged excluding gasoline and autos. Apparently, they weren’t impressed with December’s auto sales of 18.4 million units (saar), a cyclical high. Excluding gasoline but including autos, retail sales rose 0.2% to a new record high, and remain highly correlated with our Earned Income Proxy for private industry wages and salaries in personal income, which also rose to a fresh record high last month.

(4) Short-term leading economic indicators are upbeat. The Citigroup Economic Surprise Index rose to 40.7 on January 17. That’s near last year’s highest reading. The CRB raw industrials spot price index continues to recover from its cyclical low early last year. It was up 23.8% y/y on January 13.

My Boom-Bust Barometer continues to rise vertically in record high territory. The same can be said for the two Weekly Leading Indexes compiled by YRI and ECRI.

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