U.S. Equity Markets [Video]

Data developments since last month’s report have generally been positive. Overall the economic expansion looks set to continue over the next few months, and in general until further notice. All of these charts or concepts are somewhat inter-related, as is the economy in general, so the idea is to have some different data points to cross-reference. That being said, almost all indicators are still positive, with the exception of some longer-term indicators that look negative. The Services PMI moved up to a new cycle high and the unemployment rate dropped to a new cycle low. The LEI index still looks reasonably strong. The yield curve has steepened somewhat over the past month but still seems to be on track to invert later this year or early next year- it’s worth keeping in mind that yield curve inversion is historically a medium term indicator (6-24 months) with respect to a likely recession start. Recession risk over roughly the 1-5 year period has likely increased with measures suggesting the economy is potentially operating above capacity, namely the output gap and labor force capacity utilization. Operating above capacity can persist for some time but is by definition unsustainable over the longer term, however there are uncertainties with regards to the estimates for potential GDP and the natural rate of unemployment. However, for the time being, there seems to be some slack remaining in the labor market, which suggests that the economic cycle can continue for a little while longer. In general the data suggests classic late-upswing business cycle behavior. According to the CFA text, a late upswing means “at this stage of the business cycle, the output gap has closed and the economy is in danger of overheating. Confidence is high; unemployment is low. The economy may grow rapidly. Inflation starts to pick up, with wages accelerating as shortages of labor develop.” (See the Inflation and Fed chart books for analysis on inflation and wages.) To reiterate, taken together I think the U.S. business cycle picture is still positive. On balance, based on the charts and framework presented (which inevitably may not capture all possible risk factors in real-time), it seems likely the U.S. economic expansion continues until further notice.