Why the U.S. Economy and Stock Market Are Stronger Than You Think

NEW YORK (TheStreet) -- There has been a consistent drumbeat of commentary that the stock market is in nosebleed territory and that the end of the six-year bull market is close.

Don't believe it.

Almost all the underlying indexes, anecdotal evidence and most of the headline data indicate the U.S. economy is just about to achieve "escape velocity," where economic growth becomes self-sustaining. Such "escape velocity" has been elusive since the Great Recession ended, but no more. 

The economy is stronger than some in the media make it appear. The May and June data confirm this hypothesis. Below are some of the indicators.

Jobs: Probably the most important indicator of all, because this is where consumer income is generated.

  • In May, job growth was 280,000, and May was the 14th out of the last 15 months when job growth was in excess of 200,000. Over the past 12 months, job growth has averaged 255,000.
  • Job openings in May were 5.38 million, a record for this series, which began in December 2000. The highest level of this series during the dot-com bubble was 5.27 million (in January 2001), and the highest it was during the housing bubble of the 2000s was 4.66 million (March 2007).
  • On a weekly basis, new claims for unemployment insurance index is very volatile. It has been hanging around 270,000 for a number of weeks. We haven't seen numbers this low since 1973-1974 when the labor force was 88 million, or about 56% of today's 157 million.

The Consumer: Jobs, of course, translate directly into income and ultimately determine the rate of consumption, the most important element of gross domestic product in the U.S.

  • May saw a auto sales his a seasonally adjusted annual clip of 17.7 million, the best month since 2006.
  • Restaurant sales rose 7.8% year over year in May. Such sales are very sensitive to how the consumer feels about current and future income.
  • Consumer sentiment in June surprised wildly on the upside with the University of Michigan's Consumer Sentiment Index rising to 94.6 from 90.7. (It was 82.5 in June, 2014.)
  • But, the most eye-popping data of all regarding the health of the U.S. consumer showed up in the Federal Reserve's June 11 release of the Flow of Funds data for the first quarter of 2015. (Remember, some claim that the first quarter is supposed to be the beginning of the end of the economic expansion.)
    • U.S. consumers' debt-to-income ratio of 101.7% showed up as a 13-year low, down dramatically from 135% in the first quarter of 2007.
    • Their debt/assets ratio, at 13.6%, was the lowest since the fourth quarter of 2000.
    • Their ability to service their debts is its best since the 1980s.
    • And, the equity in their homes, at 55.6%, is the highest it has been since the fourth quarter of 2006.
  • Given such data, it isn't such a surprise that auto sales are at or near record highs. And, given such data, it shouldn't be a leap of faith to imagine growing consumption in the months and quarters ahead.

Housing: While less robust, housing is starting to look stronger. The Great Recession and the financial collapse in the real estate sector took out many developers. Today, the biggest complaint about housing is that there are no buildable lots. This, of course, will change with the increase in demand. The other issue is the low level of first-time homebuyers.

  • New-home sales are rising; the January to April sales rate is more than 500,000 units, the best pace since 2006. The year-over-year change is 26%. Pending home sales, too, are up 14% year over year. Housing starts (one- to four-family units) are up 15%, and new permits are up 7% over the same time frame.
  • The University of Michigan's Household Formation Index rose to 162 in May from 150 in April. The graduating millennials are now finding jobs, getting married, and moving out of their parents' homes.

The Fed and Interest Rates: The Fed has been talking about raising interest rates for at least two years; maybe we will finally see a rate increase in September.

Should you worry about rising rates? Sometimes the markets react negatively to rate increases, but this first one has been so well communicated that the stock market should have priced it in. Even if it hasn't, you should recognize that a) recessions don't occur until many quarters after the first rate hike, and b) that major bear markets in equities require an looming recession. In addition, in mid-June, Fed Chair Janet Yellen went out of her way to let the markets know that the path or trajectory of rising rates will be quite muted.

While we are several years into the recovery, this was no ordinary retracement. It has taken six years for consumers and businesses to recover, a feat that took only 12 to 18 months in past recoveries. We are now to the point where jobs are being created (i.e., businesses are expanding) and the consumer is comfortable again, able to spend more freely and even willing to take on some debt because prospects are good. We may be at the point where the economy finally produces that elusive "escape velocity." Thus, we are much more likely to be closer to the beginning of the up-cycle than to its end.

 

  This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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