PrintThe news this month is good once again, with all indicators pointing to continued expansion, despite a small pullback from January levels in some cases. Based on the latest data, the downtrend that developed in 2016 continues to reverse. The consistency of the reversal across multiple data sets and the positive levels of the data are encouraging.
The Service Sector
Signal: Green light
After dropping close to its lows since the financial crisis, service sector sentiment staged a sharp though volatile rally, and it maintained that high level last month, indicating that ongoing business and employment expansion are likely. After the recent volatility, this sustained high level suggests a more encouraging stance going forward, especially since it coincides with high levels of consumer confidence and spending.
Continued strength in the service sector is consistent with business confidence; as a representative sample of the largest sector of business, this is an important leading indicator.
Private Employment: Annual Change
Signal: Green light
January job creation came in well above expectations, which is excellent news, and the overall growth trend remains consistent with a relatively strong, late-cycle job market. On a year-to-year basis, we continue to see a slowing trend, as the labor market gets tighter, and wage growth has started to accelerate. Despite the slowing, however, job growth remains at levels consistent with stable economic growth.
Because this is an annual figure, the changes are slower and smaller than those we see in more frequently reported data. Overall, given the volatility of employment growth, this indicator remains a green light.
Private Employment: Monthly Change
Signal: Green light, but needs to be watched
These are the same numbers as in the previous chart but on a month-to-month basis, which can provide a better short-term signal. Although January’s job creation was well above expectations, downward revisions to previous months and weaker wage growth make it less positive than the headline number would suggest. Despite the strong month, job growth remains within the range of the past couple of years.
We may be seeing a weakening of the monthly data, but that is consistent with the late stage of the employment cycle and probably not a cause for concern in the short term, particularly given the last strong report. We’ll keep this indicator at a green light.
Yield Curve (10-Year Minus 3-Month Treasury Rates)
Signal: Green light
Expectations of faster growth and higher inflation drove up rates for the 10-year Treasury substantially after the election. Although that trend has now moderated, rates remain above recent levels. With short-term rates up only slightly on the increase in the fed funds rate, the spread has increased further and remains well outside the risk zone. The change in trend also remains encouraging, keeping this indicator in healthy territory.
Consumer Confidence: Annual Change
Signal: Green light
Consumer confidence dropped back slightly last month but remains very strong, close to its highest level since 2001. With the improvements in the past few months, and especially since the election, the year-on-year change has moved well above zero, putting this indicator firmly outside the trouble zone. With both the improving rate of change and the very strong base confidence level, this indicator remains a green light.
Conclusion: Economy healthy, positive trends continue
Business confidence has been very volatile, but last month’s continuation of the recent rally suggests the move to a higher level should persist, extending the positive trend we’ve seen over the past several months. Consumers remain very confident on an absolute basis, supported by job and wage growth, and there have been substantial improvements recently, suggesting they will continue to support economic growth. Financial conditions remain stimulative.
Overall, positive factors seem likely to continue, and the signal for the economy remains a green light.
