Let me start by making a confession:
I tend to be a negative person. I don't know why, but I expect and prepare for the worst. Few people know this. To the outside world I'm an average optimist, but to those I allow into the inner workings of my brain I'm a pessimist and a cynic.
It's not that I want to be a negative person. I've just seen enough to understand that eternal optimists are often disappointed. I'd rather prepare for the worst and be pleasantly surprised when things turn out better. But often they don't.
Despite my natural tendencies, over the past several years I have uncovered periods where economic data provides a glimmer of hope. I understand that change begins at the margin, and that secular positive trends start with a infinitesimal inflection point. It is easy for someone like me to tear these inflection points apart, but today I will open my mind to the possibility that the state of the US economy is improving.
Below I have outlined 9 charts that suggest that the US economy is digging out of a very deep hole, potentially validating the lofty levels of the S&P 500 (SPY).
Housing drove the US economy after the 2001 recession, destroyed the economy during the 'Great Recession' of 2008/2009 and may lift the economy into another boom era. Housing is a big deal because it has a massive trickle-down impact throughout the economy. Construction jobs, durable goods orders, building materials purchases, financial services jobs and so on are all positively impacted by a growing housing market.
The three charts below show that housing may be improving. Specifically, they show that housing starts have consistently ticked up since 2010, home prices have stabilized after falling about 30% and homeowner equity has actually started to rise. These indicators are not only positive for the housing industry but also for the broader US economy.
Guess what: people don't buy stuff when they're unemployed. So it only makes sense that an improving jobs market will have a big impact on all aspects of the American economy. The next two charts give some insight into the health of the jobs market.
The first chart shows the employment-to-population ratio. While this ratio is atrociously low (i.e. it is near levels not seen since many families were single-earner households) it has stabilized. In fact, it is higher than at any point since the late-2009 bottom. This tells me that the broad employment market has stabilized and that the US economy is operating with a consistent workforce in relation to its population. Although one wants to see this number rise significantly to be considered 'robust', predictability is good when it comes to family finances.
The second chart breaks out the ranks of the unemployed into a classification called 'job losers'. These are the folks that are unemployed because they were laid off (as opposed to those that are unemployed because they quit). As you can see from previous recessions (shaded areas on graph), rising 'job losers' is a predictor of future recessions (understandably so). Today, while the ratio of 'job losers' to total unemployed remains uncomfortably elevated, it has steadily fallen since the end of the Great Recession. A lower proportion of 'job losers' indicates that the ranks of the unemployed have more control over their destinies. People who quit their jobs are confident about the future and their ability to find another job. And confident people spend money.
3. Family Finances
A household in good financial shape is confident about the future and will spend money today. The next four charts show that family finances have improved steadily over the past few years.
The first three charts look at employee compensation in different ways. The first shows total wages across the entire US economy. This has risen considerably since the end of the Great Recession. While this doesn't adjust for population growth it does suggest that more spending-money is floating around the economy.
The second chart looks at what employees earn on an hourly basis - again, this has steadily risen, although at a slower pace than prior to the Great Recession. Rising hourly earnings suggests that employees retain some bargaining power with respect to the terms of their employment. While this may not be the most predictive indicator, it does imply that the jobs market is not entirely tilted in the employer's favor.
The third chart shows per capita real disposable income. In other words, this is what the average person takes home after accounting for inflation. This is the real measure of a person's ability to improve his standard of living and/or build long-term wealth. One could argue that this measure has flatlined over the past several years. However, the optimist would suggest that real disposable income is well off it's lows and has stabilized. As real earnings stabilize, people can better plan their future and will be more willing to spend.
The last chart looks at household debt service payments as a proportion of incomes. While defaults and low interest rates have helped, the fact is that Americans are less encumbered by their debts than several years ago. In fact, this ratio is as low as it was in the early 1990s and early 1980s - two points which were followed by massive bull markets. The optimist could argue that a low debt-service-to-incomes ratio means that spending is less restricted and there is room for credit growth, thus fueling the economy.
There you have it. My optimistic attempt to view the light at the end of the American tunnel. While I won't dismiss my opinion that America's government debt and off-balance-sheet liabilities could lead to the end of the American dream, I do believe both sides of the argument should be reviewed. After-all, the long-term outcome could be vastly different than shorter-term cyclical movements.
But let me finish by saying that I haven't been fully converted, and I won't be selling any of my physical or exchange-traded gold (ETFS Physical Swiss Gold Shares (SGOL)) anytime soon.
Disclosure: I am long SGOL.
Additional disclosure: This is not advice. While the author makes every effort to provide high quality information, the information is not guaranteed to be accurate and should not be relied on. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing decisions.