Still More Encouraging Signs

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The economy hasn't been doing too well this year, if we judge its health by reported GDP (a mere 0.8% annualized growth in the first quarter), the latest jobs number (a gain of only 38K jobs in June) and productivity (down at an annualized rate of 0.6% in the first quarter).

I've remained generally optimistic despite the disappointing headlines. For the past two months, I've had several posts highlighting encouraging developments in the economy that suggested at the very least a recession was quite unlikely, and that hinted at a bit of improvement. Here are a few more encouraging developments that keep me optimistic:

The folks at Challenger, Grey and Christmas keep a tally of all the publicly-announced corporate layoffs. Last month was among the four lowest monthly totals in the past 17 years, as the chart above shows. The oil exploration and drilling sector of the economy was responsible for most of the outsized layoffs over the past year, but that is now a thing of the past.

The active rig count (above) appears to have stabilized and even increased in the past week.

As the above chart of oil futures prices shows, oil prices have almost doubled since their low last February. The crisis in the oil patch is a thing of the past.

The BLS keeps a record of job openings across the economy. April's total was a record high - almost 5.8 million job openings. That's up 26% in the past two years.

According to the Case-Shiller Home Price index, the average price of a home in the U.S. has increased over 30% in the past four years. As the chart above shows, the volume of new mortgage purchase applications (not including refis) is up over 50% since the beginning of last year. The housing market is definitely getting back on its feet.

As the chart above shows, industrial metals prices are up over 25% in the past 5 months. And it's not just because the dollar has weakened. Measured against the super-strong Swiss franc and Japanese yen, these same metals prices are up over 20% and 15%, respectively. This suggests that global industrial activity has firmed.

The chart above shows that the dollar value of the Brazilian stock market is up almost 70% in the past five months, helped, no doubt, by the rebound in commodity prices and the prospect of a new, less corrupt administration.

5-yr Credit Default Spreads, shown in the chart above, are an excellent indicator of credit trends. Spreads have been narrowing meaningfully for the past four months, and are now at levels that are consistent with conditions that are almost "normal." The bond market has recovered a good deal of the confidence it lost in the wake of the problems with China and in the oil patch.

Spreads on high-yield energy bonds have collapsed from a high of 2000 bps to now just over 800. Central banks' generous provisions of liquidity have allowed markets to adjust to wrenching changes without dragging down the entire economy. Healthy financial markets are the best kind of "shock absorber" for events in the real economy.

Bank lending has been constrained not by the Fed, but rather by a lack of confidence, a general desire on the part of businesses and households to deleverage, and by the strong, risk-averse regulations imposed on the banking industry by the Dodd-Frank law. Despite these headwinds, C&I Loans have been increasing at double-digit rates for the past several years.

Total Bank Credit has increased at an 8% annualized pace over the past 2 years. Yet despite these sizable increases in credit extended by the banking sector, leverage in the business and household sectors remains relatively low.

The news out of China has been improving on the margin in recent months. China's forex reserves (the red line in the chart above) have been relatively stable in the past four months, as has the yuan. Declining reserves would have meant that the central bank was pegging the currency at a level that was "too high" relative to the dollar. Relative to its trading partners, the Chinese currency has been stable for the past year or so.

Despite all these encouraging signs, 10-yr Treasury yields are down to very low levels. This suggests that the market is viewing the good news with a healthy dose of skepticism, fearful that things are more likely to deteriorate than to improve further.

As I've argued for many years, risk aversion is still the order of the day.