Mitch Zacks update on the U.S. economy - Mar 4

[dan_s]

The U.S. Economy Continues to Defy Expectations with my comments in blue
Economic data to start the new year has been stronger than expected, and that has many investors worried.

Some readers may read that sentence and wonder – why would investors be worried about a healthy economy? I’ll explain why below. First, let’s dig into some of the data defying expectations that the U.S. is headed for a pronounced economic slowdown.

I’ll start with U.S. manufacturing and services surveys, which give strong insight into factory activity and overall levels of demand. In February, S&P Global’s index of services businesses rose to 50.5, pushing it back into expansion territory and marking the strongest reading in eight months (any reading above 50 marks expansion). U.S. companies that participated in the surveys reported their first growth in output since last summer and indicated optimism about activity in the months ahead. < This is bullish for oil & gas demand. Only a MAJOR global recession will cause energy demand to decline.

In manufacturing, February’s index reading rose to 48.4 from 46.9 in January. While still contractionary, the improvement suggests that activity is contracting at a slower pace, and manufacturers indicated that softer demand has allowed them to work through the backlogs that remain a legacy of the pandemic. Both manufacturers and service providers pointed to the easing of supply problems and also lower overall inflation for raw materials. Survey respondents also broadly signaled a positive outlook from here, which is not what investors were expecting at this juncture. < D&C costs should stabilize as supply chain problems are resolved.

Layoffs Continue to Hover at Very Low Levels

The other key area of economic strength is one I’ve pointed to many times in previous columns – the U.S. labor market. Hiring accelerated briskly in January with payrolls surging by 517,000, which was about 300,000 more jobs than Wall Street consensus estimates for the month. January delivered the largest payroll gain since July 2022, which pushed average job growth over the last three months to 356,000 – well above the 163,000 per month added before the pandemic.

Importantly, initial jobless claims – which is a proxy for layoffs – ticked lower in the last week of February, which suggests that employers continue to desperately cling to workers. First-time applications for unemployment benefits fell to 183,000, which is the lowest reported level since April 2022. The unemployment rate fell to 3.4% on these reports, which is a 53-year low. < One of the issues our upstream oil & gas companies are facing is finding enough qualified workers. CapEx growth will be difficult without enough people and equipment to drill and complete wells. This is one reason why I believe IEA's forecast of U.S. oil production growth may be too optimistic.

Firm wage growth has accompanied the strong jobs market. In January, average hourly earnings grew by 4.4% year-over-year, which followed a 4.8% year-over-year gain in December. Since inflation has been drifting lower as wages move higher, the effect on “real income” has been positive, which has continued to support consumer spending. In January, retail sales unexpectedly jumped 3% from December, which reversed the previous two months of declines.

Overall, what we’re seeing so far in 2023 is an economy cruising at 30,000 feet, not one that’s starting its descent. This gets back to my earlier comment about investors being worried. An economy that’s pushing ahead, expanding employment, raising wages, and seeing strong levels of spending is the opposite of what the Federal Reserve wants to see. For some, that’s problematic.

We already know the Fed is poised to raise rates by 25 basis points at the March and likely the May meetings. A ‘stubbornly’ strong economy raises the possibility of the Fed pushing rates even higher than currently expected, which some argue would come as a negative surprise to markets. It’s gotten to the point where many investors are fixated on Fed policy as the make-or-break factor for the economy and stocks in 2023.

But a key point I think is being overlooked is the effect that a stronger-than-expected economy could have on corporate earnings. Over the past year, analysts and CEOs have been bracing for an economic downturn, which has seen earnings estimates for 2023 march lower (see chart). At present, S&P 500 earnings are expected to decline by -0.2% for the year. < Based on the guidance that I've seen from our model portfolio companies (so far) is that they will remain profitable and generate free cash flow even if oil and gas prices remain close to where they are today. My opinion is that demand for oil-based products will exceed supply starting in Q2, so oil prices will rise from here. Natural gas prices were pushed down by the Paper Traders in February. Ngas prices just need a little colder than normal weather in March to move back to $4.00. Looks like some very cold weather is coming to the U.S. Northeast in a few days.

But what happens if economic resilience translates to corporate earnings resilience, and earnings throughout 2023 surprise strongly to the upside? Would fear of higher rates outweigh the benefits of stronger-than-expected earnings? Ultimately, I think the answer is no.

Bottom Line for Investors

In my view, it is counterproductive to want unemployment to rise and for the economy to falter just to increase the possibility of the Federal Reserve ‘pivoting’ to lower rates. This mindset places too much emphasis on the Fed’s role in determining economic and earnings growth, which means placing too much emphasis on how much the Fed influences equity market performance over the long term.

[ChuckGeb]

Counter point on data points.

Caution! We're Being Fed Bogus Data | Stephanie Pomboy

https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&ved=2ahUKEwjmt-75m8X9AhUOlGoFHSBBDUQQz40FegQICRAU&url=https%3A%2F%2Fwww.youtube.com%2Fwatch%3Fv%3D-4NKhH21j7s&usg=AOvVaw3kikvcMmvRkHAbk5DYn7BH

[aja57]

Great post ,Chuck. Thanks