Here Comes the Economic Growth That Confidence Data’s PredictingBy
Leading indicators point to firming economic activity
Aggregate hours worked have surged, point to 2.5% GDP growth
It turns out businesses and consumers have reason to be confident economic growth is about to pick up. But it’s not because of President Donald Trump’s policy prescriptions.
Just two weeks into the president’s term, the world’s largest economy is already churning out a raft of signals that growth is posed to accelerate, according to Renaissance Macro Research.
“What gets lost in the economic discourse, in our view, is that many leading indicators of activity have already turned,” Neil Dutta, head of U.S. economics at the New York-based firm, wrote in a report Monday. “We expect actual activity to pick up in the months ahead.”
A surge in economic optimism from businesses and consumers following the U.S. elections that wasn’t matched by leading indicators pushed the gap between measures of “soft” data from surveys and real activity to its widest level in six years. This raised the prospect that the high hopes surrounding the Trump administration’s proposed fiscal policies may fail to live up to expectations.
But Dutta highlighted four signs that the road is already rising to meet the lofty expectations held by businesses and households:
A pick-up in housing activity is poised to buoy the U.S. expansion in the coming months, given the extent to which starts have trailed permits.
“The last time permits ran this far ahead of starts, back in February 2015, single-family starts went on to grow by 140,000 units over the next six months with residential investment growing at a solid clip,” Dutta noted.
Temporary employment, which can be seen as a leading indicator for the job market, has bounced back strongly. The annual change in this metric had sunk to 0.6 percent in May, its lowest level since 2010.
In addition, aggregate hours worked have surged in the past two readings, Dutta wrote, to a level that implies growth of about 2.5 percent.
Renaissance Macro developed an index to track capital expenditures, derived from spending intentions found in a variety of regional surveys by the Federal Reserve. “Shipments are following our tracker as one would expect,” Dutta wrote. “Moreover, that core capital goods orders are running ahead of shipments implies room for continue gains ahead.”
Economists at Morgan Stanley used a similar metric to point to an increase in business investment through the first half of 2017.
Gains in final sales to private domestic purchases do more than tell us about what’s transpired, but are also fairly adept at telling us what’s in store for jobs and aggregate activity.
“It does a better job of telling us where GDP growth will be one quarter later than GDP itself,” Dutta noted.