We’re in the midst of 2016 second quarter earnings releases and I wanted to share with you the picture of the U.S. economy that is becoming clearer as companies release data. Overall earnings figures are a bit better than expected. In general, companies made more money last quarter than most analysts expected. The consensus amongst most analysts is for a better than expected second half of 2016 than originally noted in January. Both plow horse and tortoise metaphors are common in reports as they sum up thoughts on the current state of the economy. While this often makes for bland reading and tame headlines, it is good news that should be welcomed as slow growth means less volatility in how companies operate. Companies that are growing slowly and adding jobs at low, steady rates are less likely to overproduce and need to cut those jobs in a hurry when facing some contraction. This lower volatility within operations helps keep the company, and the economy as a whole, chugging along a slow growth path.
There are several data points analysts are pointing to as they upwardly revise their expectations for the rest of 2016. Unemployment is decreasing, year over year retail sales are up, housing starts continue to increase, and average worker pay – a previously worrisome weak spot in the recovery – is increasing.1 In fact, the current economy is basically meeting the definition of full employment.2 The one figure that has been noted again and again in these analyses is the ISM Manufacturing Index. This index is a survey of purchasing managers around the country and tends to quickly reflect any changes in employment, production, inventories and new orders. This index rose from 51.3 in May to 53.2 in June.3 Historically, such rises indicate a period of economic growth. Lastly, investors are largely bearish at the moment. The contrarian view is often correct as we do typically see a rising market when investors are pessimistic and expect a pullback. The combination of all this data points to an economy continuing on a path of slow, steady growth. While there is nothing especially exciting to report, this should nonetheless be welcome news embraced by the average investor seeking portfolio growth and lower volatility.
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