Reliable Data, Not Emotions, are Pointing to a Growing U.S. Economy
In roughly one month, we will be halfway through 2023. While many point to the Fed’s pace of tightening and the downward sloping yield curve, as a reason to run around like Chicken Little warning of a coming recession, a fresh read of the economic tea leaves tells a different story. Just today, May 23, the PMI Output Index (PMI) rose to its highest reading in over a year. Home sales figures were also reported to show that new homes in May sold at the highest rate in over a year. These are both reliable leading indicators that point to growth in both services and manufacturing.
U.S. Composite PMI Output Index
Business activity in the U.S. increased to a 13-month high in May due in large part to strong growth in the services sector. This is a reliable indication that economic expansion has growing momentum. Despite the negative talk of those that are concerned that the Fed has lifted interest rates closer to historical norms and that the yield curve is still inverted, in part due to Covid era Fed yield-curve-control, the numbers suggest less caution might be warranted.
S&P Global said on Tuesday (May 23) its flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, rose to a reading of 54.5 this month. It indicates the highest level since April 2022 and is up from a reading of 53.4 in April. A reading above 50 indicates growth, this is the fourth consecutive month it has been above 50. The consensus among economists was only 52.6.
Home Sales
One sector that is directly impacted by interest rates is real estate. However, new home sales rose in April, this is a clear sign that prospective buyers are making deals with builders.
New homes in April were sold at a seasonally-adjusted annual rate of 683,000, Its the highest rate since March 2022. The April data represents a 4.1% gain from March’s revised rate of 656,000,. The report was from the Census and Department of Housing and Urban Development and was reported Tuesday May 23. Economists had expected new home sales to decline to 670,000 from a March rate of 683,000. It was the largest month-over-month increase since December 2022.
Leading Indicators
PMI is forward-looking as it surveys purchasing managers’ expectations and intentions for the coming months. By capturing their sentiment on future orders, production plans, and hiring intentions, PMI offers insights into economic trends that have yet to be reflected in other after-the-fact indicators.
Home sales are considered a leading indicator because they can serve as a measure of other needs and broader economic trends. Home sales have a significant impact on related sectors, such as construction, home improvement, finance, and consumer spending. Changes in home sales can influence economic activity and indicate shifts in consumer confidence, employment levels, and overall economic health.
While many economic reports offer rear-view mirror data, these reports are true indicators of business behavior as it plans for future expectations, and consumer behavior as it is confident that it will have the resources available to purchase and outfit a new home.
The upbeat reports prompted the Atlanta Federal Reserve to raise its second-quarter gross domestic product estimate to a 2.9% annualized rate from a 2.6% pace. The economy grew at a 1.1% rate in the first quarter.
Take Away
Many economists are negative about the economic outlook later this year. Market participants have been positioning themselves with the notion that there may be a late year recession. Is the notion misguided? Recent data suggests there may be buying opportunities for those willing to go against the tide of pundits preaching recession.
No one has a crystal ball. In good markets and bad, there is no replacement for good research before you put on a position, and then for as long as the position remains in your portfolio.
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Managing Editor, Channelchek
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