Stocks Settle Down Ahead of Yellen's Speech

Charles Schwab: On the Market

Posted: 8/25/2016 4:15 PM ET

Stocks Settle Down Ahead of Yellen's Speech

U.S. stocks closed mildly lower and European equities snapped a winning streak as caution prevailed ahead of tomorrow's speech from Federal Reserve Chairwoman Janet Yellen. Some upbeat domestic data included better-than-expected reads on weekly jobless claims and durable goods orders, while a preliminary report on services sector activity unexpectedly declined but remained in expansion territory. Treasuries and gold were lower, the U.S. dollar was little changed and crude oil prices were higher.

The Dow Jones Industrial Average (DJIA) declined 33 points (0.2%) to 18,448, the S&P 500 Index lost 3 points (0.1%) to 2,173, and the Nasdaq Composite decreased 5 points (0.1%) to 5,212. In moderately light volume, 705 million shares were traded on the NYSE and 1.5 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.56 to $47.33 per barrel, wholesale gasoline added $0.01 to $1.42 per gallon and the Bloomberg gold spot price declined $1.64 to $1,322.64 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 94.76.

HP Inc. (HPQ $14) reported fiscal 3Q earnings-per-share (EPS) ex-items of $0.48, above the $0.44 FactSet estimate, as revenues declined 4.0% year-over-year (y/y) to $11.9 billion, versus the projected $11.5 billion. HPQ issued softer-than-expected 4Q EPS guidance, while lowering the high end of its full-year profit outlook. Shares pared sharp early losses.

Tiffany & Co. (TIF $73) posted 2Q profits of $0.84 per share, north of the forecasted $0.72, with revenues declining 6.0% y/y to $932 million, compared to the expected $933 million. 2Q same-store sales decreased 8.0% y/y, compared to the expected 7.8% drop. TIF maintained its full-year EPS outlook and shares rallied.

PVH Corp. (PVH $107) announced 2Q EPS ex-items of $1.47, well above the projected $1.28, as revenues increased 4.0% y/y to $1.9 billion, roughly in line with forecasts. The parent of Calvin Klein and Tommy Hilfiger issued mixed 3Q guidance, while raising its full-year profit forecast and reaffirming its revenue outlook. Shares gave up early gains and finished lower.

Dollar General Corp. (DG $76) reported 2Q earnings of $1.08, one penny below forecasts, with revenues growing 5.8% y/y to $5.4 billion, just shy of the expected $5.5 billion. 2Q same-store sales increased 0.7% y/y, versus the estimated 2.7% gain. DG confirmed its full-year EPS outlook, while announcing an additional $1.0 billion in share repurchases. DG closed sharply lower.

Dollar Tree Inc. (DLTR $86) posted 2Q EPS of $0.72, one cent south of expectations, as revenues rose 66% y/y to $5.0 billion—reflecting results from its acquisition of Family Dollar—compared to the projected $5.1 billion. 2Q same-store sales rose 1.2% y/y, compared to the 2.4% gain that was anticipated. DLTR issued stronger-than-expected 3Q earnings guidance, though it raised and lowered its full-year EPS and revenue forecasts, respectively. Shares were decisively lower.

Durable goods orders easily top forecasts, jobless claims unexpectedly dip

July preliminary durable goods orders (chart) jumped 4.4% month-over-month (m/m), compared to Bloomberg's estimate of a 3.4% gain and June's downwardly revised 4.2% drop. Ex-transportation, orders gained 1.5% m/m, easily topping the 0.4% forecasted increase, and June's favorably revised 0.3% decline. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, increased 1.6%, well above projections of a 0.2% increase, and following the upwardly revised 0.5% rise in the month prior. Gains were widespread, notably surges in the volatile aircraft and parts and a sharp jump in computers and related products, though motor vehicles were flat and communications declined.

The business spending component of the report has posted back-to-back monthly gains, and a continuation of this trend could give the U.S. economy a needed boost to escape this prolonged period of stagnant growth. As noted in the Schwab Market Perspective: The Calm Before the…., consumer confidence has firmed, with the labor market continuing to improve, housing is looking good, and wages are finally starting to rise. Additionally, we've seen signs that consumers may be more comfortable taking on debt. However, it will be difficult to get the U.S. economy rolling without an improvement in productivity, which is undoubtedly being constrained by ongoing tepid capital spending. Read the whole perspective at www.schwab.com/marketinsight, and follow Schwab on Twitter: @schwabresearch.

Weekly initial jobless claims (chart) dipped 1,000 to 261,000 last week, versus estimates of a rise to 265,000, with the prior week's figure unrevised at 262,000. The four-week moving average declined 1,250 to 264,000, while continuing claims fell 30,000 to 2,145,000, south of the estimated level of 2,155,000.

The preliminary Markit U.S. Services PMI Index for August unexpectedly declined to 50.9 from July's final reading of 51.4, compared to forecasts of a modest rise to 51.8, though a reading above 50 indicates expansion. The release is independent and differs from the Institute for Supply Management's (ISM) report, as it has less historic value and its index components are weighted differently.

Treasuries were lower, with the yields on the 2-year note and the 30-year bond ticking 2 basis points (bps) higher to 0.79% and 2.27%, respectively, while the yield on the 10-year note increased 1 bp to 1.58%. For analysis on the fixed income markets see the video from Schwab's Managing Director of Trading and Derivatives, Randy Frederick and Fixed Income Director Collin Martin, CFA, titled Tempered Expectations for Bond Returns: Why Hold Bonds? Also, Schwab's Chief Fixed Income Strategist, Kathy Jones addresses in her article, What Does Strong Job Growth Mean for Bond Investors?, at www.schwab.com/marketinsight. Follow Randy and Kathy on Twitter: @randyafrederick and @kathyjones.

Tomorrow, the U.S. economic calendar will close out the week with the first revision (of two) of 2Q GDP, projected to be adjusted slightly lower to a 1.1% quarter-over-quarter annualized rate of growth, after 1Q's 0.8% expansion. The University of Michigan Consumer Sentiment Index will follow, expected to be revised modestly higher to 90.8 from 90.4, and an improvement from July's 90.0 figure, while wholesale inventories will close out the day, projected to tick 0.1% higher m/m in July following June's 0.3% gain. However, the highlight of the morning will be the 10:00 a.m. ET speech from Federal Reserve Chairwoman Janet Yellen at the Central Bank's annual policy symposium in Jackson Hole, Wyoming.

Schwab's Chief Investment Strategist, Liz Ann Sonders discusses in her latest commentary, With a Little Help From My Friends: On Africa, Economy and Earnings, we continue to believe a rate hike is on the table for this year. The combination of Fed policy uncertainty and the contentious election season could mean the recent lull in volatility will not persist into the fall. Read more at www.schwab.com/marketinsight. Follow Liz Ann on Twitter: @lizannsonders.

Europe and Asia lower as global markets eye Yellen's speech

European equities finished lower, declining for the first time in four days, with basic materials stocks lower on the continued pressure on the mining sector and as the markets digested some mixed economic data in the region, headlined by a disappointing read on August German business sentiment. Global caution persisted ahead of tomorrow's key speech from U.S. Federal Reserve Chairwoman Yellen at the Central Bank's annual policy symposium in Jackson Hole, Wyoming. Healthcare issues came under pressure amid concerns about a potential pricing crackdown following comments from U.S. Democratic nominee Hillary Clinton. In other economic news, Spain's 2Q GDP growth was unexpectedly revised higher and U.K. August retail sales figures rebounded. The U.K. report added to recent data to suggest the U.K. economy is seeing a limited impact from the late-June vote to leave the European Union, known as Brexit. For commentary on the Brexit vote fallout, see Schwab's Director of International Research, Michelle Gibley, CFA, discusses Keep Calm and Carry On: The Brexit Shock That Wasn't at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch. The euro was higher and the British pound lost ground on the U.S. dollar, while bond yields in the region finished mostly higher.

Stocks in Asia finished lower in subdued volume as the global markets remained cautious ahead of tomorrow's key speech from U.S. Fed Chair Janet Yellen, while the recent drop in crude oil prices and dampened sentiment in the mining sector weighed on commodity-related issues. Japanese equities declined despite some weakness in the yen, while basic materials led Australian securities lower. Stocks in India fell amid some choppy trading on the expiration of monthly derivatives contracts and South Korean listings finished flat. Equities trading in mainland China fell and those in Hong Kong were little changed as liquidity concerns resurfaced and reports that the government may act to cool speculation in the financial and real estate markets fostered some uneasiness. Amid the uncertain global backdrop, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, offers Three Reasons Why Now is Not the Time to Retreat from Global Diversification and Your portfolio may be less diversified than you think. Read both articles at www.schwab.com/oninternational and be sure to follow Jeff on Twitter: @jeffreykleintop.

Tomorrow, the international economic docket will deliver consumer price inflation for Japan, consumer confidence from Germany, preliminary 2Q GDP from France and business investment, the Index of Services and preliminary 2Q GDP from the U.K.

FINANCIAL REVIEW

One Foot on the Gas, One Foot on the Brake

Sinclair Noe — January 30, 2015

 

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

DOW – 251 = 17,164
SPX – 26 = 1994
NAS – 48 = 4635
10 YR YLD – .08 = 1.67%
OIL + 3.25 = 47.78
GOLD + 25.00 = 1284.10
SILV + .31 = 17.33

GDP growth slows. The Commerce Department reports fourth quarter gross domestic product grew by 2.6%, down from a very strong 5% growth rate in the third quarter. The results were below consensus estimates of 3% growth. For all of 2014, the economy grew 2.4% compared to 2.2% in 2013.

Consumer spending advanced at a 4.3% pace in the fourth quarter – the fastest since the first quarter of 2006 and an acceleration from the third quarter’s 3.2% pace. The final read on the University of Michigan’s consumer sentiment index was 98.1, down a tick from the 98.2 in the preliminary estimate. That’s still above the 93.6 mark in December and the best reading in 11 years.

Just as consumers were stepping on the gas, businesses were tapping the brakes. Business spending on equipment fell at a 1.9% rate. It was the largest contraction since the second quarter of 2009. The fourth-quarter weakness could reflect cuts or delays to investment projects in the oil industry. But it could also be payback after two back-to-back quarters of robust gains.

A wider trade deficit, as slower global growth curbed exports and solid domestic demand sucked in imports, subtracted 1.02 percentage point from GDP growth in the fourth quarter.

That’s how it works when the rest of the world is moving to QE. Worldwide central bank stimulus now totals over $10 trillion dollars. The new buzz phrase is currency wars, or you could just call it competitive devaluation. Countries are competing against each other to achieve a relatively low exchange rate for their own currency. As the price to buy a currency declines, so too does the price of exports from the country and imports become more expensive. This allows domestic industry and employment to expand.

The downside of this is that price increases for imports can harm citizens’ purchasing power. A policy of competitive devaluation can also result in retaliatory action by other countries, which in turn, can lead to a general decline in international trade. For the US, the problem is that a stronger dollar is slowing GDP growth even as we see the benefits of lower oil prices to counter tougher export markets.

Inflation remains muted in the fourth quarter. In a separate report the Labor Department reports the personal consumption expenditures (PCE) price index fell at a 0.5% rate, the weakest reading since the first quarter of 2009. Excluding food and energy, prices rose at a 1.1% pace, the slowest since the second quarter of 2013. The strong pace of consumer spending in the fourth quarter was overshadowed by a drop in capital expenditure. The PCE is the inflation gauge used by the Federal Reserve, and it is telling the Fed not to rush into raising rates.

In Europe – Deflation. Eurostat today reported the largest decline in consumer prices in the eurozone since July 2009. Consumer prices were 0.6% lower than in January 2014, having fallen 0.2% on an annual basis in December.

European stocks slipped today on the deflation report, but the region’s equity benchmark was still on track for its best monthly performance in more than three years. The Stoxx Europe 600 is up 7.2% for the month of January, which would be its best since October 2011.

Russia’s central bank cut its key interest rate to 15% this morning, after announcing a surprise hike from 10.5% to 17% in December to shore up the weakening ruble.

European Union foreign ministers have extended existing sanctions against Russia, but held off on tighter economic measures for now. Last year’s travel bans and asset freezes will now continue until September. Any sanction require a unanimous vote by all the EU countries. There was some question about whether Greece would approve sanctions, but much of that was misreported. Greece did not oppose sanctions; the EU just never asked the Greeks, and the Greeks did not appreciate being neglected in that manner. It was really symptomatic of how the EU has dealt with Greece for several years now.

Meanwhile, Greece’s new, leftist government opened talks on its bailout with European partners today by flatly refusing to extend the program or to cooperate with the international inspectors overseeing it. Prime Minister Alexis Tsipras has repeatedly said he wants to keep Greece in the euro but he has also made clear he will not back away from election campaign pledges to roll back the terms of the bailout.

A funny thing happened today in the oil market, prices went up, and it was a fast move. There was a big drop in the number of US oil rigs. Baker Hughes reports petroleum producers took 94 oil-drilling rigs off the market in the United States this week as sub-$50 oil continued to wreak havoc on the oil industry. Prices jumped and then many traders probably decided to cover short positions on the last trading day of the month. This week’s drop left 1,223 oil units up, the lowest number in three years. It was the biggest one-week decline for oil rigs since 1987. That year, the oil industry had faced another oil bust that left hundreds of rigs idle or repossessed by banks, which sold them for scrap.

Earlier today, the Commerce Department reported investment in drilling rigs and wells climbed at an 8.9% pace in the fourth quarter after an 8.3% increase from July through September. Prices were going down in the fourth quarter and domestic oil producers were shrugging and pumping more. At least until just recently.

By the way, if you were wondering what lower oil prices mean for renewables, the quick answer is not much. Oil is for cars; renewables are for electricity. The two don’t really compete. The biggest limit to solar installations is the availability of panels. And even as gas prices have dropped, the price for electricity continues to go up. And that is the advantage of solar; as time passes, the efficiency of solar power increases and prices fall. It’s a technology, not a fuel.

And it would be crazy to believe oil prices will stay this low forever. The history of oil prices follows a golden rule: What goes down must come up. Goldman Sachs identified almost $1 trillion in investments in future oil projects that are no longer profitable with oil under $70 a barrel. American drillers are idling rigs faster than they have since 1991. Eventually, supply will shrink and prices will rise again.
Shares of solar and wind companies have been pulled down with oil prices. Still, global investment in clean energy increased 16% last year, to $310 billion. Fossil-fuel subsidies outpace renewable-energy subsidies by a factor of 6 to 1, and this represents a strain on government budgets, and not just here in the US. Reducing the subsidy gap is one of the cheapest ways to increase fuel efficiency and speed up the switch to cleaner energy.

And then that pesky problem of climate change isn’t going away. The U.S. and China reached a historic deal in November to rein in greenhouse gases. Pope Francis is preparing a papal encyclical on climate change, a letter to the world’s bishops that will formalize the church’s moral position on the issue for 1.2 billion Catholics.

With today’s move, oil prices are up 5.8% for the week, but still down 9.4% for the month.

For the week, the Dow was down 2.8%, the S&P was down 2.8% and the Nasdaq down 2.6%. For the month, the Dow was down 3.6%, the S&P fell 3.1% and the Nasdaq was off 2.1%. January marked the worst monthly performance for both the Dow and S&P since January 2014.The Dow has now dropped under support at 17,200 and the S&P has dropped under 2000.

Do you want to know how stocks might perform this year? A widely followed market theory, the January barometer, claims that as January goes, so goes the year. It worked two years ago; January 2013 was a positive month for stock prices, up 7%, and the market went higher for the year by 30%. January 2014, saw stock prices drop by 4%, and it didn’t work – prices were up last year by a little over 11%.

Interestingly enough, while an up January is generally bullish for stocks, a down January is not a reliable predictor of a weak year overall. In ten out of twenty-four weak January years, the stock market actually ended higher, often by a very substantial amount. Indeed, this has happened four times in the last decade alone.

Visa announced an 11.5% increase in profit during the quarter, as a strengthening U.S. job market and cheaper gasoline prices encouraged people to spend. Beating both top and bottom line estimates, net income rose to $1.57B from $1.41B, a year earlier. Visa also announced a four-for-one stock split, cutting its weight in the Dow from 9% to 2.5%.
(Here’s a little quiz. Q: Now that the weighting for Visa is dropping, which Dow Industrial stock has the highest price weighting? A: Goldman Sachs.) (Goldman Sachs and Visa both entered the Dow in September 2013, when the average was last reshuffled. Visa rallied 25% since it joined the gauge on Sept. 20, 2013, while Goldman Sachs gained 3.7%, compared with Dow’s 13% advance. So, Goldman has the highest weighting, due largely to underperformance.)

Shake Shack’s initial public offering priced well above expectations at $21 apiece, and in its first day of trading, the burger chain more than doubled to $48. Underwriters had set an expected price range of $17-$19 per share, up from an initial $14-$16 due to strong demand. At the IPO price, Shake Shack boasted a valuation of about $746 million. Following today’s gain, the market value is more than $1.7 billion. Shake Shack’s debut comes two days after a CEO change at McDonald’s Corp., which is mired in its worst US sales slump in more than a decade.
Next week brings more earnings reports including a slew of energy companies. Monday, we’ll get a report from the Institute for Supply Management. Auto sales are coming out on Tuesday. Next Friday we have the monthly jobs report.

Thursday, August 14, 2014 - The Circular Capex Spending Problem

Financial Review with Sinclair Noe

DOW + 61 = 16,713
SPX + 8 = 1955
NAS + 18 = 4453
10 YR YLD - .01 = 2.40%
OIL - .39 = 97.20
GOLD + .70 = 1313.90
SILV + .05 = 19.95

Iraqi Prime Minister Nouri al-Maliki stepped down today, a surprising reversal for a prime minister who a day earlier had assured his supporters that he wouldn’t step down unless forced out by Iraq’s high court.

President Obama says the US operations have broken the ISIS siege of Mount Sinjar. Thousands of Yazidi refugees were stranded on the mountain. Many of those displaced had now left the mountain and further rescue operations are not planned, however US airstrikes against ISIS will continue for now. And Iraqi and Kurdish forces fighting ISIS will continue to receive US military assistance.

Russian President Vladimir Putin said Russia would stand up for itself but not at the cost of confrontation with the outside world, which sounded like a softer, gentler Putin. Trust him about as far as you can throw him. Intense fighting continues as the Ukrainian military kept up its offensive to retake separatist strongholds in Eastern Ukraine.

A new, five-day truce between Israel and Hamas appeared to be holding despite a shaky start, after both sides agreed to give Egyptian-brokered peace negotiations more time. The second extension of the ceasefire, this time for five days rather than three, has raised hopes that a longer-term resolution to the conflict can be found; maybe.

The Missouri State Highway Patrol will take over the supervision of security in the St. Louis suburb that's been the scene of violent protests since a police officer fatally shot an unarmed black teenager.

Earnings season continued to wind down. WalMart reported earnings and revenue that met expectations, but the company cut its forecast for coming quarters. Last night, Cisco Systems offered a weak outlook for its current quarter and announced massive job cuts despite reporting revenue that beat expectations.

We’ve all heard of jobs offshoring; US jobs that once built the world’s biggest middle class, have been sent overseas, and it’s been going on for quite some time. The idea was heralded as free trade globalism and the argument was that it was merely mutually beneficial free trade; but American jobs have been lost and continue to be lost, not to competition from foreign companies, but to multinational corporations that are cutting costs by shifting operations to low-wage countries.

One result of offshoring is lower labor costs, but that also means lower wages. University graduates in the US are just as likely to be employed as bartenders or baristas as they are to get a job as a software engineer of plant manager. And there’s a good chance that recent grads are still living at home with their parents. More than half with student loans are having a hard time paying down student loan debt; 18% are either in collection or delinquent; another 34% have student loans in deferment or forbearance. And if they do find jobs, they find those jobs don’t pay well. Wages have stagnated.

Even though the economy has been adding jobs, it has not been enough to push a recovery in wages. In July, average hourly wages rose a penny to $24.45, a disappointing result after strong gains in June and May. In 23 of the past 24 months, the yearly increase in hourly pay has ranged from 1.9% to 2.2%, or about one-third less than usual during an economic recovery. The 12-month increase in wages as of July was just 2%; and inflation wiped out about three-fourths of that gain. There’s been no change since the start of 2014. While it might seem counterintuitive that wages are flat while jobs are being added, the likely reason is that there are a lot of poor paying jobs plus a few very good paying jobs. According to revised data from the Commerce Department, employee compensation, including wages and benefits, was lower for each year from 2011 to 2013 than previously calculated.

Jobs off-shoring, by lowering labor costs and increasing corporate profits, has enriched corporate executives and large shareholders, but the loss of millions of well-paying jobs has made millions of Americans downwardly mobile. Between October 2008 and July 2014 the working age population grew by 13.4 million persons, but the US labor force grew by only 1.1 million. In other words, the unemployment rate among the increase in the working age population during the past six years is 91%. Since the year 2000, the lack of jobs has caused the labor force participation rate to fall, and since quantitative easing began in 2008, the decline in the labor force participation rate has accelerated. Clearly there is no economic recovery when participation in the labor force collapses. In addition, jobs off-shoring has destroyed the growth in consumer demand on which the US economy depends with the result that the economy cannot create enough jobs to keep up with the growth of the labor force.

Some people argue that the problem with economic growth doesn’t start with wages and jobs, but rather with credit, and they point to graphs of the recent rise in auto loans; just as mortgages once fueled a housing boom, now, subprime lending is fueling a boom in auto sales. Credit tightened in the wake of the housing collapse and the housing market remains weak, while auto lenders have become aggressively permissive and US auto sales have made a huge recovery, leading some to argue that consumption depends on access to credit. This is wrong. Access to credit is the lubricant for the engine of economic commerce; it is not the engine. The real driver of the economy is good paying jobs.

There have been magnificent innovations in transportation, medicine, communication, and technology as commerce has spread globally. Credit did not create technological advances, people did. Money and credit could always be used to purchase the tools to make money in business, but money could never produce anything by itself; food, clothing, shelter, cars, and thousands of other worthwhile things were always made by the labor of people, not the sweat and intelligence of a coin or a plastic credit card.

The Federal Reserve just released a report showing that two-thirds of American households have no savings set aside for an emergency, and 40% are unable to raise $400 cash without selling possessions or borrowing from family and friends. Offshoring, by lowering labor costs and increasing corporate profits, has enriched corporate executives and large shareholders, but the loss of millions of well-paying jobs has made millions of Americans downwardly mobile. In addition, jobs off-shoring has destroyed the growth in consumer demand on which the US economy depends for expansion. Corporations are borrowing money not to invest for the future but to buy back their own stocks, thus pushing up share prices.

A new report from Morgan Stanley shows the average age of industrial equipment in the US is now almost 10.5 year old. That’s the oldest since 1938, at the height of the Great Depression. Nonresidential capital expenditure; in other words, spending on equipment, nonresidential buildings like factories, and intellectual property, has fallen short of the long-term trend by 15% per year. That means businesses have pumped into the economy $400 billion less than they normally would have every year. That's $1.6 trillion over the past four years, and it's affecting every sector. Spending has been down 14% on buildings, 16% on equipment, and 6% on intellectual property.

Instead of investing that money, corporations have been hoarding cash; by some estimates, corporations are sitting on a pile of almost $2 trillion. Occasionally they dip in for share buybacks. S&P 500 companies bought back an estimated $160 billion in stock in the first quarter; that would lag only the $172 billion in the third quarter of 2007, shortly before the worst bear market since the Great Depression. Repurchases are all the rage, but are all too often made for an unstated and ignoble reason: to pump or support the stock price. Another corporate incentive for buybacks is that a pumped-up share prices make the stock grants and options held by senior executives more valuable. Occasionally they dip into the cash pile for mergers and acquisitions. North American M&A activity stands at $1.2 trillion year to date, up 83% from last year. This year is almost certain to be the best year for M&A since the crisis. Boosting growth and returns through long-term investment in their business hasn't registered nearly as highly.

The problem then becomes circular: weak demand holds back capital expenditures, which drags on growth, which depresses demand. Productivity growth in the United States, the rate of growth in the level of output per worker, is near a 30 year low. Spending on research, development and technology, would surely improve this trend. Productivity alone does not spur capex spending. Rather, spending increases when demand increases. You don’t buy a new factory or new equipment unless your customers are spending. However if your customers are spending, you will happily invest in the facilities to fill their orders. But real median household income fell 10% between 2007 and 2012. And since the financial crisis, demand across the US economy as a whole has been far below trend.

Several of America’s great cities, such as Detroit, Cleveland, St. Louis have lost between one-fifth and one-half of their populations. Real median family income has been declining for years, an indication that the ladders of upward mobility that made America the “opportunity society” have been dismantled. So, now we face a tipping point, where we either start to reinvest in industrial production or watch the infrastructure turn to rust, and the US becomes a third world country.

The good news is that we are making progress in some areas. We add jobs every month, more than 200,000 jobs per month for the past six months. Capacity utilization is now up to 79%. US exports now top $2 trillion, the highest level in history. Despite the numerous false dawns since the Great Recession, analysts still expect capex to pick up. If it does, then the broader economy should benefit. Factories and equipment will have to be replaced, eventually. It might represent an opportunity; if we’re lucky.