“The fundamentals are sound.” The catchphrase is the last refuge of economic scoundrels. It’s what politicians tend to say when the economy is in a recession and about to slip deeper into contraction. Beware of anybody using it to deflect attention from the iceberg of bad news that is looming just off the bow.
An economy that is years away from full employment, and in which the Federal Reserve feels compelled to pump $85 billion of new money into the financial system every month, can hardly said to be entirely seaworthy. And yet, nearly four years into the current expansion, after the stock market has doubled, the flurry of economic news out Tuesday seems to indicate that many of the fundamentals are looking somewhat sound.
Let’s review. Consumers have been the quiet heroes of the last several years, chipping away at debt and scrimping and saving to consume and invest in the face of a poor job market and stagnant wages. And yet data released this week suggest they are doing quite well. Indeed, Americans are doing a commendable job at keeping up with financial obligations. The American Bankers Association said Tuesday that the delinquency rate on credit cards has fallen to 2.47 percent. As Consumerist.com notes, that’s “an 18-year low and significantly better than the 15-year average of 3.87%.” Americans are also doing a much better job of staying current on their mortgages. Fannie Mae, the catastrophic government-owned lender, reported Tuesday morning that the delinquency rate on its huge portfolio of loans had fallen to 3.29 percent at the end of 2012, down from nearly 5.5 percent in March 2010. Thanks in part to such improvements, Fannie Mae reported a massive $7.6 billion profit in the quarter. And have we mentioned that housing is back?
That noise you hear is expectations being ratcheted up higher—not just for auto sales or for corporate profits.
Autos are both the biggest manufacturing sector and the biggest retail sector in the U.S. economy. So when Americans buy lots of cars, good things happen throughout the economy. Throughout Tuesday, manufacturers reported their sales results for March. And they were almost uniformly positive: General Motors, up 6.4 percent from last year; Chrysler, up 5 percent; Ford, up 5.7 percent. “The improved showing prompted automotive-market researcher Edmunds.com on Tuesday to raise its 2013 U.S. sales forecast to 15.5 million new cars and light trucks, a 6.9% gain over 2012,” The Wall Street Journal reported. “Its previous forecast was 15 million.”
In response to rising demand for durable goods like autos, companies have been ratcheting up production. On Tuesday morning, the Census Bureau reported that factory orders in February rose 3 percent in February from January. At the same time, it revised January’s result from a decline of 2 percent to a decline of just 1 percent.
The stock market’s daily movements are dictated by a thousand factors. But to a large degree it is a futures market—investors are making daily bets about the future profits of companies. So it’s not surprising that Tuesday’s data helped spur another rally on Wall Street. The Dow Jones industrial average and the S&P 500 both closed at record highs.
That noise you hear is expectations being ratcheted up higher—not just for auto sales or for corporate profits. Macroeconomic Advisers maintains a real-time model that estimates the performance of the economy in the current quarter. It starts with a projection at the beginning and then plugs incoming data and continually spits out new estimates. The almost uniformly positive flow of data so far this year has caused Macroeconomic Advisers to ratchet up its estimation of first-quarter growth from a baseline of 2.1 percent to the current estimate of 3.6 percent.
Now that’s only one quarter of growth. And the above summary is just one day’s worth of economic data. Factors ranging from the sequester to the ongoing crisis in Europe have the capacity to sandbag the economic expansion. But as 2013 enters its second quarter, it’s increasingly looking as if many of the fundamentals are sound.