February 10, 2025

QuickTakes

Economic Growth Seems

To Be Picking Up

Bearish stock market narratives have been pervasive since early 2022. They are becoming more so now with each headline coming out of Washington. Duties, deportations, duties, and de-bureaucratization (the four "Ds") can have a shock-and-awe effect. But financial markets broadly have been unperturbed because the US economy continues to be rock solid.

Then again, reining in the budget deficit and trade deficit is no easy task. President Donald Trump has even acknowledged that the cost of doing so may be some short-term pain. But we remain optimistic on the economy and therefore bullish on the stock market. Notwithstanding all the commotion in Washington, including frequent shifts in fiscal and monetary policies, the US economy's resilience speaks for itself. Currently, we see signs that not only is growth strong but it might be getting stronger.

Here are a few charts to illustrate this point:

(1) Manufacturing. After contracting for nearly the entire post-pandemic period, the ISM M-PMI suggests that the manufacturing sector is starting to expand (chart).

(2) Employment. Since January 2023, while payroll employment continued to grow, household employment largely stagnated (chart). This led the permabears and hard-landers to claim that the household measure is superior, and to forecast that inevitably payrolls would be revised lower to match. (The household survey measures the number of people with jobs, while the payroll survey measures the number of jobs, including full-time and part-time positions.)

Friday's labor market revisions rebuffed that view: They featured huge upward revisions to the size of the labor force and to household employment and a minimal downward revision to payrolls. (The upward revision was not retroactively distributed over time but all hit in January.)

(3) Unemployment. The entire time, the household survey has suggested that the US economy is at full employment. Indeed, the unemployment rate fell to a historically low 4.0% in January. The ongoing low level of initial jobless claims has pointed to few layoffs and a strong labor market (chart).

(4) Private payrolls. There's also been skepticism that without government hiring, payroll growth would be much lower. We've suggested that this is less concerning, as state and local governments have accounted for much more hiring than the federal government. Regardless, over the past three months, the private sector has added an average of 209,000 payroll jobs after upward revisions. And the employment diffusion index suggests that those gains have been broad-based across industries (chart).

(5) Forward earnings. We are big fans of using S&P 500 forward earnings, which we derive from analysts' consensus estimates, as an economic indicator. It tracks the Index of Coincident Economic Indicators (CEI), in part because the CEI includes payroll employment (chart). Firms that are profitable and growing tend to hire more workers.

(6) Earnings season. The latest earnings season surpassed even our very bullish expectations. Analysts started the year expecting S&P 500 companies’ collective earnings per share to have grown 8.2% y/y in Q4-2024. We expected 12.0% growth. It turns out we weren't bullish enough, as the Q4 earnings of companies that have reported to date are up 13.3% y/y as of last week (chart). We're anticipating better-than-expected results for the upcoming quarters as well.

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