HOPE for the economy?
‘It’s the hope that kills you’ - Spurs fan
HOPE stands for Housing, new Orders, Profits and Employment. The US economic cycle has traditionally moved in phases with housing showing the way and brought up in the rear by employment.
US housing market activity has slowed as mortgage rates have climbed from the lows of 2021 to the highest levels seen for over 10 years. Mortgage applications have petered out and new home sales have declined.
Rising mortgage rates have seen a slowdown in New Home sales in the US back to pre-pandemic levels.
Source: Bloomberg, Artorius
It is worth noting that housing as a share of the US economy is much smaller than it was pre-2007, circa 3.5% vs circa 5%.
After the housing market, the next economic signal that shows how the US economy is faring is contained within the Orders element of the survey and activity data. New Orders in the business survey data have fallen from 2021 highs but remain above the 50 threshold that signals growth.
Both ISM New Orders (survey) and Capital Goods Orders point to ongoing economic growth.
Source: Bloomberg, Artorius
Likewise, core capital goods new orders continued to grow by 6% year on year (YoY) in April. This suggests that the corporate sector remains comfortable with investment spending.
Profits drive returns. Whilst profits growth rates continue to retreat from the elevated post-pandemic rates, profits continue to climb. As a result, equity investors are faced with equities that are cheaper on a valuation basis than they were a few months ago.
Whilst equities have fallen the earnings base continues to grow
Source: Bloomberg, Artorius
The upward path of earnings may be interrupted if a recession derails the revenues (as is the case with the UK retail sector due to the cost of living squeeze) or if profit margins get eroded, but for the time being both appear to be resilient.
The last of the economic indicators to slow is employment. Post-pandemic labour market recovery appears to be continuing.
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