The current recovery started in June 2009, 105 months ago, making it the third longest recovery in U.S. history.

The longest – a 120-month recovery in the 1990s – saw real GDP expand an annual average of 3.6%.  The current recovery has experienced just a 2.2% average annual growth rate – what we have referred to as "plow horse" economic growth.

That's changing.  In particular, the labor market is gathering strength.  In February, nonfarm payrolls rose 313,000, while civilian employment, an alternative measure of jobs that includes small-business start-ups, rose 785,000.

Hourly wages rose a tepid 0.1% in February, but in the past six months, average hourly earnings are up at a 2.7% annual rate while the total number of hours worked is up at a 2.6% annual rate.  Total earnings are up at 5.4% annual rate in the past six months, which is faster than the trend in nominal GDP growth the past few years.

New orders for "core" capital goods, which are capital goods excluding defense and aircraft, were up 6.3% in the year ending in January, while shipments of these capital goods were up 8.7%.  Sales of heavy trucks – trucks that are more than seven tons – are up 17.4% from a year ago.

The pace of home building is set to grow in the year ahead, in spite of higher interest rates or the new tax law limiting mortgage and property tax deductions.  In the fourth quarter of 2017, there were 1.306 million new housing permits issued, the highest quarterly total since 2007.

A better economy also means higher interest rates, but this doesn't spell doom.  Housing has been strong despite rising mortgage rates many times in history.  In fact, both new and existing home sales were higher in 2017 than they were in 2016 in spite of higher mortgage rates.

Yes, the new tax law will be a headwind for homebuyers and builders in high-tax states, but it's going to be a tailwind for construction in low tax states like Texas, Florida, and Nevada.  Housing starts have increased eight years in a row.  Look for 2018 to be the ninth.      

In the past two months, both ISM surveys - for Manufacturing and Services - have beaten consensus expectations.  The US economy is not going to grow at a 3.0% pace every quarter, but all this data suggests that our forecast for an average pace of 3% growth this year is on steady ground.   

The bottom line is that the U.S. economy is accelerating, not decelerating, and the potential for any near-term recession is basically zero.  Corporate earnings growth, and forecasts of future earnings, have accelerated, and our 2018 year-end forecast for Dow 28,500 and S&P 500 3,100 remain intact.   Even with higher interest rates!  Stay invested.

Brian S. Wesbury - Chief Economist
Robert Stein, CFA – Deputy Chief Economist 

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Implications:  The job market boomed in February, a clear sign the Federal Reserve is behind the curve.  Nonfarm payrolls grew 313,000 in February, the largest increase in 19 months, beating the forecast from every economics group.  Meanwhile, civilian employment, an alternative measure of jobs that includes small-business start-ups, increased 785,000.  In the past year, nonfarm payrolls are up 190,000 per month while civilian employment is up 202,000 per month, both solid figures.  Given tax cuts and deregulation, we expect similar gains in the year ahead.  Although the unemployment rate remained at 4.1% in February, that stability was due to an 806,000 increase in the labor force.  As a result, the labor force participation rate rose to 63.0%.  That's still low by the standards of the past 40 years, but it ties the highest level since March 2014.  Some analysts will bemoan the tepid 0.1% gain in average hourly earnings in February, but these wages, which don't include irregular bonuses or commissions, are up a respectable 2.6% from a year ago.  Meanwhile, total hours worked rose 0.6% in February and are up 2.2% from a year ago.  As a result, total earnings, which combine the total number of hours and average hourly earnings, are up 4.8% from a year ago, suggesting plenty of growth in consumer purchasing power.  In other recent news on the labor market, new claims for jobless benefits increased 21,000 last week to s still-low 231,000.  Continuing claims fell 64,000 to 1.87 million.  These figures are consistent with continued healthy job growth in March, although at a pace that's likely to be slower than the rapid gains in February.  What will the Fed do with all this?  It's almost certainly going to raise rates on March 21.  At present the futures market in federal funds suggests 37% odds of the Fed raising rates by at least 100 basis points this year; we'd put those odds at more like 60%.  If so, long-term rates should continue to trend up as well.  

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Implications: When President Trump sees an increase in January's trade deficit he'll think the world is "killing" us in trade.  But what really matters, and what President Trump and other policymakers should be focused on, is that the balance of trade is due to voluntary decisions made by producers and consumers. Moreover, it is the total volume of trade – imports plus exports – that signals how much value consumers find in the global economy. The disappointing part in today's report was not that the trade deficit increased to $56.6 billion in January, but that total trade fell by $2.7 billion.  Exports fell $2.7 billion in January while imports were unchanged.  Some argue today's trade deficits must be offset by future trade surpluses.  We beg to differ.  The US finances trade deficits with foreign capital inflows. The trade deficit must equal foreign investment and foreign investors have been willing to be paid a very low return on their US investments.  So low, that Americans still earn more on their investments abroad than foreign investors earn on their US assets.  As long as that continues, and we see no reason why it shouldn't, the US can continue to run trade deficits.  Moreover, many of the policies President Trump has passed, including cutting tax rates and allowing for construction of more energy infrastructure, will make the US an even stronger magnet for capital from abroad.  The protectionist talk coming from Washington, along with the new tariffs on steel and aluminum, is worrisome. But as we wrote in our Monday Morning Outlook, the tariffs just announced only partially offset the benefits of the tax cuts already passed.  We will continue to watch trade policy as it develops, but don't see any reason yet to sound alarm bells. In other news today, nonfarm productivity was revised slightly higher from a preliminary reading of -0.1% at an annual rate to an unchanged reading in Q4.  Productivity is up 1.1% versus a year ago.  We expect productivity to accelerate in 2018.  Companies have increased business investment, which should generate more output per hour.  Meanwhile, the tight labor market should encourage firms to find more efficient ways to produce. In employment news this morning, the ADP Employment index showed private payrolls increased 235,000 in February.  As a result, we're projecting that Friday's official report on nonfarm payrolls will show a gain of 225,000.

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