There has been a lot of talk about the economic impact of the recent tax reform. All of it, including the analyses that include lots of fancy math, amounts to nothing more than speculation, usually informed by little more than the political bias of the analyst. I am guilty of that too to some degree but I don’t let my personal political views dictate how I view the economy for purposes of investing. I am, to put it mildly, a skeptic. I don’t believe half of what I hear from politicians or economists – sadly not that much different these days – and even less of what I hear from Wall Street.
I rely on the markets – the wisdom of crowds – to understand the economy. While almost everyone on Wall Street and Main Street are trying to read the economy in the hope they can predict the future of the markets, I concentrate on trying to figure out what the markets are saying about the present economy. I eschew the impossible for the merely difficult. When people ask me about our outlook I’m often at a loss for words because we really don’t have one. We take things as they come and adjust as necessary. Contrary to popular belief, it is not necessary to predict the future accurately – an impossible task – to be a good investor. But you do need to see the present clearly. And our internal biases – political and other – make that difficult but not impossible.
In these twice-monthly reports, I do review the recently released economic data but mostly to confirm what we see in our market-based indicators. If there are divergences we will generally rely on the market data rather than the oft-revised individual releases of economic data. What do I see today? Believe it or not, there has been little change in the market’s view of the economy. Right-handed economists claim tax reform will accelerate growth now while the left-handed ones say the opposite. The market is unbiased – ambidextrous one might say – and its verdict is that neither is right. So far, all we’ve seen is an upturn that has taken us to the high end of the range we’ve been in since mid-2013. Tax reform may indeed eventually push us out of that new normal rut we’ve been in but it hasn’t yet.
Economic Reports
Economic Growth & Investment
While a lot of the incoming economic data is just so much noise, when you add it all up you can get some useful information. One indicator that does that is the Chicago Fed National Activity Index. It is a weighted average of 85 existing monthly indicators of national economic activity. A value of zero means the economy is growing at trend while a positive value indicates growth above trend and a negative value the opposite. The January read was 0.12, down slightly from a December read of 0.14. December was originally reported as 0.27 but was revised lower. If you aggregate a bunch of individual data points that are subject to revision then the aggregation too will be subject to revision. That’s why you can’t take this for gospel and use it as a standalone indicator. What I find interesting about the CFNAI right now is that at 0.12 it says the economy is growing just slightly above trend. In other words it isn’t confirming the narrative of the economic bulls – or the bears.
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