We continue to be impressed by the incoming economic data, which is consistent with a broad-based economic recovery.
The major beneficiaries of this recovery are the industries that were hit hardest by the pandemic. We continue to see earnings surprises and upward earnings revisions for these industries.
Business Surveys Reach Record Levels
The Markit PMIs (timely business surveys) for both services and manufacturing reached new record highs in April. These surveys indicate the U.S. economy is enjoying a strong start to the second quarter, as loosening virus restrictions, an impressive
vaccine roll-out, massive stimulus, reopening businesses, and a brighter outlook all helped boost demand.
The Services PMI rose to the highest level since data started in October 2009, and more than double the value from a year ago when the economy was in lockdown. New business jumped at a record pace, helped by a solid rise in export orders. This led to unfilled orders accumulating at its quickest rate in seven months, which in turn led to more hiring, to ease some of the operating capacity pressures.
The Manufacturing PMI also rose to a record high, driven by strong growth in new orders. Output also rose sharply, although producers noted that they were constrained by raw material shortages and supplier delivery delays. Order backlogs also rose, prodding firms to increase their pace of hiring.
The surveys also showed that business optimism about the 12-month growth outlook remained high, on expectations of an end to the pandemic and continued strong client demand. We are also seeing robust manufacturing indicators in Europe and Japan. While global service indicators continue to face pandemic headwinds, we expect the service sector to show significant improvement as vaccinations accelerate and social distancing measures are lifted in the coming months.
Leading Indicator Consistent With Strong Growth Ahead
The Conference Board’s Leading Economic Index (LEI) for March jumped the most in seven months. All 10 LEI components made positive contributions, led by fewer initial jobless claims and strong ISM new orders. The significant gains in the LEI over the last six months are consistent with above-trend economic growth and an improving outlook.
Economic Recovery Also Broadening Across States
The Philly Fed State Coincident Indexes increased in 49 states in March and decreased in only one. These indexes show that not only has the recovery broadened across states last month, but activity has strengthened across all states over the past six months.
Housing Remains Strong
Following a sharp weather-related drop in February, new home sales rebounded 20.7% in March to a 1.021 million
unit rate, the highest level since August 2006. On a y/y basis, new home sales surged 66.8%, the most since January 1992.
While existing home sales fell 3.7% to a 6.0 million unit annual rate, they are still up 12.3% from a year ago. Tight housing inventory remains the major constraint to higher sales. At 1.07 million units, inventory was 28.2% lower than a year ago. Months’ available supply edged up marginally to 2.1, barely off its record low of 1.9 from a couple of months ago. On average, homes sold in 18 days, a record short time. This shows immense buyer interest, driven by the improvement in labor market conditions and the broader economic recovery, and despite the recent backup in mortgage rates. We remain positive on the housing cycle.
Strong Economic Readings Translating to Healthy Profits
Unsurprisingly, the improvement in economic data has coincided with solid earnings results, particularly among the industries hit hardest by the pandemic. With just over one-quarter of the S&P 500 having reported, first-quarter earnings-per-share is now expected to grow 30%, driven by major earnings surprises. We are seeing the most positive earnings surprises in deep cyclical sectors and Financials. We remain favorable on Financials, Industrials, Materials, and Energy which are all major beneficiaries of improving economic activity.
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