The Goldilocks Economy Is Rolling Along

All the data released this past week confirmed "Goldilocks Economy" is continuing.

The term, Goldilocks Economy, has not been used to describe the U.S. since it was first coined in March 1992.

The final U.S. growth rate for the third-quarter of 2016's gross domestic product was released and it was revised upward again.

The Bureau of Economic Analysis, a U.S. government agency, announced that the economy grew by 3.5%. Just weeks ago, the BEA had revised its expectations for third quarter growth from 2.9% to 3.1%. The final revision to 3.5% is a good surprise.

The red bars show the expected growth rate quarterly in 2017. That's based on an early-December survey of about 70 economists by The Wall Street Journal. Their consensus forecast was tweaked upward a tenth of 1%, to 2.4%, over the four quarters ahead. Although a tenth of 1% is not much, it is in the right direction.

The other component of GDP accounting for growth is business investment, the chart in the upper right quadrant. A long inventory correction ended and businesses started spending again to replenish inventory.

By far, the most important of the four components of GDP growth is consumer spending, which drives 69% of GDP growth. Last month, the spending spree slowed, but the slope in the red line shows the longer-term trend. The key to economic growth, consumer spending, has been on a 10% growth plane.

Keeping in mind that consumer activity represents 69% of the economy, November's personal income figures released Thursday show employee compensation is booming. Wages and benefits are up 3.6% year over year. But it's not what you earn that matters, it's what you take home after taxes.

What's left of personal income after taxes is your disposable personal income, which is shown in this chart.

Disposable personal income, in red, and spending, in black, have been in recovery for seven years.

The compound annual rate of growth in DPI for the 12 months ended November 31, 2016 is trailing the peak DPI of 5.3% achieved in the last economic expansion.

But it's not what you take home after taxes that matters, it's what you take home after taxes and after inflation.

After-inflation disposable personal income and spending, in the 12 months ended November 31, 2016, grew at an annually compounded rate of 2.3%.

Importantly, that growth rate is on a larger dollar amount of income.

Real purchasing power per person grew 1.9% over the 12 months ended November 31, 2016, which is better than during the 2002 to 2007 economic expansion.

Americans are lots better off than before The Great Recession. Income stagnation is a myth.

Consumer sentiment has returned to normal following its collapse in the financial crisis of 2008, according to The University of Michigan Survey Research Center's December latest release.

This chart also is useful in looking for signs of irrational exuberance. Often after stock market rallies, consumer sentiment booms because higher stock prices lift retirement accounts and people feel wealthier. And, after long periods of stock rallies, investors can begin to exhibit signs of irrational exuberance. In contrast to the stock market bubble of early 2000, the current consumer sentiment level is well within normal range.

However, since consumer sentiment booms after a stock market rally, it's obviously a lagging indicator.

An indicator designed to tell you what's ahead for the economy is the Conference Board's Leading Economic Index, which suggests the economy will continue expanding into the first half of 2017.

The LEI is comprised of 10 forward-looking indexes. While the Conference Board's economist cautioned that economic growth was "unlikely to considerably accelerate," there is no reason to think it is coming undone.

For months in advance of the last two recessions, the LEI has definitively rolled over and collapsed. So it is a good forward-looking indicator.

The Standard & Poor's 500 index gained 2.83 points, or 0.1 percent, to close the week at 2,263.79. America's largest public companies hit an all-time record high recently, and are trading at about 19 times its earnings per share over trailing 12-month earnings. While not overvalued by historical standards, stocks are fully valued.

The bull market is old by historical standards, and a drop in stock prices historically happens every year or two. However, investor ebullience recently is rooted in data like we saw this past week. Key economic benchmarks are showing none of the signs that normally precede a recession. The 90-month long economic expansion is far from the longest on record in post-War America, and it could continue for many months or years.

With fake news flourishing and stock prices hitting new highs, the Internet has made it possible to offer you an independent financial news channel not influenced by big media, Wall Street, or politics, a prudent analysis of news affecting your wealth over the long run. Please feel free to share our timely weekly reports with your family and friends.

This was written by a veteran financial journalist based on data compiled and analyzed by independent economist, Fritz Meyer. While these are sources we believe to be reliable, the information is not intended to be used by as financial advice without consulting a professional about your personal situation. Indices are unmanaged and not available for direct investment. Investments with higher return potential carry greater risk for loss. Past performance is not an indicator of your future results.