A Mixed Picture – Economic Snapshots

The U.S. economic picture is mixed, with some signs of slowing, along with areas of strength. Let’s take a look at the current snapshots to gain a more comprehensive view.

To learn more about The Economic Picture, watch this video

ISM Manufacturing

In our opinion, the most worrying data have been ISM Manufacturing Index readings. ISM Manufacturing declined to 49.4 in August from 52.6 in July, which points to continued weakness in a sector that has been a major drag on economic growth. However, the manufacturing survey has shown improvement since February 2016. Therefore, we’ll need to see more than one month’s reading in order to detect a change in trend.

us-chart1Consumer Spending

A more positive story is consumer spending, which remains robust and is the strongest contributor to GDP. Much of the rise in the preliminary Q2 2016 GDP came from 4.2% growth in consumption.

us-chart2Wage Growth and the Employment Picture

Sustaining that strength in consumer spending depends largely on wage growth, which remains sluggish. However, the Atlanta Fed’s Wage Growth survey shows the pace of wage growth is close to 3.6% year-on-year and accelerating rapidly, which is not far from the previous cyclical peak of 4%.

us-chart3

 

Another slowing, but still robust indicator has been Non-Farm Payrolls, as labor market data show continued strength. Jobless claims remain relatively low and have been consistent with a still-strong trend in employment growth. Payrolls for August were below consensus, but our indicators, we believe, still point to strengths.

The unemployment rate has been holding at 4.9%, and the U-6 underemployment rate remained at 9.7%.  Within August’s private payrolls, manufacturing, construction and mining lagged whereas retail and financials showed the most growth.

Productivity

Weak productivity growth, at near 0, remains the factor that is holding down GDP growth, despite labor market strength. With disappointing productivity growth for several years, we believe a rise in investment as a share of GDP would be necessary in order to see any future productivity gains.

us-chart7

 

Fed Q3 “Now-Casts”

As the third quarter comes to a close, it’s important to note that the “now-casts” produced by the Federal Reserve Banks of Atlanta and New York continue to show stronger growth for Q3 than the first half of the year. The Atlanta Fed is current forecasting a 3.7% seasonally adjusted annual rate of return (SAAR) for the third quarter. The New York Fed forecast for Q3 is 2.6%. These forecasts are significantly higher than their own respective final estimates for Q2, and also higher than the Bureau of Economic Analysis’ preliminary estimate for Q2 of 1.2%. (The third estimate for Q2 GDP will be released on Thursday).

Overall, the consensus of economists’ estimates for U.S. economic growth looks stable, but have decreased to 1.54% for 2016 and 2.25% for 2017.

 

The Astor Economic Index

Meanwhile, the Astor Economic Index® (AEI), the cornerstone of our fundamentally-driven, macroeconomic-based approach to asset allocation, shows the economy is growing—but at a comparatively slow pace. As always, we continue to keep our finger on the pulse of the economy to determine the current trend as we invest accordingly.

 

 

 

All information contained herein is for informational purposes only. This is not a solicitation to offer investment advice or services in any state where to do so would be unlawful. Analysis and research are provided for informational purposes only, not for trading or investing purposes. All opinions expressed are as of the date of publication and subject to change. Astor and its affiliates are not liable for the accuracy, usefulness or availability of any such information or liable for any trading or investing based on such information.

 

 The Astor Economic Index® is a proprietary index created by Astor Investment Management LLC. It represents an aggregation of various economic data points: including output and employment indicators. The Astor Economic Index® is designed to track the varying levels of growth within the U.S. economy by analyzing current trends against historical data. The Astor Economic Index® is not an investable product. When investing, there are multiple factors to consider. The Astor Economic Index® should not be used as the sole determining factor for your investment decisions. The Index is based on retroactive data points and may be subject to hindsight bias. There is no guarantee the Index will produce the same results in the future. The Astor Economic Index® is a tool created and used by Astor. All conclusions are those of Astor and are subject to change.

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Eyes on the Fed: No Urgency for a Rate Rise

All eyes are on the Federal Reserve this week and the often-discussed question: Will they or won’t they raise rates? Here at Astor, our prediction of what we believe the Fed will do (spoiler alert: we don’t expect a rate rise in September) comes down to two important data points: employment and inflation.

To learn more about The Fed, watch this video

These data points relate directly to the mandate of the Federal Open Market Committee (FOMC) as stated in The Federal Reserve Act, particularly to promote the goals of maximum employment and stable prices. In the chart below, the blue horizontal band represents the inflation target (roughly 2%) as set by the FOMC, while the pink vertical band shows the unemployment rate (roughly 5%).

fed

 

We can see that as of August 2016 (far left), the Fed has made progress in fulfilling its mandates. The unemployment rate has been cut in half, from the high of 10% in October 2009 (in January 2010 it was still a lofty 9.8%) to 4.9% in August 2016. Inflation, meanwhile, has been not been above the Fed’s target for more than a month or two.

Looking ahead, the question that we believe is on the collective mind of the Fed is what will happen a year or two out, particularly with unemployment being so low. Will a relatively tight labor market lead to higher wages and, in turn, force inflation higher, above the Fed’s target? Recent speeches and comments made by central bankers seems to us an FOMC that is divided on this issue.

The “hawks” have been making their case for raising interest rates; in their view, with unemployment being so low, inflation looks certain to increase. For instance, earlier this month, Federal Reserve Bank of Boston President Eric Rosengren said “a reasonable case can be made” for tightening interest rates to avoid overheating the economy.

On the other hand, the “doves,” who favor keeping interest rates steady, see additional slack in the labor market; with economic growth slowing, they don’t believe higher rates are necessary. Fed Governor Lael Brainard, for example, said in a recent speech that leaving rates unchanged since December 2015 “has served us well in recent months, helping to support continued gains in employment and progress on inflation.”

Here at Astor, our analysis of the Fed’s comments is that the FOMC will refrain from raising rates in September. (We’re not alone in that view: As the Wall Street Journal reported, the widespread expectation in the market is for rates to stay steady.) Come December, though—a full year after the last rate hike, and with another quarter of economic data to digest—we believe the Fed will take the next step and raise rates.

All information contained herein is for informational purposes only. This is not a solicitation to offer investment advice or services in any state where to do so would be unlawful. Analysis and research are provided for informational purposes only, not for trading or investing purposes. All opinions expressed are as of the date of publication and subject to change. Astor and its affiliates are not liable for the accuracy, usefulness or availability of any such information or liable for any trading or investing based on such information.

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September Quick Read on the US Economy

I interpreted last month’s economic releases as somewhat weaker.  Forward looking surveys were concerning though consumer spending in the US, the most important single component of GDP, seems to be stable.

Our latest reading for the Astor Economic Index® (“AEI”) is lower over the month, though I see no discernible trend over the last twelve months.  I still see the US as currently growing above average. The AEI is a proprietary index that evaluates selected employment and output trends in an effort to gauge the current pace of US economic growth. 

aei

 

The nowcasts produced by the Federal Reserve banks of Atlanta and New York are both still showing stronger growth in the third quarter than the first half of the year.  The Atlanta Fed is currently estimating a gaudy 3.3% SAAR and the New York Fed is currently forecasting 2.8%.  These are both significantly stronger than their final Q2 estimates and represent a significant increase from the poor Q2 release.  Both have been updated since the employment report.

Another month of solid job growth means that the we are adding more jobs than needed to absorb the natural increase in the labor force.  We can also see strength in the labor force from some less-often discussed numbers such as the quit-rate which has increased 9% over the last 12 months and the number of job offers, which is at a high for the recovery.  These series can be seen in the JOLTS report put out by the Bureau of Labor Statistics.  On the other hand, there are still signs of higher levels of labor market slack than we would normally expect late in the cycle. The chart below shows unemployment (the headline number) and underemployment.   While unemployment is fairly low and roughly at the level targeted by the FOMC, underemployment shows significant additional slack in the labor market.

unemp-rate

 

The latest purchasing managers surveys from the Institute for Supply Management (ISM) were disappointing. 

pmi

The manufacturing index gave up much of its gains for the year.  I hope this is not a harbinger of renewed manufacturing weakness such as we saw in the first quarter of this year.  Surprisingly, non-manufacturing survey was also quite weak in August and it’s at the lowest level of the recovery.  A diffusion index (such as these) is a bit challenging to interpret exactly and a glance at the chart will show many months spike up or down without signaling sustained shifts in growth.  Digging into the details of the reports we see that much of this month’s weakness was due to drops in new orders and non-manufacturing exports.  This will bear close watching in coming months.

The hawks at the Fed seem to be getting louder, and one month’s survey data is, in my opinion, unlikely to deter them.  See this speech by San Francisco Fed President John Williams who makes the argument that 1) because the unemployment rate is low the Fed will need to raise soon and 2) better to raise sooner by less rather than later my more.  I see both those assertions as questionable (see Tim Duy for an argument about why it might make sense to let the unemployment rate drift lower) but I think a hike is coming in September or December assuming growth stays on its current course. For what it’s worth, my interpretation of Fed Funds futures prices shows that the market places a low possibility of a September hike but a likely hood of December hike.

 Overall, the economy continues its pattern of positive but modest growth.  The ISM numbers make me a bit worried about the fall.  As always I will be monitoring developments in the US economy carefully in the weeks ahead.  Clients are welcome to get in touch for a detailed conversation.

 The Astor Economic Index® is a proprietary index created by Astor Investment Management LLC. It represents an aggregation of various economic data points: including output and employment indicators. The Astor Economic Index® is designed to track the varying levels of growth within the U.S. economy by analyzing current trends against historical data. The Astor Economic Index® is not an investable product. When investing, there are multiple factors to consider. The Astor Economic Index® should not be used as the sole determining factor for your investment decisions. The Index is based on retroactive data points and may be subject to hindsight bias. There is no guarantee the Index will produce the same results in the future. The Astor Economic Index® is a tool created and used by Astor. All conclusions are those of Astor and are subject to change.

 All information contained herein is for informational purposes only. This is not a solicitation to offer investment advice or services in any state where to do so would be unlawful. Analysis and research are provided for informational purposes only, not for trading or investing purposes. All opinions expressed are as of the date of publication and subject to change. Astor and its affiliates are not liable for the accuracy, usefulness or availability of any such information or liable for any trading or investing based on such information.

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