July Quick Read on the US Economy

The economic news improved somewhat from my last update.  The labor market looks more solid than it did a month ago and there are some signs the manufacturing sector may have found it footing.  I believe the Brexit vote will likely have only a modest direct impact on the US, but will make all observers less confident of their predictions for global growth.  This summer, the fed may try to convince the market that it will hike again in September, but my guess is that the December will be the earliest.

 

Our latest reading for the Astor Economic Index® (“AEI”) is higher than last month, and at near the highest level posted this year.  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.

Source: Astor calculations

The labor market has been doing its noisy best to upset the stomachs of economists.  June’s payroll number showed a solid recovery from the weak numbers posted for April and May.  That being said, smoothing the series somewhat by looking at year over year percentage change shows that the US economy is still adding jobs but at a somewhat slower pace than has prevailed over the last few years.

The nowcasts produced by the Federal Reserve banks of Atlanta and New York are both still showing stronger growth in the second quarter than the first.  The Atlanta Fed is currently estimating 2.3 SAAR and the New York Fed 2.1.  These are both slightly weaker than last month’s estimate.  Both have been updated since the employment report.

 

The biggest economic surprise of the year has been the vote for the UK to leave the European Union.  At Astor, we were pleased to provide rapid reaction to this event on our blog on the morning and afternoon of the vote.  I think our analysis holds up well: see CEO Rob Stein’s take here and mine here.   As some of the dust has settled, short term implications for the UK economy are seen as dramatic by many economists.  For example, the panel of economists surveyed by Consensus Economics is now forecasting 1.1% growth in 2017, down from a 2.1% forecast last month.  Reductions for growth in the Eurozone are smaller.  Consensus Economics now forecasts 1.4% in 2017 down from 1.6%.  These same economists are not currently seeing significant direct effects on the US or the rest of the world.  The swift resolution of the UK leadership contest (with a new Prime Minister this week as opposed to the September time table originally announced) may offer grounds for optimism that a deal may cut short the period of uncertainty.

 

I see Brexit uncertainly leading to reduced investment by both firms and households as the primary channel affecting UK GDP.  To the to the extent that the uncertainly will have sustained spillovers into the financial markets it could have indirect effects on the US.  For example, the dollar initially rallied after the vote, but is now about the level that obtained in early June.  Should the dollar appreciate against our trading partners, it would be expected to make exporting more difficult.  In my opinion, the largest effect, however, seems to be in government bond yields.  US ten year yields have moved down 25 basis points to a yield of around 1.50% as this note is being written.  While, some of this may be safe haven demand that one can hope will be reversed as a path forward emerges, there are few of the other typical signs of investor fear.  Investors willing to take 1.5% for 10 years may be foreseeing long spell of a worrying lack of attractive opportunities for investment in the US and abroad.

 

When last we heard from the fed, their rate-raising plans were put on hold by the poor payroll numbers in April and May.  Does the decent report for June portend another hiking scare?  I think it is too soon to tell.  My interpretation of their speeches is that for the fed to raise rates they need to be convinced that the labor market is at full employment and that inflation will return to target in the medium term.  The last report has some points for both sides.  If the decision was finely balanced before, then in my opinion the Brexit vote strengthened the doves’ position.  Neither inflation nor the labor market are likely to see a boost because of it, and I imagine the decline in yields has the fed’s attention.  My guess is that a few hawks will try to make the case for a hike over the summer but that the fed will not hike before December.  For what it’s worth, the most common interpretation of rates implied by fed fund futures market sees only a small chance of a hike before the end of the year, as opposed to the situation in January when more than one additional hike was priced in.  A sustained return to the relatively robust labor market we saw over 2014-2015 would increase the likelihood of a hike.

 

Overall, I am relieved the labor market seems to have bounced back from a weak April and May, but I will feel better about the economy if we see this strength confirmed over the next few months.

 

 

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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March Quick Read on the US Economy

In my opinion, the latest numbers on the US economy were positive last month. After plummeting for the first half of February, stock markets became markedly more positive over the second half. International equity prices seem to have regained their footing and oil prices are well off the lows of the year as well. I still see the global growth environment as tepid: with the US being the main bright spot. Despite the international headwinds, I expect the Fed to begin to signal it will continue to tighten according to plan.

Domestic highlights in February

Our Astor Economic Index® (“AEI”) shows growth somewhat above the recent average and slightly stronger than last month. 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.

I saw the employment report (nonfarm payrolls) for February as broadly positive. The number of new jobs was almost exactly at its two year average. I see no sign of broad based weakness in the economy when viewing the payroll numbers. Readers who want to burnish the negative case may have to dive into the weekly aggregate payroll. This number takes the number of employees and multiplies by the hours per week and again by dollars per hour. The result is something like a weekly wage bill and it posted a rare down month in February as hourly earnings and hours worked both posted modest declines.

In short: I think the pessimism in the first two months of the year were driven by fearful projections rather than data and that current views of the state of US economy are more realistic.

International environment

Last month, I was hoping for signs of strength in the world manufacturing cycle. It seems as if my hopes will have to wait at least until spring. While the Institute for Supply Management’s Manufacturing Index for the US showed a modest (but welcome!) bounce for the month, the picture in the rest of the world was not so rosy. The chart below weighs PMIs in roughly the G-20 countries, each one weighed by their GDP. This measure is looking for new low since 2012.

 

world.pmis.2016-03-04.png

Source: Institute for Supply Management, Markit, Astor calculations

The Fed

I believe the next red-letter day for the market should be FOMC Chair Yellen’s post meeting press conference on March 16th. Few expect the Fed to raise rates but many will be placing bets on the nature of the committee’s communications. Will the FOMC be hawkish or dovish? The Fed has repeatedly said they are data dependent and not tied to the calendar. However, as University of Oregon Economist Tim Duy has pointed out: we will need some clarity on which data they are dependent on.

In my view, the case for promising to raise rates again soon is that continued strength in the economy will move unemployment below the natural rate by a fair amount and perhaps for an extended period. In the view of Vice Chair Stanley Fischer for example, such labor market strength would risk setting off enough of an inflationary process that even larger rate hikes would be necessary to contain it.

However, I believe there are several complicating factors to give the Hawks a pause. First, is the tightening of financial conditions reflected in higher rates for corporate borrowers as well as the volatility and general decline of equity prices.  Second, inflation expectations, while hard to measure, may be declining. Inflation expectations derived from market prices are substantially lower than they were a year ago though survey-based expectations may have stabilized.  The chart below shows five year forward forecasts of CPI from surveys an derived from market prices.

infl.png

Source: Bloomberg, Federal Reserve bank of Philadelphia

My prediction is the Fed will raise not rates in either March or April and instead, focus on the tightening in the financial markets and weakness in inflation expectations in its released statement.  Therefore I am expecting the Fed to promise two or more hikes in 2016.   My preference (if I were a voter) would be for the Fed to make it clear that it is willing to be symmetrical around the 2% inflation target and would tolerate a year or two above the target as we have spent each of the last 8 years below it.

Conclusion

Overall, I am pleased to see continued growth in the US despite the tepid international environment. I expect the Fed to try to move back towards, but not fully achieve, its plan of four hikes this year.


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 investment return and principal value of an investment will fluctuate and an investor’s equity, when liquidated, may be worth more or less than the original cost.
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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January Quick Read on the US Economy

The US continues to post moderate growth, though pockets of weaknesses remain.  Global financial markets started the year trying to read the magic eight ball of the Chinese equity and currency markets – a recipe for emotional distress.  Overall, my judgement about the current expansion remains unchanged with slightly above-average growth.

The US economy

·         Our Astor Economic Index® (“AEI”) shows growth somewhat above the ten-year average and slightly better than last month.  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.

Source: Astor calculations

Source: Astor calculations

·         The most important and timely indicators for December 2015 were mixed.  On the positive side, payrolls were quite strong and above expectations.  The only quibble with last Friday’s report being recent signs of wage growth seem to have stalled.  I believe a sustained period of real wage gains will be necessary for a robust consumer sector and hence a strong economy.

·         On the bad news side, the weakness in the manufacturing sector as measured by the ISM Purchasing Managers Index continued.  Industrial production, as measured by the year-over-year change in the Fed’s industrial production index, turned negative for first time since the recession in last month’s release.  I tentatively started calling a manufacturing recession last month and I feel a bit stronger about that now.  The non-manufacturing PMI is still fairly strong and though it is off its recent highs, it is still about the average level in the current recovery.

Source: Federal Reserve, Astor calculations

Source: Federal Reserve, Astor calculations

·         While I still see the current (that is, for early 2016) state of growth  as above average, it is looking like the fourth quarter will see a weak GDP print.  The Atlanta Fed’s GDP Now project is currently forecasting growth below 1% (quarterly SAAR).

The Fed

·         The Fed finally began to raise rates with its December meeting.  2016’s market volatility, on its own, is unlikely to cause the Fed to reconsider its path unless it gets more extreme.  It is said central banks tighten according to plan and ease in reaction to events.  The consensus seems to be that the Fed’s plan is to tighten a quarter point at every other meeting or so for a while, as long as the economy continues to hold its present course.  Weak inflation prints, however, could give the FOMC pause.  With energy prices moving lower again this year it is hard to see early inflation prints being strong.  See Tim Duy’s dissection of the December minutes for more.

·         If the Fed does stay the course, the next big obsession for Fed watchers will be when they will begin to allow their QE investments to roll off.  The Fed currently reinvests coupon and principal payments on its portfolio in similar securities so as to maintain a level portfolio.  The first step to reducing the balance sheet will be to cease this reinvestment.  (For a dated but still, I think, correct description see my Cleaning Up After The Party Is Over).  Expect fevered commentary about the issue this summer if nothing else spices up the dreary lives of central bank observers.

The international environment

·         My reading of the global picture has not changed.  The fundamental fact of the global economy today is the weakness in China and the attendant disruption in the supply chains built up to feed its growth.  I believe we see this result in the broader commodity weakness as well as the manufacturing weakness discussed above.

·         There is a great deal written on the Chinese economy, not all of which increases understanding.  A few pieces I appreciated:

o    Noah Smith on why we might not have to fear the Chinese stock market

o    Martin Sandbu on what we should be afraid of (Chinese capital flows)

o    Paul Krugman on when China stumbles.

·         Note too that the US is not alone, the UK’s industrial production also recently turned negative year-over-year.  Globally, the GDP-weighted manufacturing sector PMI has been declining steadily for the last 18 months, though it is still above the lows seen in this measure in 2012.  Note too that those low levels were associated with a stagnation, not a decline, in the level of global industrial production.

Sources: Bloomberg, Markit, IMF, Astor calculations

Sources: Bloomberg, Markit, IMF, Astor calculations

·         In addition to the diffuse reduction in commodity demand, there is an energy specific supply shock.  One can imagine this an oily game of chicken among suppliers waiting to see who will take remove supply from the market first.

Conclusions

Overall, I see the US as currently in modest growth and perhaps we should be pleased the Economy has done as well as it has in a challenging external environment.

 

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 investment return and principal value of an investment will fluctuate and an investor’s equity, when liquidated, may be worth more or less than the original cost. 

 301161-350

 

December Economic Read

The US economy continues its pace of modest expansion. Though self-sustaining growth continues to be the most likely outcome, a few soft spots – mainly related to weak growth overseas – continue to worry. I expect the economy to adapt well to the beginning of a shallow and gradual rate hike cycle.

Our Astor Economic Index® shows growth somewhat above the ten year average, though it is lower than a month ago. The AEI is a proprietary index which evaluates selected employment and output trends to try and gauge the current pace of US economic growth.

Good news first. The broad economy continues to expand as can be seen in the steady pace of jobs growth. It may be a promising sign for the future that construction jobs continue to grow at a slightly faster rate than they have since the Great Recession. The housing sector has been weak in the recovery and improvement would be welcome.

The weakness in the manufacturing sector continues as demonstrated by a range of indicators. The latest survey from the ISM was below the line demarcating manufacturing expansion/contraction, though this level is consistent with a growing economy, not a broad recession. This is also reflected in the index of industrial production. The manufacturing sub-index has been weak all year, though not nearly as weak as the mining sub-index.

Source: Bloomberg, Bureau of Labor Statistics, Institute of Supply Management

Source: Bloomberg, Bureau of Labor Statistics, Institute of Supply Management

I see this weakness mainly as a consequence of the slower pace of growth in the Chinese economy leading to broad emerging economy weakness which, in turn, is directly reducing prices on commodities produced in the US as well as reducing overseas demand for US produced intermediate goods. As part of the financial markets reaction to this adjustment the dollar has rallied about 20% against a broad currency index over the last 18 months. The IMF estimates that the dollar movement alone has reduced US GDP growth (by reducing net exports) by about 1% in the last few years.

Will this manufacturing recession spread to the rest of the economy? I do not believe recessions can be forecasted at significant horizons, so I will not lay odds. My guess, however, is that it would take significant further deterioration in the global environment for this to happen. And whatever odds you place on them, it is also possible that the headwinds the US is facing in the external environment will begin to dissipate or at least stop deteriorating next year, a slightly optimistic vision.

The continued decent growth in the US in the face of some overseas challenges is one of the reasons why the Federal Reserve will begin raising rates shortly. They seem to be anticipating the attenuation or reversal of growth constraining factors and hope that by starting rate hikes sooner they will not need to raise them as much. Additionally, if we take the Fed at their word, they are worried about labor market slack being close to completely used up.

If I were on the FOMC I would vote against a hike as the Fed’s inflation target does not seem to be close to binding any time soon and because I would be hoping to decrease the numbers of involuntary part timers as well as try to move the labor participation rate back higher, though demography limits potential gains.

Be that as it may, the Fed is still likely to initiate a rate hike, followed by a stately pace of follow-up rate hikes. Given that the Fed has not begun to shrink its balance sheet (maintaining a substantial stimulus) and that fed funds may only be around 1% a year from now, few serious observers are anticipating that this will seriously hurt the economy.

Overall, I am still cautiously optimistic on the US economy, though less so than last month and I will be watching developments in the export sector closely.


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 investment return and principal value of an investment will fluctuate and an investor’s equity, when liquidated, may be worth more or less than the original cost.

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. 312151-336

November Economic Read

• Early indications are that October was another month of slow but positive growth in the U.S. and abroad. The monthly nonfarm payroll number for October was the strongest of the year, suggesting that weakness in August and September’s numbers was just noise. Emerging markets continue to be a small drag on the U.S. economy, but there are no signs of a crisis at this point. On the monetary policy view, the Fed continues to prepare the markets for tightening, perhaps at the December meeting.
• At 271,000 new jobs, the month-to-month change in nonfarm payrolls released in last Friday’s employment report was the strongest of the year. In addition, the year-over-year change in wages was as strong as it has been since the crisis, up 2.5% year-over-year. We can hope that wage gains hint at more of the economy’s gains accruing to average Americans to build a firmer foundation for a sustainable recovery. It is worth noting that as the expansion ages we can expect monthly employment gains to moderate and to see strength in the labor market represented as additional wage growth.
• On the international scene my view continues to be fairly strong growth in the developed world and faltering growth in the emerging world. Below, I plot the Purchasing Managers’ Indexes for the major international economies. For China (the epicenter of current concern) the PMIs stopped falling in October, though only time will tell if this level will be followed with renewed expansion or further deterioration. The economies most associated with exporting intermediate or raw goods to China (Australia, Taiwan, Hong Kong, Korea) continue to show contraction in the their PMIs. Indeed, these countries are seeing expectations of 2016 growth marked down. At the same time indexes ticked up in the Eurozone, the UK and Japan last month and a GDP-weighted average PMI increased in October.

International PMI heatmap

Source: Bloomberg, Markit, Astor calculations


• The Fed renewed its hold on investors’ attention last week with Chair Janet Yellen announcing the December meeting could mark the first raise in rates since 2006. Many of us are hopeful that whatever the other consequences, the first hike will at least mark the end of our long purgatory of waiting for the first hike. Focus should shift to the pace and ultimate extent of rate hikes. Given the uncertainty about the amount of slack in the labor market and inflation below target, I expect rate hikes to be much more gradual than in the 1999 or 2004 cycles. In addition, the FOMC members (who have consistently been too bearish in their rate forecasts since the crisis) currently see Fed Funds rate topping out at about 3.5%, well below previous cycles. Perhaps the tightening could be as modest as a two-year long move to a 2% Fed Funds rate
• Why is the Fed interested in rising rates? The FOMC seems to believe the labor market is close to full employment and that core inflation should move back to its 2% target in the next two years or so. Given the uncertain lags associated with monetary policy, the FOMC believes it is best to start to act now.
• Overall, I view the information released in the last month as supporting a slightly more optimistic take on U.S. growth.

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 investment return and principal value of an investment will fluctuate and an investor’s equity, when liquidated, may be worth more or less than the original cost. 311151-324

October Economic Read

• The most recent readings on the U.S. economy show a moderating pace of growth. Both points are worth emphasizing: the US is still growing but at a slower rate than a few months ago. We see support of this statement in the recent nonfarm payroll and ISM Manufacturing report releases. Even at the more subdued three-month average of 167,000 new jobs a month, we will still be net adding jobs above the number of new workers. Likewise, an ISM Manufacturing reading of 50.2 is below where we have been but still signals expansion (above 50). I believe the source of the slowdown is likely the sharp rise in the trade-weighted value of the dollar over the last several months and, to a lesser extent, weakness in the world economy.
• I see the weakness in the world economy as stemming mainly from the dislocation of global growth due to a lower level and a changing pattern of economic growth in China. It seems there is excess in the global supply structures that were built up to supply raw materials to facilitate the rapidly expanding Chinese infrastructure growth. Presently, it appears the Chinese government wants to shift growth to be more consumer oriented in addition to adapting to a more modest rate of economic growth.
• The chart below shows the year-over-year change in the volume of world trade as measured by the CPB. We can see world trade has been at somewhat lower levels since the global financial crisis and even bearing that fact in mind, the volume of world trade is at low though not crisis levels.

Source: CBP, NBER, Astor Calculations

Source: CBP, NBER, Astor Calculations

• This world trade number is quite thorough, but not as timely as one would like. The chart above is only updated through July. The next chart shows the GDP-weighed purchasing managers indexes of the 20 largest economies for the last few years. This measure looks to have been slowing over the last few months though it does not look like an emergency.

Source: Bloomberg, Markit, Astor calculations.

Source: Bloomberg, Markit, Astor calculations.

• The Federal Reserve refrained from tightening in September though they made a special point to say October 28 is a live meeting, that is saying one in which the FOMC may raise rates. We can be sure there will be a deluge of Halloween related headlines before the meeting. Should we be braced for something more serious? As far as the market is concerned, the FOMC may as well play cards this month as almost no one believes they will raise rates. This belief is because the committee said it is waiting for further labor market strength, but we will not get any additional labor market information before the meeting.
• The Fed is also looking for a conviction that inflation will be heading toward its 2% target in the medium term. How is that side of the Fed’s dual mandate going? The chart below shows three different five year ahead inflation forecasts: the blue and green lines are derived from market prices and the red line is from the Philadelphia Fed’s Survey of Professional Forecasters.

Source: Bloomberg, Federal Reserve Bank of Philadelphia

Source: Bloomberg, Federal Reserve Bank of Philadelphia

• The market based forecasts show marked deterioration this year while the survey has held steady the last few months, though somewhat lower than last year. Various Fed officials have said they are looking through the market measures of inflation somewhat, thinking they may be artificially depressed due to temporary factors. A policy maker with a strong bias toward hiking might be able to square that desire that with current inflation forecasts, but I think holding off would be more appropriate.
• Overall, this last month’s data has made us a bit more cautious on the economy, though we do see continued expansion in the U.S. as the most likely scenario.

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 investment return and principal value of an investment will fluctuate and an investor’s equity, when liquidated, may be worth more or less than the original cost. 310151-305

August employment day economic read

  • My view of the US economy is for continued modest expansion. Our proprietary Astor Economic Index was essentially unchanged for the month and still showing that the US is solidly in an expansion.
  • Today’s employment report was almost exactly as expected with 215 thousand net jobs added and a steady unemployment rate of 5.3%. These are the solid, gradual improvement in the economy we have seen since 2013. Nobody’s view of the state of the economy or the likelihood of rate hike should have changed with this report. Nevertheless, be prepared to dodge the think pieces on the Fed as September’s meeting approaches.
  • I see contradictory trends emerging in the broader world economy.       On the robust growth side of the ledger the rest of the developed world seems to be stabilizing at levels of positive, if unspectacular growth. We see this, for example, in the Eurozone PMI making new highs for the year. (see chart below)
Source: Bloomberg, Markit, Astor calculations

Source: Bloomberg, Markit, Astor calculations

  • On the negative growth side of the ledger the primary story is the apparent weakness in China. Chinese economic statistics are widely thought to be unreliable but what we can see makes me nervous. If we look at the purchasing managers indexes for China they are at or near multi year lows and showing flat or decreasing orders. We see the same thing in areas which are highly exposed to Chinese orders: Hong Kong, Taiwan, South Korea and Australia for example. Chinese weakness is also a possible explanation for broader weakness in commodity prices. Led by oil, which were one of the more dramatic market developments last month.
  • The rule of thumb used to be “when the US sneezes, the rest of the world catches a cold.”   How contagious is China today? One worrying sign is that the volume of world trade (as measured by CPB Netherlands Bureau for Economic Policy Analysis) is showing an unusual contraction, at least through the latest report for May. Most areas are seeing contractions in volumes of imports and exports and more severe drops in the value of imports and exports. (The drop the value of trade is magnified by lower commodity prices.) While widespread, the drops are most severe in emerging Asia. The chart below shows the CPB volume of trade index with US recessions highlighted in pink. It will be interesting to see the reaction of the US economy if this decline continues. As can be seen in the chart sustained downturns in world trade have been associate with the last two recessions, though obviously a recession in the US would be expected to decrease world trade so causality is murky.
Source: CPB Netherlands Bureau for Economic Policy Analysis, Astor calculations

Source: CPB Netherlands Bureau for Economic Policy Analysis, Astor calculations

  • Overall, I see decent US growth but some worrying overseas developments.