Readings on September’s economic output pointed to a bounce back after a disappointment in August. We see these as hopeful signs that the economy, which has been growing slowly but steadily, may be positioned for further gains in Q4 and as we head into the end of the year.

ISM Manufacturing

A drop in PMI in August renewed concern about growth in the manufacturing sector. The ISM Manufacturing Index slid below the 50 mark (diffusion index) to 49.4 in August. But come September, things looked appreciably brighter, as the index jumped 2.1 points to 51.5 percent.

Chart 1: ISM Manufacturing index readings show a rebound in September

ism-mfctg-index

ISM Non-Manufacturing

An even stronger rebound was seen in ISM Non-Manufacturing, the much larger service side of the economy. The big surprise here (Chart 2) was a September reading of 57.1, a gain of 5.7 percentage points over August and considerably higher than expectations.

Chart 2: ISM Non-Manufacturing gains 5.7 percentage points in September

ism-non-mftg

 

Outlook for Q3 GDP

These two reports, we believe, provide reasons to be hopeful about the pace of economic growth, particularly on the consumer side. Later this month, we will get the first look at GDP for Q3, with the advance reading scheduled to be released on Oct. 28. Currently, the expectation is that Q3 GDP will come in right around 2.5%, compared to the final Q2 GDP reading of 1.4%. If the Q3 GDP report comes in at least in line, and we see follow through in the ISM gauges in October, this could be a good springboard for continued growth in Q4.

Growth Picture and the Fed

Soft numbers in August helped keep the Fed on hold in August. Barring some “economic upset,” more stable economic numbers will pave the way to a December rate hike. Observers see it as becoming harder for Fed Chair Janet Yellen to hold off dissenters within the FOMC. U.S. Treasury 10-Year yields are hitting levels not seen in many months (see Chart 3). What this indicates, in our view, is that the market believes the Fed will raise rates by the end of the year.

Chart 3: U.S. Treasury 10-Year yields rise steadily

treasury-10-year

Finger on the Pulse – in Real Time

Key output numbers and other data points, we believe, underscore to the importance of keeping a “finger on the pulse” of the economy. At Astor, we accomplish this through in-depth economic analysis and our proprietary Astor Economic Index® (AEI), which provides us with insights into the current trend. Using these economic snapshots, we allocate assets accordingly, based on whether the economy is expanding or contracting, and to what degree. As John Eckstein, our Chief Investment Officer, said recently, we don’t react to “every little wiggle” in the numbers. Rather, we keep a close watch on the economic data and what they indicate about the prevailing trend, in real time, as we pursue our goal of generating smoother, solid returns and mitigating risk over time.

Bryan Novak is Senior Managing Director, Portfolio Manager and A Cleveland fan stuck in Chicago for the World Series.

 

 

 

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.

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