The latest numbers on the US economy were positive. As a promising sign for the future, the global manufacturing environment may be showing signs of stabilizing – coincident with a stabilizing of commodity and international equities prices. I still believe the Fed will continue to hold and will not raise rates in April.
Our Astor Economic Index® (“AEI”) shows growth somewhat above the recent average and 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.
Source: Astor calculations
The employment report (nonfarm payrolls) for March was broadly positive. The number of new jobs was again quite close to its two-year average. We can see no sign of broad based weakness in the economy within the payroll numbers. The tick up in the unemployment number was welcome as it represents more people looking for work who were previously on the sidelines of the labor market. The prime age employment-population ratio has improved markedly in the last quarter, though it is still lower than the previous expansion.
Despite this good news on the employment front, the preliminary release for GDP for the first quarter of 2016 – due at the end of April – is likely to be weak. The chart below shows the Atlanta Fed’s current estimate of first quarter GDP calculated via their GDP Now methodology. The weakness – if it materializes in the final numbers – can partially be put down to a higher trade deficit and an inventory drawdown both of which can be transitory. Weaker consumer expenditures is more concerning.
It is also worth noting the BEA is considering a secondary seasonal adjustment to try and account for the pattern of unusually weak first quarters which economic observers have been subjected to over the last few years.
The Atlanta Fed’s GDP Now
For several months we have been highlighting the weak international manufacturing environment. This weakness is most easily seen in the chart below of global manufacturing purchasing managers indexes. which have shown sharp deterioration over the last year. The latest numbers show a bit of an improvement so perhaps we can be hopeful, though careful readers will recall similar optimism in February’s read. If this bounce continues, it is possible that some of the external weakness in the US will begin to be reversed.
Source: Markit, NAPM, Bloomberg, Astor Calculations
The Federal Reserve chose not to raise rates in March and statements since lead me to believe the hawks on the committee have become somewhat convinced the prospect of a weaker economy poses a greater danger than the specter of run-away inflation. The official stance is the FOMC wants to be convinced inflation is heading back to its target – somewhat above current levels. I would expect the reversal of recent trends in the dollar and crude oil prices will both tend to move inflation higher in coming months. The latest data we have shows the Fed still sees an additional two to three hikes in 2016, while the market predicts about one.
In short: The evidence today suggests to me the US continues another month of positive if somewhat tepid growth.
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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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