Our proprietary Astor Economic Index® is still showing good growth in the US economy relative to its recent average, though the index dropped significantly last month, partly in response to weaker purchasing managers surveys. The fading fiscal stimulus from last year’s tax cut may be partially responsible for a downshift (though not a reversal) in growth. It may also be the case that some of the trade tensions are feeding through to the broader economy, though hiring remains robust.
Establishments added more than expected new jobs in the last month of 2018 showing that the real economy continues to be strong. This number more than made up for a few months when the rate of new hiring was closer to what we would normally expect at this late stage of the business cycle. In addition, wage growth is at its highest level of the economy. The chart below shows two different measures of wages, both looking strong.
The purchasing managers index for manufacturers started the new year on a sour note falling by the most in two years. It’s worth remembering that there was a similar large, ongoing decline in the manufacturing index in the second half of 2016 associated with the dramatic retrenchment in the energy sector which did not lead to a broad economic slowdown. The non-manufacturing index dropped as well, though not by as much.
Both the manufacturing and non-manufacturing surveys are conducted the same way – they measure the number of firms who say business is getting better vs. the number saying it’s getting worse. If the index is at 50 about the same number are saying conditions are increasing as decreasing. These surveys are not measures of actual output but they have been strongly correlated to output in the past.
The Fed raised short term interest rates in their December meeting. Rate moves in 2018 were fairly well telegraphed. Recall that the Fed has decided to hold a press conference at every meeting (roughly every six weeks) as opposed to the quarterly schedule which Ben Bernanke initiated. This will give the central bank an opportunity to fine-tune its message to the market, though it may be equally likely to give the market twice as many chances to misunderstand the Fed’s message!
What can we expect from the Fed in 2019? Overall the Fed has a chance to stand pat, and the speeches which have been made by FOMC members since the market turmoil have put slightly more emphasis on a possible pause in the hiking cycle. The Fed, as always, is trying to resolve the tension of its duel mandate: maximum employment in the context of price stability. Both those goals look to be in reach today: unemployment is quite low, but core inflation is slightly below the Fed’s target. In addition, the Fed funds rate has entered the range many think is neutral. In a speech at the American Economic Association conference Powell said: “With the muted inflation readings that we’ve seen, we will be patient as we watch to see how the economy evolves.”
I think it will be vital to see exactly how the data progress. If employment gains moderate and inflation remains quiet, the Fed may well pause in the presence of macroeconomic uncertainty. Should firms go on a renewed hiring binge and discover more pricing power, the Fed may choose to slow the economy further. But at this point I think the Fed does not have a plan and will be reacting to events. The usual interpretation of the Fed funds futures market also shows no action expected from the Fed over the next quarter, after correctly forecasting hikes all of last year.
For still more charts you can see our weekly collection of economic charts or download the Astor Economic Research App from the App Store. As always, we at Astor will be monitoring the economy closely to inform our investment decisions.
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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. All conclusions are those of Astor and are subject to change.