Our proprietary Astor Economic Index® is still showing strong growth in the US economy. The index is currently near the top of the fairly narrow range it has been in the last twelve months.
The labor market continues to add more jobs than is required to keep up with the natural growth of population and while the unemployment rate ticked up slightly in June, this is hidden good news in that it means that Americans previously on the sidelines have been drawn back into the labor market. This can be seen in the chart below which graphs the employment / population ratio: the percentage of Americans in the labor force, which is at a high-water mark for the current recovery.
We can finally see the Federal Reserve close to its inflation target. The chart below shows the Consumer Price Index (which garners the headlines) as well as the Personal Consumption Expenditures Price Index or PCE (which the Fed chooses to target). The Fed says they have a symmetric target around 2% in the PCE inflation rate. If that is the case, a look at the prolonged undershoot of the last several years means they would be happy to accommodate a core PCE of 2-2.5% for several years in the name of spreading American prosperity more widely. This is to say that the recent increases in inflation may not make the Fed accelerate its plan to gradually reduce the stimulus being supplied to the economy to zero and after that, perhaps to raise rates to a point where rates restrain economic growth.
The international environment continues to worry observers about a prolonged, unnecessary reduction in world trade. How bad would a trade war be? There is too much uncertainty over what specific tariffs and other trade restrictions would be implemented by us and our partners to have a definitive conclusion. Uncertainty aside, the consensus of the economics profession is that economic growth will slow and inflation will rise in proportion with the degree of trade constriction. The aggregate slowdown should be manageable but as we saw in the Global Financial Crisis, the composition of growth matters. About 12% of the US economy is devoted to exports and a severe contraction in that significant chunk of the US economy would create major challenges for the economy as a whole.
Ironically, many economists also believe that the increased budget deficits coming from lower tax rates and higher rates of spending passed by the current government will lead to higher trade deficits despite the stated goal of our trade policies.
While we have abundant trade worries today, the reality has yet to come to pass or to be seen in the economy. Perhaps any uncertainty related to the slowdown is being offset by the substantial fiscal stimulus passed last year. Today, a trade war is still only a possibility and there is plenty of time for all sides to declare victory and go home without much damage done.
As always, we at Astor will be monitoring the economy closely to inform our investment decisions. To see more of our weekly collection of economic charts, visit www.astorim.com/charts.
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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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