In June, our proprietary Astor Economic Index has continued the slide it began in late 2018. The AEI now corresponds to a level of activity slightly above average growth for the U.S. economy. Although the deterioration in our reading of the current US macroeconomic state is troublesome, it is worth noting that average growth is just that – namely, economic output that corresponds roughly with the historical mean.
Jobs and Manufacturing Show Nascent Signs of Weakness
Both the Nonfarm Payroll report and ISM Manufacturing PMI surprised to the downside this month. In each case, data continued recent trends suggesting a slowing in the pace of growth, rather than an outright contraction. The ISM printed at 52.1 in May, down from 56.6 in the beginning of this year, raising the possibility that tariffs have begun to bite.
Nonfarm Payrolls shows 75,000 new jobs were added in May, which was lower than estimates. Additionally, prior months were revised downwards. With that said, NFP tends to be quite noisy: a three-month average implies that job creation is around the level required to keep employment levels static. The weak number could imply a slowing of the US economy, or alternatively indicate that the U.S. has begun to reach full employment. In the later case, we would expect some firming of wage numbers in the coming months.
Clearer Case for FOMC rate cuts
Softer economic data, tepid inflation, and the continued slowdown in global growth have encouraged market participants’ expectation of rate cuts by the Federal Reserve later this year. The Fed Fund Futures implied probability of a rate cut by September stands at 99.1%. Call me a skeptic, however. Although the ongoing trade has certainly introduced some headwinds, the U.S. economy remains on solid, if not stellar footing. A further deterioration in macroeconomic fundamentals and continued weakness in inflation data would be required to make a stronger case for rate cuts in July or (more plausibly) in September. If current equity prices reflect expectations for a cut, risk-assets may deteriorate if the Fed is not moved to action this summer.
Overall, the macroeconomic outlook remains sound in the U.S., but recent trends in some fundamentals will bear close watching in the future.
For still more charts you can see our 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.
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.