Our proprietary Astor Economic Index® is still showing above average growth in the US economy, though the index dropped significantly last month, partly in response to the payroll report.
I characterize US growth as being good – somewhat above average – but below the strong growth we saw in 2018. Note that part of this is an expected response to the fading impulse of the fiscal stimulus enacted a year ago and part may be a function of the aging recovery.
Mixed payroll data
The 20,000 headline gain in jobs in February was weak beyond a doubt. This is especially concerning in the context of the last few years where the strong labor market has been the US economies’ bright point. We can feel somewhat better that it follows January’s upwardly revised 311,000 jobs. The simple average is about 165,000 jobs or still slightly above the rate needed to accommodate new workers on a monthly basis. Also, January was somewhat warmer than normal and in February the Midwest was affected by the polar vortex and thus weather may have distorted both months.
The chart below shows the year over year percentage change in non-farm payrolls. We can see the drop off in the last number but also a fairly stable range over the last eight years.
Some of the secondary numbers in the report were strong – prime aged employment population and annual wage gains are both near the high of the recovery, and the number of people unemployed or marginally attached to the workforce is at its lows.
Overall, we can dismiss one weak payroll number as a fluke and say the US labor market continues to impress. Another number like February’s and we might begin to get concerned.
Is there consumer weakness?
We are still gathering data on the 4th quarter of last year but there was a widely reported drop in retail sales in December which was only partially reversed in January. One thing which stands out for me is that this odd retail air pocket coincides with Christmas. An economy with wage gains and full employment should be buying more than ever at Christmas. This blip seems to line up with the drop in consumer confidence I mentioned last month. The consumer confidence numbers got worse in the New Year though they staged a partial recovery along with the end of the government shutdown. The magnitude of the missing spending is too large to be just the families directly impacted. We will continue to keep a close eye on the consumer in the coming months
2019 is shaping up to be a year of overseas weakness. The European Central Bank conceded to the private sector’s opinion this week and dramatically cut their expectations for economic growth this year. Accordingly, they changed their forward guidance to defer any hike to 2020 at the earliest. With rates at zero already, there is not much the ECB could do, though wondering out loud about the wisdom of running government surpluses in times of economic weakness might be useful.
China needs no such reminders about fiscal policy. A slowdown from recent years growth pace is expected this year. This seems to be as much a domestic phenomenon of slowing consumer spending as a function of Chinese-US trade tensions. In response the government has penciled in tax cuts for the year and local governments are boosting infrastructure spending.
The chart below shows the manufacturing purchasing manager’s indexes for the worlds three most important economies the US, the Eurozone and China. While the US has moderated, both the Eurozone and China are below 50, that is more manufacturers reporting lower than higher activity last month.
Fed pause continues
While by all signs the US economy continues to grow at or slightly above potential, nothing in the recent news will have made the Federal Reserve question its decision to pause its tightening stance. With the economy seeming to slow compared to last year and inflation slightly below its target the Fed has ample opportunity to wait and see how the economy evolves. The most common interpretation of the Fed Funds futures curve shows that the Fed is not expected to raise rates again this cycle.
This year we should also hear more about how the Fed intends to adjust its operating procedures. The central bank will need plan for a world with permanently low interest rates and where the balance sheet is significantly larger than it was before the global financial crisis.
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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.