- We see a slightly weaker U.S. environment this month than we did last month, though we still see growth as being above the recent average. The most notable change was in the ISM Purchasing manager’s survey which showed a slower expansion than last month. While this shows manufacturers’ orders continue to expand, this gauge is at its lowest reading in about 2 years. Positive employment trends appear to be steady giving a reason for basic optimism about the US economy.
- The most interesting development in the world economy in the last month was the spreading recognition that China is in some sort of slowdown. Note it is not at all clear anything became worse last month, but financial market gyrations have brought increased attention. The opaque nature of economic statistics and the unique character of the Chinese economy mean it is difficult to say with any confidence what is the exact rate of growth. However, we can be fairly sure China is currently growing significantly more slowly than a few years ago.
- The crash in Chinese stocks should not directly affect U.S. growth prospects nor should a modest decline in the value of the Chinese currency against the U.S. dollar. As we have been highlighting recently, the concern is the weak world growth environment. Specifically, our concern is the weakness of the countries who have been selling commodities to fuel the Chinese infrastructure boom. It was a good growth strategy for many commodity exporting countries for 15 years and adapting to change will be difficult. It is not clear to what extent the primary and secondary effects of such a slowdown would affect U.S. growth.
- The drop in the U.S. stock market is also a concern. We see the chances of a sustained downturn in equity prices to be low as long as the underlying growth in the economy remains intact. We do see some signs of increased financial stress though. The increased volatility in the stock market was partially matched by increases in credit spreads for example. Our proprietary Astor Financial Stress Index is showing increased levels of stress, though not nearly as much as a glance at the CBOE Volatility Index (VIX) would indicate.
- The big unknown, and possible cause of some of the stock market’s drop, is the possibility of the Fed hiking short term rates at its September meeting. I do not think the FOMC knows what it wants to do yet. You could say the labor market has recovered so one precondition for a rate hike has been met. However, the prospect of inflation returning to its 2% over the next year or so seems to be harder to justify. Fed Chair Yellen has said repeatedly the timing of the first rise is not as important as the number and rate of subsequent increases which raises the possibility of a “one and done” message coming out of the September meeting. Though I think it more likely the hike will be pushed back to December.
- In summary, we see continued economic growth in the United States as the most likely scenario though we are slightly less optimistic than we were last month.
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The Astor Financial Stress Index is a propriety measure of financial market “stress.” The Index is an aggregation of various datasets. 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 CBOE Volatility Index (“VIX”) is a widely-used measure of market volatility and seeks to represent the implied volatility of the S&P 500 Index over the next 30 days.