I interpreted last month’s economic releases as somewhat weaker. Forward looking surveys were concerning though consumer spending in the US, the most important single component of GDP, seems to be stable.
Our latest reading for the Astor Economic Index® (“AEI”) is lower over the month, though I see no discernible trend over the last twelve months. I still see the US as currently growing above average. The AEI is a proprietary index that evaluates selected employment and output trends in an effort to gauge the current pace of US economic growth.
The nowcasts produced by the Federal Reserve banks of Atlanta and New York are both still showing stronger growth in the third quarter than the first half of the year. The Atlanta Fed is currently estimating a gaudy 3.3% SAAR and the New York Fed is currently forecasting 2.8%. These are both significantly stronger than their final Q2 estimates and represent a significant increase from the poor Q2 release. Both have been updated since the employment report.
Another month of solid job growth means that the we are adding more jobs than needed to absorb the natural increase in the labor force. We can also see strength in the labor force from some less-often discussed numbers such as the quit-rate which has increased 9% over the last 12 months and the number of job offers, which is at a high for the recovery. These series can be seen in the JOLTS report put out by the Bureau of Labor Statistics. On the other hand, there are still signs of higher levels of labor market slack than we would normally expect late in the cycle. The chart below shows unemployment (the headline number) and underemployment. While unemployment is fairly low and roughly at the level targeted by the FOMC, underemployment shows significant additional slack in the labor market.
The latest purchasing managers surveys from the Institute for Supply Management (ISM) were disappointing.
The manufacturing index gave up much of its gains for the year. I hope this is not a harbinger of renewed manufacturing weakness such as we saw in the first quarter of this year. Surprisingly, non-manufacturing survey was also quite weak in August and it’s at the lowest level of the recovery. A diffusion index (such as these) is a bit challenging to interpret exactly and a glance at the chart will show many months spike up or down without signaling sustained shifts in growth. Digging into the details of the reports we see that much of this month’s weakness was due to drops in new orders and non-manufacturing exports. This will bear close watching in coming months.
The hawks at the Fed seem to be getting louder, and one month’s survey data is, in my opinion, unlikely to deter them. See this speech by San Francisco Fed President John Williams who makes the argument that 1) because the unemployment rate is low the Fed will need to raise soon and 2) better to raise sooner by less rather than later my more. I see both those assertions as questionable (see Tim Duy for an argument about why it might make sense to let the unemployment rate drift lower) but I think a hike is coming in September or December assuming growth stays on its current course. For what it’s worth, my interpretation of Fed Funds futures prices shows that the market places a low possibility of a September hike but a likely hood of December hike.
Overall, the economy continues its pattern of positive but modest growth. The ISM numbers make me a bit worried about the fall. As always I will be monitoring developments in the US economy carefully in the weeks ahead. Clients are welcome to get in touch for a detailed conversation.
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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