Overall, the U.S. Economy continues to improve but appears to have hit a soft patch. Some leading indicators were fractionally positive, many stayed more or less the same and a few turned slightly negative. Additionally, the Fed is providing additional information on its bond buying program, hinting at tapering, but being coy about what metrics beyond the inflation and unemployment rates it will be monitoring. Recent information from various Fed Governors has added to the discussion and generally points to the Fed continuing their bond purchase program through the end of the year and then tapering the amount of bonds they purchase over time. The Fed is not about to exit anytime soon and will continue to support economic growth as it sees fit well into 2015.
Currently, while we see a slowing in the U.S. Economic situation, we continue to believe this is a short term condition and our economy will continue to expand into the end of 2013 and the start of 2014. Internationally, while some economies are showing signs of improvements (Germany and France) other European economies and emerging economies appear to be treading water or losing ground to recessionary pressures. It will take longer for the global economies to emerge from recession.
Here is a summary of some important economic indicators, showing historical information and areas of potential risk that could threaten the economic recovery in the U.S.A.
Mostly sunny. Consumer spending moderated somewhat over the past three months. Retail Sales slipped mildly in February but recovered in March, April, and May, boosted by increased spending in autos and home building materials. The trend, while positive and going in the right direction, was muted. As stated in last quarter’s economic updates, Retail Sales are expected to plateau through the end of the year primarily because subdued improvement in the employment rate and because Americans are curtailing their savings habits and choosing instead to spend the money they earn.
Sunny with a chance of clouds. Monthly Wholesale Trade year-over-year (YOY) comparisons have consistently shown improvements to the tune of over 4% which confirms an improving economy. However, recent reports show weakness in Wholesale Trade of both Durable and Nondurable Goods over the past month and general weakness in the metric as a whole.
We believe the current weakness is only temporary and expect both Durable and Nondurable Goods to recover and continue to rise sometime in 3Q 2013 and into 2014 due to economic expansion and a continued recovery in the housing market.
Sunny with a chance of clouds. Like Wholesale Trade, Manufacturing, after a string of positive reports, is now showing shows signs of weakness. YOY comparisons continue to be positive showing the economy is stronger now than at this point in time last year. Since this February however, Manufacturing metrics such as Industrial Production has basically been flat (fractionally up one month, down another, etc).
As with Wholesale Trade, we believe the current weakness is only temporary and expect overall Manufacturing to recover starting sometime in 3Q 2013.
Potential for rain. As expected, during the second quarter, the yield 10-year Treasury gradually decreased below 1.75%. In fact, on May 2 the 10-year note was yielding just 1.63%. Now, barely three weeks later, with the discussion raging about the post-Fed QE economic environment, the yield on the U.S. 10-Year Treasury has soared to 2.6%.
The Fed has begun to provide more transparency with regards to its eventual tapering of its bond buying program. The targets still stand; the unemployment rate must fall below 6.5% (now at 7.6%) or core inflation must rise above 2.5% (now at 1.7%). However, the Fed also clarified that no one number will determine its view of the labor market and that many factors will be considered.
The Fed, signaling it could begin tapering as early as the end of 2013, confirms our belief that the U.S. economy is recovering. The time to lock in historically low long term rates is now.
Cloudy with a chance of Rain. As reported previously, in the last half of 2012, Capital Goods New Orders were flashing a warning sign, declining when compared to YOY metrics. Now however, new orders, compared to 2012 totals, have stabilized. February’s new order inched higher while March’s new came in below expectations. April’s orders matched YOY comparisons. Basically 2Q 2013 was a draw.
The steady decline in new orders over the past year or so appears to have abated. We will continue to monitor Nondefense Capital Goods New Orders to see if a clear, positive trend emerges. Until then, this metric continues to flash a warning sign; a yellow warning sign vs. a red danger sign that we reported from our last economic review.
Mostly sunny. National housing starts have been somewhat volatile over the past few months but are, on average, continuing their steady upward trend. Single-family starts rose 0.3 percent after falling 4.2 percent in April. Multi-family starts surged 21.6 percent after a plunging 32.2 percent in April. Overall, both components are adding-on average-to-moderate growth which is a positive trend.
As mentioned last quarter, the National Association of Home Builders (NAHB) Housing Market Index (HMI), a gauge of homebuilder sentiment had been declining month-over-month. The June reading changed dramatically with the index surging to 52, the first time this index has been above 50 since April 2006. The NAHB explains the increase by saying builders are now seeing better market conditions as the inventory of existing homes is decreasing which in turn leads to an increase in requests for new homes.
Fog, Heavy at times. Weakness in the European Union continues but appears to have leveled off somewhat. In Germany and France, productivity gains of 1.2% and 2.3% respectfully, were realized. Also in France, April Industrial Production jumped 2.2% and Manufacturing Output was up 2.6%. Tempering the positive news out of the two largest Euro economies was Italy, where first quarter GDP was revised downward by 0.7% and Industrial Production slid to levels not seen since 2009. As for the U.K., Industrial Production was basically flat, rising only 0.1% on the month.
In Asia, there is concern China’s growth may be slowing with reports that Manufacturing in that country is contracting. Another concern, recently reported, was the concern of a potential banking crisis where banks were unwilling to lend to each other. This situation is similar to what happened in the U.S. at the start of the current Great Recession.
Given the recent information, it is understandable why the World Bank lowered its global growth forecasts. For the Euro area it predicts a deeper than expected recession, lowering GDP expectations to 0.6% and, for developing economies, muted growth.
From our perspective, German and French economies appear to have bottomed for the time being. This however, does not signal a trend and we will need to wait for updated economic indicators to confirm a recovery is in place. In China and the rest of Asia, additional data will be needed before making any firm forecast.