Economic Slowdown Averted?

Posted by Brad McMillan, CFA, CAIA, MAI

Find me on:

This entry was posted on May 5, 2017 3:09:52 PM

and tagged In the News

Leave a comment

economic slowdown avertedWe’ve been seeing mixed data on the economy lately—even some signs that a slowdown might be under way. But was the slowdown real, or was it just another slow first quarter, which has been the norm for the past couple of years? A weak set of data for March raised concerns even higher, and this week was going to help us confirm what was really going on.  

As of today, it looks like predictions of the recovery’s death have been exaggerated once again. Two data points this week—the strong service sector reading from the ISM Non-Manufacturing survey and the strong jobs report—suggest that the weak first quarter was likely only a pause rather than the end.

Business sentiment and activity bode well for the rest of 2017

Let’s start with the service sector. Services constitute about seven-eighths of the economy, so business sentiment matters. The unexpected increase for April, from 55.2 to 57.5, moves a huge portion of the economy even further into the expansionary zone, almost entirely reversing a worrying drop in March. Both the business activity and new orders components of the ISM Non-Manufacturing survey are good forward-looking indicators, and both increased strongly, with new orders hitting a 12-year high.

The good news doesn’t end there. The export order index is up to its highest level since May 2007, and the expansion has broadened to 15 of 18 sectors. Notwithstanding the first-quarter slowdown, this report indicates that economic growth is likely to pick up for the rest of the year.

Better-than-expected employment data could finally fuel spending growth

The jobs report also came in stronger than expected at 211,000 new jobs, well above expectations for a 190,000 increase. This gain was partially offset by a downward revision of the previous month’s data, from 98,000 to 79,000. Still, there’s no denying this better-than-expected performance, which also seems to confirm the idea that the weak March report was due more to weather than any other factor.

The unemployment rate, which is drawn from a separate survey, dropped to 4.4 percent, which is the lowest level in a decade. Even more important, the underemployment rate also dropped to a decade low of 8.6 percent. Meanwhile, wage growth moved up to 0.3 percent, suggesting that the labor market continues to tighten. With a growing shortage of workers, and rising wages, the conditions for faster spending growth are in place.

Signs are positive, but let’s not declare victory yet

Job growth and the service sector are two of the four economic signals I watch most closely. This strong reversal from last month’s weak performance is a positive sign. And although there is still a gap between confidence and spending—both for consumers and businesses—the numbers suggest that spending growth may ramp up soon. This is the last missing piece in the recovery.

It is still too soon to declare victory. We need to monitor whether consumers and businesses are indeed walking the walk as well as talking the talk. But I think the economy has given us good reason to hope. Overall, it was a good week.

Subscribe via E-mail

New call-to-action
Crash-Test Investing
Commonwealth Independent Advisor

Hot Topics

Have a Question?

New Call-to-action

Conversations

Archives

see all

Subscribe

Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly into an index.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.  

Third party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®