Monday Update: Economy Starting to Hit Its Limits

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jun 5, 2017 3:28:33 PM

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Monday updateLast week’s data was mixed, with some strong areas offset by areas of weakness. Looking at the big picture, growth is likely to continue and even accelerate over the next couple of quarters. Still, the economy is starting to hit its limits, particularly in employment.

Last week’s data

We saw good news on the consumer front. On Tuesday, personal income grew as expected, by 0.4 percent for April, on continued job and wage growth. This was an improvement from 0.2-percent growth for March. Personal spending growth was also strong, at 0.4 percent in April, with the March figure revised up from flat to growth of 0.3 percent. These very positive results suggest that consumers are spending again after a slow winter.

Also on Tuesday, the Conference Board consumer confidence survey declined from a downwardly revised 119.4 to 117.9. But the index remains close to a 16-year high, and the three-month average is now at the highest level since January 2001. The decline came almost exclusively from expectations, rather than current conditions, which rose even further. Overall, despite the small decline, this remains a positive signal for the second half of the year. Given both growing incomes and high confidence levels, the consumer will continue to support the recovery.

On Thursday, the ISM Manufacturing Index did well, beating expectations by rising slightly from 54.8 to 54.9 against an expected flat result. The growth was broad based, with 83 percent of industries expanding, and the index remains securely in expansion territory. Looking at the details, both new orders and the employment subindex rebounded. With sentiment still positive, the rebound in new orders, in particular, could be a sign of accelerating growth going forward.

The international trade report was released on Friday. The results disappointed, with the trade deficit widening to a three-month high of $47.6 billion. This number is up from an upwardly revised $45.3 billion and well above expectations of $44.0 billion. Exports fell by 0.3 percent on declines in auto and consumer goods trade, while imports were up by 0.8 percent. Trade will most likely be a drag on economic growth in the second quarter and offset some of the gains from consumers and business.

Finally, on Friday, the jobs report also disappointed, adding 138,000 jobs in May, well below the expected increase of 182,000. On top of this shortfall, the prior months were revised down by 66,000. Job growth appears to be slowing on a trend basis, with the average for the past three months down to 121,000 per month, as companies find it harder to locate qualified workers. The unemployment rate dropped to 4.3 percent from 4.4 percent, the lowest in 16 years, and the underemployment rate dropped to 8.4 percent from 8.6 percent, the lowest since November 2007. Against these signs of a tightening labor market, wage growth dropped from 0.3 percent to 0.2 percent growth on a monthly basis and to 2.5 percent on an annual basis—the lowest pace in over a year. So, while both employment and wages continue to rise, the trend is slowing, which typically happens toward the end of an expansion.

What to look forward to

Last week was full of economic data releases. In contrast, this week will be quite slow.

The only report of significance, the ISM Non-Manufacturing Index, was released on Monday. This is a diffusion index conveying business sentiment in all areas except manufacturing, with values above 50 indicating expansion. The number came in slightly below expectations, at 56.9 versus 57.1. This result was also down from a very positive 57.5 in April. Despite the decline, however, the data still signals strong growth, although at a slightly slower rate. Again, this suggests that while the expansion continues, we may be getting close to the end of the cycle.

Have a great week!

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