The Independent Market Observer

Monday Update: More Slow But Steady

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Dec 7, 2015 1:33:28 PM

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Monday UpdateLast week was a busy one, with several important releases that provided a mixed bag of both support for a continued slowdown and a suggestion that growth remains solid despite that slowdown. Let’s take a closer look.

Last week’s data

The two indicators that suggested the slowdown continues came from the Institute for Supply Management (ISM). The manufacturing survey dropped significantly, from a barely expansionary level of 50.1 to a contractionary level of 48.6, well below expectations. This is the lowest level since the recession ended in 2009, and it reflects the continued pain from the rise in the dollar’s value and economic weakness elsewhere in the world. Despite hopes from other indicators, the industrial sector does not appear to be stabilizing yet, as the forward indicators—new orders, for example—dropped by even more.

Also disappointing (although less so) was the nonmanufacturing survey, which also dropped substantially from 59.1 to 55.9, well below expectations. In this case, however, the drop was from close to record levels, and service sector confidence remains healthy despite the drop. Survey results at this level are typically correlated with growth above 2.5 percent, according to the ISM, and services constitute about seven-eighths of the economy.

Combined, these indices suggest continued growth between 2.0 percent and 2.5 percent going forward, which is slower than had been hoped, but it remains reasonably robust for this recovery. Subindices for employment also remained reasonably strong, suggesting employment growth will continue.

The final report for last week was the jobs report, released on Friday, which also supported continued employment growth; 211,000 jobs were added, slightly above expectations, but previous months were also revised upwards by 35,000 jobs, for an even stronger report. The unemployment rate remained stable at 5.0 percent, as people rejoined the labor force—a positive sign—while the underemployment rate ticked up slightly to 9.9 percent from 9.8 percent, as more people reported working part-time for economic reasons—a negative sign. Earnings growth dropped back to 0.2 percent per month and 2.3 percent for the past year.

Based on all the data, the economy appears to be slowing somewhat but continuing to grow at a consistent rate. As the last major economic reports before the Federal Open Market Committee meeting next week, it appears that the conditions for a rate hike have been substantially met, a conclusion reinforced by two separate speeches by Janet Yellen last week. Once again, we have a slow but steady indicator for the economy as a whole.

The week ahead

We have two major economic releases this week that should give some insight into how consumers are thinking: the retail sales report and the University of Michigan Consumer Confidence Survey, which will both be released on Friday. Considering that I gave the consumer confidence risk metric a yellow light this month, I will be watching these closely.

The retail sales report is expected to show a gain of 0.3 percent, up from 0.1 percent the previous month, with core retail sales (excluding autos) also expected to grow at 0.3 percent, up from 0.2 percent. There may well be a surprise in this data, though, as Black Friday sales will make up a good proportion, and any shift to web-based purchases in the following week may not show up in this month’s figures. Although there is downside risk, any disappointments will have to wait until December figures come in to really evaluate.

The Michigan Consumer Confidence Survey will also be important. Expectations are for a slight increase, from 91.3 to 92.0, which is reasonably healthy and suggests further moderate growth.

Given recent weakness in many of these measures, expectations are less certain than usual. Have a great week!

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