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Why the Soft Patch is Unlikely to Last

The American Institute for Economic Research takes a hard look at the two very different storylines in the U.S. economy in its March edition of its new Business Conditions Monthly, which was released on Wednesday.

Recent weak data at the start of this year on manufacturing activity, industrial production, retail sales and existing home sales exposed a soft patch in a growing economy, said Bob Hughes, the lead author of the report.

But that came as strong data continued to emerge for the labor market, including job creation, the unemployment rate, estimates for take-home pay, and initial claims for unemployment insurance. Consumer confidence remains at a generally high level, and the stock market is doing well.

The evidence suggests that the recent weakness in some economic indicators may simply be temporary, perhaps weather-related, said Hughes, senior research fellow at AIER. The economy is likely to reaccelerate in the coming months, much like in the aftermath of severe winter a year ago, he said.

“However, data are data, and hints of weakness should not be ignored,” Hughes said.

AIER uses a series of indicators to predict a recession. In March, the proportion of AIER’s leading indicators expanding fell to the important threshold of 50 percent, the first time it had fallen to that mark since 2010. A reading above 50 percent indicates that economic expansion is likely to continue. Still, other indicators remain well above that threshold.

“We continue to monitor our business cycle indicators and other economic data for any more signs of a change in direction,” Hughes said.

Business Conditions Monthly is a comprehensive, data-driven look at the state of the economy right now, and where AIER researchers see it headed, including views on inflation, government policy, investing, commodities, monetary policy, and consumer prices.

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