Our Economic Model Shows Weakness, Stability
Here at AIER, we use our data-driven Business-Cycle Conditions model as a barometer of the health of the economy, and the risk of recession.
Last month, we saw quite a shift downward, as our index of leading indicators fell below the neutral level of 50 for the first time in 110 months.
Today we are releasing this month’s results, and our model shows the Leaders index unchanged at 38. Consequently, AIER researchers judge the risk of recession to be elevated and have edged closer to calling one.
However, a combination of the Leaders not weakening further, and some potentially positive signs that aren’t reflected in our model, justifies maintaining a cautious outlook instead.
But first, let’s look at why the reading remains so low. Real gross domestic product, or GDP, growth slowed over the 12 months through March, dropping from a 3.9 percent annualized rate in the second quarter of 2015 to 2 percent in the third, 1.4 percent in the fourth, and just 0.5 percent in this year’s first quarter.
Residential investment remained healthy in the latest report from the U.S. Bureau of Economic Analysis, but the growth in consumer spending slowed, while business investment and exports fell. Some of the slowdown by consumers may be attributed to a drop in auto sales from the record setting 2015 pace. Still, signs of deterioration in the core economy remain a significant concern.
Despite the slowing economy and weak readings from our Leaders Index, there have been some hints of improvement. Private services employers added more than 2.5 million new jobs over the past year. Increased employment in private services industries suggests that sector may provide a base of growth and help the overall economy.
Furthermore, narrowing corporate bonds spreads, rising commodity prices, and relative strength for consumer discretionary stocks compared to consumer staples stocks all indicate that investors are expecting the economy to strengthen in coming months.
While our Leaders index is below 50 for the second month, it hasn’t worsened. Combined with signals from markets, there’s a reasonable chance that the economy is passing through yet another weak patch in an ongoing expansion.
Meanwhile, here are some comments from our Jia Liu on this morning’s release of the April Consumer Price Index from the Labor Department:
- The overall CPI jumped 0.4 percent in April from March, the highest monthly growth since February 2013.
- The higher-than-expected monthly CPI growth reflects a strong rebound in energy prices in April, which grew 3.4 percent from March.
- Core CPI grew 0.2 percent, in line with economists’ forecast. (My forecast model showed 0.2 percent for April core CPI)
- Goods, excluding food and energy, were cheaper overall in April. Cheaper goods include apparel, household furnishings and supplies, and new vehicles.
- But most service prices accelerated in April.
“I don’t think this is a big surprise to the Fed,” Liu said. “The overall strong CPI growth was mainly due to energy prices, which are extremely volatile. One month of strong data would not be enough to change Fed officials’ minds. Also, excluding food and energy, the core price growth was in line with expectations.”
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