Snails’ Pace Growth to Keep Fed on Sidelines

There are now dueling economic growth forecasts by regional Fed banks. The Atlanta Fed’s GDPNow model forecast for Q1 GDP growth is 0.3 percent and the Federal Reserve Bank of New York’s recently unveiled Nowcast model anticipates that GDP will expand by 0.8 percent. Forgive us if we are not that interested in the half of a percentage point differential, because either way, we are talking about snail’s pace, sub-one percent growth.

In the seven years since the end of the recession (the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) said the recession ended in June 2009), the expansion has been sluggish, averaging between 1.5 and 2.5 percent. While so-so growth is typical of recoveries that follow cataclysmic, near-death experiences like the financial crisis and the 18-month Great Recession, the reality is that progress has felt like one step forward, one step back.

It appears that Q1 will be one of the “one step back” periods--we will see when the government releases its first estimate of growth for January-March this week. The good news is that the report is already history and the current quarter could see a step forward. Analysts at Capital Economics “anticipate a rebound in the second-quarter and expect annual GDP growth will be slightly above 2 percent for 2016 as a whole, which would be broadly in line with the trend during this recovery.”

Although economic conditions are looking up, the data have not be strong enough to encourage the Fed to raise interest rates at its upcoming policy meeting this week. The central bankers will likely tell us about the improvement in financial conditions, stabilization of oil prices and diminishing fears over China’s economic outlook and its ripple effects on emerging market currencies, but none of that will prompt action. The big question, according to Capital Economics, “is whether the improvement in financial conditions and the slightly better global outlook persuades the FOMC to drop the language in the statement that ‘global economic and financial developments continue to pose risks’?” If the Fed opts to change its language, it could be preparing markets for a June increase, something investors are not yet anticipating.

MARKETS: Although earnings have fallen over the past year, results have not been as bad as feared and large stocks have been able to edge up. Both the Dow and S&P 500 are 2 percent or less below their 52-week intra-day highs.

• DJIA: 18,003 up 0.5% on week, up 3.3% YTD
• S&P 500: 2091 up 0.6% on week, up 2.3% YTD
• NASDAQ: 4906 down 0.7% on week, down 2% YTD
• Russell 2000: 1146, up 1.4% on week, up 1% YTD
• 10-Year Treasury yield: 1.9% (from 1.75% a week ago)
• June Crude: $43.73, up 4.8% on week (up 67% from Feb lows)
• June Gold: $1,230, down 0.4% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.13 (from $2.11 wk ago, $2.49 a year ago)

THE WEEK AHEAD:

Mon 4/25:

Haliburton

10:00 New Home Sales

Tues 4/26:

3M, Apple, Chipotle, Twitter

FOMC Policy Meeting Begins

8:30 Durable Goods Orders

9:00 S&P Case Shiller Home Price Index

10:00 Consumer Confidence

Weds 4/27:

Boeing, Facebook

10:0O Pending Home Sales Index

2:00 pm FOMC Meeting Announcement

Thursday 4/28:

LinkedIn, Amazon, UPS, Ford, MasterCard, Conoco Phillips

8:30 Q1 GDP – 1^st estimate

Friday 4/29:

Chevron, Exxon Mobil

8:30 Personal Income and Spending

8:30 Employment Cost Index

9:45 Chicago PMI

10:00 Consumer Sentiment

Leap Day for Investors

Leap Day (Feb 29) occurs every four years, so will this year’s be more like 2012, when the US economy grew by 2.3 percent or the more ominous 2008, when it contracted by 0.3 percent? I’m guessing that it will be a 2012 kind of year. To recap, anxiety over a global growth slowdown, a precipitous slide in oil, an increasing US dollar and a potentially over-aggressive Federal Reserve has increased the recession chatter this year. The latest round occurred last week, after it was reported that world trade in 2015 dropped to the lowest level since the financial crisis, due in large part to the slump in China and other emerging economies.

Even with a slight revision higher, Q4 US growth was at a still-paltry 1 percent annualized pace, close enough to zero to make even the most ardent bull nervous. But according to economist Joel Naroff, “It is hard for the U.S. economy to fall into recession if the consumer is spending and guess what, that is happening. Consumption was strong in January and it was across the board. Solid gains were posted for durable and nondurable goods as well as services.  More importantly, households can keep up the pace, as income growth was robust.”

There will be fresh data on the labor market, when the government releases the February employment report. The consensus sees an uptick in job creation to 185,000 from January’s lower than expected 151,000. The unemployment rate is likely to remain at 4.9 percent and with labor market conditions tightening (jobless claims remain low and job openings are high); hourly wages should rise by 2.6 percent from the prior year. If that’s the case, then consumers should keep spending at a moderate clip, which would help propel growth in the first quarter to at least a 2 percent annualized pace.

Despite the economy’s middling progress, it’s hard to see a widespread recession developing in the near term. As a reminder, the National Bureau of Economic Research's Business Cycle Dating Committee is the organization that keeps track of business cycles. While there is no fixed definition of economic activity, the Committee draws on various measures of broad activity, which Morgan Stanley has defined as “The Four D’s”:

• Deceleration: Every classical business cycle slows before it contracts, so look for a pronounced slowdown first. While Q4 looked weak, there is ample evidence that there will be a recovery in Q1.
• Diffusion: The weakness must be widespread across industries. Outside of energy and manufacturing, activity in the rest of the economy appears to be OK
• Depth: Broad indicators such as employment, income, production and sales need to contract by at least 1.5 percent from their cyclical peaks.
• Duration: The NBER looks for a period of at least six months of contraction in the economy to be convinced that the episode was a recession

MARKETS: US stock indexes have rallied more than 6 percent from their lows reached on Feb. 11, narrowing year-to-date declines.

• DJIA: 16,640 up 1.5% on week, down 4.5% YTD
• S&P 500: 1948 up 1.6% on week, down 4.7% YTD
• NASDAQ: 4590 up 1.9% on week, down 8.3% YTD
• Russell 2000: 1037, up 2.7% on week, down 8.7% YTD
• 10-Year Treasury yield: 1.77% (from 1.61% a week ago)
• Apr Crude: $32.78, up 3.2% on week
• Apr Gold: $1,223, down 1% on week
• AAA Nat'l avg. for gallon of reg. gas: $1.74 (from $1.72 wk ago, $2.37 a year ago)

THE WEEK AHEAD:

Mon 2/29:

9:45 Chicago PMI

Tues 3/1:

Dollar Tree

Motor Vehicle Sales

9:45 PMI Manufacturing Index

10:00 ISM Mfg Survey

10:00 Construction Spending

Weds 3/2:

8:15 ADP Private Jobs

Thursday 3/2:

Costco

8:30 Productivity and Costs

9:45 PMI Services Index

10:00 Factory Orders

10:00 ISM Non-Mfg Survey

Friday 3/3:

8:30 Feb Employment Report