Thursday, May 1, 2014

Today's numbers look good

Lots of numbers out today, all of which show the economy remains on a solid—albeit relatively slow—growth track, after slumping in the first quarter of this year under the burden of bad weather.

No sign of deterioration in the labor market. Corporate layoff activity remains at a very low level.

The ISM manufacturing index rebounded solidly from its weather-induced slump earlier this year. Conditions in the manufacturing sector are consistent with overall economic growth of 3-4%. Second quarter GDP growth in almost certainly going to be at least 3-4%.

Weak exports were one of the main sources of weakness in the first quarter GDP statistics. The ISM export orders index jumped in April, a good sign that things are back on track, and that overseas economies remain relatively healthy.

The ISM employment index also jumped in April, a welcome sign that the weakness earlier this year was only temporary.

The Eurozone continues to slowly improve, and this reinforces the outlook for improvement here.

Swap spreads are one of my favorite leading indicators, and they have done a great job of predicting the improvement in the Eurozone economy (and the U.S. economy also). With Eurozone swap spreads continuing to decline to more healthy levels, it is likely that manufacturing conditions in the Eurozone will also continue to improve. Healthy financial markets are always a good indication that economic fundamentals are in good shape. U.S. swap spreads remain very low, another good sign.

The personal consumption deflators are the Fed's preferred measure of inflation. Late last year they were trending below the Fed's desired minimum of 1%, but now both the headline and the core measure show inflation approaching the 1.5% level.

The principal source of low inflation pressures comes from the durable goods sector, where prices have been falling since 1995. That year marked the beginning of China's huge manufacturing and export explosion. If inflation is "too low" for some tastes, it's mainly because we are the beneficiaries of cheap manufactured goods from China. That's just plain old good news, not something to worry about.

Monetary conditions remain very accommodative, as the chart above shows. Real short-term interest rates are decidedly negative and the yield curve is still very steep. There is no indication here at all that the Fed's ongoing tapering program is causing a shortage of liquidity. A recession is therefore highly unlikely for the foreseeable future.

I don't usually pay much attention to spending, since as a supply-sider I prefer to focus on production and investment—if those are strong, spending is likely to be strong as well. But it's nice to see a significant pickup in real consumption spending. Of course, it's still relatively weak from a long-term historical perspective, but on the margin things look to be improving.


Hans said...

Did that included yesterday GNP?

.025% last quarter growth rate - at least the economy is not intoxicated.

Benjamin Cole said...

The long-term trend line on inflation and interest rates, of course, is towards zero. Inflation might go lower (become deflation), but as we all know, interest rates stop at zero, as they found out in Japan.

For five years running, most economists have been saying interest rates would go up. For five hers running, I have been saying maybe not, as we are like Japan. So far, sadly, I have been right, mostly. Maybe we are like Japan-lite.

We well have weak growth, and low inflation, and very low (historically) interest rates for a long time yet.

The low interest rates may be the new norm. Rates are still low, the Fed is tapering down on QE. The globe is flush with capital. Aggregate demand remains softish. Hard to see what would send rates up.