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Tags: economy | gdp | investors | recovery

There's Certainly No Hint of a Recession in Latest US Data

There's Certainly No Hint of a Recession in Latest US Data
(Dollar Photo Club)

Dr. Edward Yardeni By Monday, 29 February 2016 10:32 AM Current | Bio | Archive


I know that the year is just two months old, but can we have a do-over?

This year started out badly for stocks around the world on mounting concerns that the global economy was falling into a recession and dragging the U.S. down too. Last week, we learned that U.S. durable goods orders increased ­­­4.9% during January, the strongest since March of last year. In addition, both real personal income and consumption rose 0.4% during the month to fresh record highs.
 
In other words, the new year began with solid economic growth in the U.S. The Atlanta Fed’s GDPNow now shows a gain of 2.1% for the current quarter, up from the previous quarter’s upwardly revised gain of 1.0%.

According to the GDPNow website: “The forecast for first-quarter real consumer spending growth increased from 3.1 percent to 3.5 percent following this morning’s personal income and outlays release from the U.S Bureau of Economic Analysis (BEA). This was more than offset by a downward revision of the contribution of inventory investment to first-quarter real GDP growth from 0.2 percentage points to -0.4 percentage points after this morning’s GDP release from the BEA.”
 
That’s a healthy mix of strong final demand, with some of it coming out of inventories, which augurs well for production, which (by the way) rose 0.9% m/m during January. The Citigroup Economic Surprise Index has made a surprising recovery, rising from a recent low of -55.7 in early February to -21.4 on Friday. There’s certainly no hint of a recession (or an “Ice Age”) in these latest economic indicators for the U.S.
 
All this upbeat news came along with Friday’s report that the core PCED rose 1.7% y/y through January, the highest since July 2014. That’s good news for Fed officials who’ve been aiming to boost this inflation rate closer to 2.0%.

However, that also puts at least one more Fed rate hike back on the table for this year. It also boosted the trade-weighted dollar, which Fed officials finally recognized is equivalent to monetary tightening in the January 26-27 FOMC minutes.
 
As a result, the S&P 500 dipped 0.2% on Friday. However, the latest relief rally, which started on February 11, is still intact with a gain of 6.5%, led by the cyclical sectors:
  • Consumer Discretionary (9.1%),
  • Financials (8.2),
  • Materials (8.1),
  • Industrials (7.4),
  • Information Technology (6.7),
  • Health Care (5.9), Energy (5.5),
  • Telecommunication Services (3.6),
  • Consumer Staples (3.4),
  • and Utilities (0.9).
 
In addition to the latest batch of solid U.S. economic indicators, which belie the recession scenario, here are a few more drivers of the latest relief rally:
 
(1) Oil. There is mounting evidence that US frackers are starting to cut their oil production, which has helped to lift oil prices and Energy stocks. The February 25 FT reported: “The two largest oil producers in the Bakken formation of North Dakota, one of the heartlands of the US shale boom, are giving up bringing new wells into production, in a stark illustration of the problems faced by the industry. Continental Resources and Whiting Petroleum are cutting back on well completions as part of steep reductions in capital spending intended to stabilize finances following the fall in crude prices.”
 
However, any increase in price is likely to be limited for the following reason: “Leaving drilled but uncompleted wells — sometimes known as DUCs — which need hydraulic fracturing to bring them into production, is a tactic that has been adopted by some companies in the hopes that they can bring production on quickly and relatively cheaply if oil prices recover.”
 
(2) China. The S&P 500 rose 1.1% last Thursday despite a 6.1% drop in Chinese stocks, suggesting that China matters less, for now. That might be because Chinese officials are promising to do what they can to boost their economy and support their currency. Furthermore, “investors increasingly realize Chinese stocks aren’t a particularly good gauge of the health of the world’s second-largest economy,” noted a February 25 WSJ article titled “Why China’s Selloff Isn’t Bringing Down U.S. Stocks.”
 
Last Thursday, PBOC Governor Zhou Xiaochuan said, “China still has some monetary policy space and multiple policy instruments to address possible downside risks.” On Friday, the PBOC also published a statement defining current policy as “prudent with a slight easing bias.” Previously, the central bank had promised to maintain a prudent policy with “reasonable, ample” liquidity.
 
(3) The Fed. While this year’s correction seemed to be triggered by the 7.0% plunge in the Shanghai-Shenzhen index on the first trading day of the new year, Joe and I blamed the 9.0% plunge in the S&P 500 through January 20 mostly on two Fed officials (Governor Stanley Fischer and FRB-SF President John Williams) for insisting that the markets should anticipate four rate hikes this year. Both of them backed off quickly as global financial turmoil ensued.
 
What will the FOMC do now that their mandates for unemployment and inflation seem to be on target? They are likely to do nothing at their next meeting, on March 15-16. They might have trapped themselves. If they start preparing the markets for another rate hike, they risk triggering another round of global financial turmoil, including a stronger dollar, weaker stock and commodity prices, and mounting credit defaults.
 
According to a Reuters report, “One of the Federal Reserve’s most dovish policymakers said on Friday that the strong rise in January inflation is not about to change her view that the Fed should be very cautious in raising interest rates. Fed Governor Lael Brainard, appearing on a panel in New York, was asked whether a 1.7 percent rise in year-over-year core personal consumption expenditures (PCE) was enough to give her confidence that inflation is returning to the United States. ‘I think that’s kind of taking “data dependency” to the extreme of data point dependency,’ she responded. ‘Obviously we’re looking for a pattern in the data’ in deciding the preferred policy path. She added the Fed needs to ‘nurture’ the U.S. economic recovery given vulnerabilities, including from overseas weakness, and she said that the idea of negative rates is not currently relevant to policy considerations.”

Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research. To read more of his blogs, CLICK HERE NOW.

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EdwardYardeni
I know that the year is just two months old, but can we have a do-over? This year started out badly for stocks around the world on mounting concerns that the global economy was falling into a recession and dragging the US down too.
economy, gdp, investors, recovery
1043
2016-32-29
Monday, 29 February 2016 10:32 AM
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