Positive labor market signs bolster hopes of an economic rebound rather than a recession.
As our Leaders index shows, the economy remains weak and vulnerable. 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.
There are alternative ways to measure GDP. One categorizes output as goods, structures, or services. Based on first-quarter data, services make up about 60 percent of the total, final sales of goods make up about 31.6 percent, and structures count for about 7.6 percent, with the remainder reflecting inventory changes. By this method, goods output fell at a 3 percent annual rate in the first quarter, while services rose 1.7 percent and structures climbed 5.4 percent.
Continued gains in services and structures are positive for the outlook. Also, increased employment in private services industries suggests that sector may provide a base of growth and help the overall economy avoid recession. Private services employers added more than 2.5 million new jobs over the past year, while 300,000 were added in construction-related industries. Goods producers shed about 166,000 jobs, mostly in mining industries. Continued strength in the pace of hiring in services industries combined with a low level of layoffs across the economy offer hope that the current expansion may have additional room to run (Chart 1).
With 38 percent of our leading indicators on an upward trend for the second straight month, our Business-Cycle Conditions model is showing the first back-to-back readings below 50 since January-February 2007. AIER economists believe the latest data suggest that the economy remains at an elevated risk of recession. However, since the index did not decline any further from March to April, that may indicate economic activity is stabilizing.
Our model’s underlying data may be revised in coming months. With the Leaders index unchanged, along with the potential for future revisions to the data and some mildly positive data not included in the model, we are not ready to call a recession. We believe that maintaining a heightened degree of caution is more appropriate.
Among the Leaders, three were trending higher: real new orders for consumer goods, initial claims on unemployment insurance, and the difference in yields of Treasury securities that mature in one year and 10 years. Of the remaining indicators, six trended lower and three were neutral.
The percentage of expanding coincident indicators held steady in the latest month, registering 75 percent in March for the fourth month in a row. Among the Coinciders, four were trending higher while one was trending lower and one was neutral. The proportion of lagging indicators expanding held at 83 percent for a third straight month (Chart 2). Among the Laggers, five were trending higher while one was trending lower.
Click for interactive Indicators at a Glance (on mobile device turn to landscape)