Business Conditions Monthly

Friday, August 14th, 2015

As the recovery enters its seventh year, revised data reveal slower progress than previously estimated.


The Economy…
While the latest data confirmed our reading at the start of the year that economic weakness was temporary, and despite accelerating growth in the second quarter, the more complete and detailed information released last month show that the recovery since 2012 has been slower than previously reported. Today’s GDP value is almost one percentage point lower than earlier estimates led us to believe. This means the current business-cycle expansion, whether measured by output or employment growth, has been the slowest in U.S. postwar history.

Strong CPI growth in June underlined AIER’s analysis last month pointing to rising inflationary pressures. The latest scorecard shows that 17 out of 23 indicators support rising inflationary pressure, compared with 15 in our previous report, indicating a higher likelihood of future price increases. Anticipated policy firming on interest rates may moderate rising inflationary pressures.

Fed policy makers did not provide any new signals on the timing of an increase in short-term interest rates following their July meeting. and despite the weaknesses highlighted in the revised report, the Fed continues to indicate that its policy remains on track for a liftoff this year.

With still-modest growth and inflation, bond yields remain very low. However, a slowly improving U.S. economy and declining unemployment may support the Fed’s first rate hike in almost a decade. That, in turn, may pressure bond yields higher, but the question of how high yields may rise remains open.

Weak global growth and a strong dollar have sent most commodity prices tumbling to multi-year lows. Add to that a price war in crude oil and the decline in demand for gold as a haven and the environment for commodities remains unfavorable.

Equities around the world have done reasonably well this year—valuations are rising in many markets. Critical to continued price gains will be better economic growth helping drive future earnings.


Wednesday, July 15th, 2015
As the Fed looks for employment improvements to support a liftoff in rates, we assess the labor market’s condition.


The Economy…
While some U.S. labor market measures are at record levels following six years of expansion, others hold room for improvement compared with past performance in previous recoveries. Our view is that the economy remains resilient, growth is reaccelerating from a temporary first-quarter weakness, and the likelihood of recession in the next six to 12 months remains low.

AIER’s inflationary pressures scorecard suggests an increase in May as 15 of 23 indicators showed rising pressure compared with six that displayed declines, suggesting that prices may rise in coming months. Among CPI components, energy climbed at a fast pace in May, contributing to strong growth in the index, while food prices stayed unchanged. In the labor market, more jobs were created, but productivity growth slowed and labor costs rose, putting upward pressure on inflation. Stubbornly high rates of underemployment and discouraged workers are areas showing room for further improvement in a market closely watched by Fed policy makers poised to raise short-term rates for the first time in nine years.

First-quarter weakness, though seen as temporary, led to scaled-back growth projections from the Fed in June. While policy makers left short-term rates unchanged at their June meeting, a majority of FOMC members expect an increase later this year rather than a delayed take-off in 2016. At the same time, they expect the pace of normalizing policy to be slower than previously anticipated.

Employment and incomes are not expanding as robustly in this recovery as both did in earlier cycles. As long as uncertainty in jobs and earnings persists for large parts of the population, political attitudes are likely to favor protectionist tendencies in trade, immigration, and on other issues.

Federal budget deficits remain large by historical measures but have narrowed substantially in recent years, curbing the Treasury’s need to issue new debt. Combined with ongoing geo-political risks and uncertainty, the resulting reduction in issuance could partly offset the negative effects of anticipated rate hikes.

In the world of precious metals, gold prices have outperformed silver by a wide margin in recent years, suggesting that silver will be the better performer in coming years, based on historical patterns.

Further improvement in labor markets should begin to push compensation costs higher, supporting consumer spending but also potentially squeezing corporate profits. Companies will need to either pass along higher costs, boost productivity, or both, to maintain earnings growth.

Globally, market performance has been quite divergent. U.S. equities have performed admirably, particularly compared with developed markets. Greece and China had roughly similar histories until the Great Recession. Since then, Greek shares have languished while Chinese indexes have posted large gains, only to suffer recent sharp declines.

Tuesday, June 9th, 2015

The recovery’s accelerating credit growth provides a positive sign for the economy and the financial sector.


The Economy…
Our business-cycle leader’s index picked up in May, jumping to 64 following three months at the neutral 50 level. Despite a poor first-quarter performance amid unusually harsh weather, we expect real GDP to return to a moderate pace of growth, with private domestic demand faring even better. We base our analysis on sound fundamentals seen in key areas, including consumer spending, business investment, and to a lesser degree, residential housing. An improving economy should encourage moderate credit growth and an opportunity for lenders to boost income. Commercial bank lending has expanded in key categories for several years as financial institutions capitalize on interest rates that have remained near historic lows. 

Recent data suggest a reemergence of inflationary pressures. Overall, 12 out of 23 measures tracked by our inflationary pressures scorecard point to rising price pressures, up from nine last month. Energy prices have rebounded from the plunge in the last half of 2014, while the coincident rally in the U.S. dollar tailed off in March. Since then, the depreciating value of the currency has pushed up import prices.

The Consumer Price Index rose in April for the third straight month. The increase in food prices, which lasted throughout 2014, has stalled this year. At the same time, energy prices have firmed. These two forces largely offset one another, resulting in only a mild increase in the overall CPI. The increase in core CPI, which excludes volatile food and energy prices, remains close to its long-term historical average. 

Fed officials continue to explain their thinking and current views on the economy while laying out their framework for reaching a decision on “liftoff.” They need to see continued improvement in the labor market and they need to have “reasonable confidence” that inflation is headed back up to the 2 percent goal. Projections by Fed members for the outlook for inflation suggest confidence has weakened recently.

Fed Chair Yellen noted in a recent speech that the FOMC would proceed cautiously during the period of policy normalization, that she and her colleagues at the Fed are data-dependent, and that interest rates are not on a predetermined course. We expect the first rate increase later this year but only periodic increases after the initial “liftoff.”

Credit growth is typical for a healthy and expanding economy and is a positive development for financial stocks. For some financials, the rebound in equity markets and the improving economy have been positive supports. The low interest-rate environment can benefit issuers of debt but can be a challenge for lenders who earn income on spreads, or the difference between what they charge borrowers for loans and what they pay for the money they lend.

Financial stocks in the U.S. have trailed the rebounding S&P 500, which has marched to fresh records at least 10 times this year, yet conditions suggest support for further gains. Global financial shares have performed best in emerging markets and Asia outside Japan. Sector stocks with the biggest growth potential—and the greatest risk—may be found in Europe and Japan. 

Thursday, May 14th, 2015

A healthy corporate America provides a solid foundation for capital markets and continued economic expansion.

Tuesday, April 14th, 2015

Consumers are poised to lead economic growth higher.

Wednesday, March 25th, 2015

Despite some signs of economic weakness, there’s no recession signal yet.

Tuesday, February 24th, 2015

A strengthening U.S. dollar is having far-reaching effects on the U.S. economy and global markets.

Wednesday, January 21st, 2015

Changing global oil market dynamics send prices tumbling, helping some while hurting others and shifting investment prospects.

Friday, December 19th, 2014

As 2014 drew to a close, American Institute for Economic Research (AIER) economists and analysts took a step back to put major economic and financial events of the past year in context.