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Economy Poised to Grow at Solid Pace for Rest of Year

Economy Poised to Grow at Solid Pace for Rest of Year
(Dollar Photo Club)

Thursday, 19 April 2018 11:55 AM Current | Bio | Archive

  • INDICATOR: March Leading Indicators, April Philadelphia Fed Manufacturing Survey and Weekly Jobless Claims
  • KEY DATA: LEI: +0.3%/ Phil. Fed: -0.9 point; Orders: -17.3 points; Employment: +1.5 points; Expectations: -7.2 points/ Claims: -1,000
  • IN A NUTSHELL: “It looks like solid growth will be with us for the rest of the year.”

WHAT IT MEANS: When it comes to the economy, there is little reason to think conditions will weaken appreciably anytime soon. The Conference Board’s Index of Leading Indicators rose moderately in March after posting robust gains in January and February. Taken together, they point to strong growth for at least the next six months. The gains were powered by increases in most components of the index, which further supports the belief that the economy is in very good shape. But, as the report notes, “labor market components made negative contributions in March and bear watching in the near future.” The March employment report was disappointing but the average monthly gains simply moved back to more sustainable levels.

Despite the Conference Board’s cautionary comment, I am not worried about the labor markets. Indeed, the number of new claims for unemployment remains at very low levels, despite the minimal decline last week.

As for the manufacturing sector, the Philadelphia Fed’s Business Outlook Survey showed that conditions remained strong in early April. Hiring was solid and employees are being asked to work longer hours. However, and this is one case where the warning is something to heed, it looks like inflationary pressures are building. Both the prices received and prices paid indices jumped. There was also a sharp downdraft in new orders, though they remain solid. Looking forward, optimism did fade, but it remained high. The special question this month was about investment plans and it looks like the tax cuts are having some impact on business spending plans. Ten percent of the respondents indicated that the changes will induce them to increase their purchases significantly. But the major reason for investing remains the need to replace older equipment and to the extent the law is pushing firms to do so, that should improve productivity and growth in the future.

MARKETS AND FED POLICY IMPLICATIONS: There really looks like there are no major impediments to growth. Businesses are confident and are seeing sales improve. Earnings look like they are pretty good as well. Now if we can only get rid of some of the wild swings created by political noise, we just might get a few quarters of really strong growth. But don’t expect them until later this year. One interesting result of the Philadelphia Fed’s survey is that most of the actual capital spending will not be made until the second half of the year. That makes sense since firms cannot just flip the switch and start making major spending decisions immediately. They are also likely to want to be secure in the belief that the pick up in growth is long lasting. While it is always good to invest in productivity increasing capital, expanding capacity is another issue. You need extended sales gains to support those expenditures otherwise you wind up with excess capacity. Thus, if the tax law is working, look for the best growth to be toward the end of this year and early next. Given the solid condition of the economy, rising energy prices and building general inflation pressures, another rate hike is coming. The Fed is meeting May 1-2 but the next move will likely come at the June 12-13 gathering.

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.

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It looks like solid growth will be with us for the rest of the year.
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Thursday, 19 April 2018 11:55 AM
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