Monthly Economic Outlook by Scott J. Brown, Ph.D. - March 7, 2016

Raymond James Financial Services

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Raymond James Economic Research What about the dollar? In the short-term central bank policies are a key factor in exchange rate movements. However, the Fed has only raised short-term interest rates by 25 basis points. Dollar strength cannot be pinned on monetary policy alone. Capital outflows from emerging economies have fueled dollar strength and the flight to safety has lowered longterm Treasury yields. Europe’s migrant crisis and the UK’s June referendum on whether to stay in the European Union should dampen economic enthusiasm across the Atlantic.

So, the U.S. remains an attractive location for global capital. U.S. Dollar (December 31,2013 = 100) 145 140 135 stronger dollar 150 150 145 Mexican Peso 140 135 130 130 Canadian Dollar 125 125 120 120 115 115 110 110 105 105 Chinese Yuan 100 95 100 Source: Federal Reserve, Raymond James Jan-14 95 Jan-15 Jan-16 The dollar appears to be having a more significant impact on U.S. exporters, particularly for those exporting to our largest trading partners.

The cumulative strength in the dollar and softer global demand will remain significant headwinds. The U.S. exports a lot of food and raw materials to the rest of the world and the prices of these have fallen sharply.

Monthly trade data are notoriously choppy, but January figures showed a steeper decline in exports across sectors. Still, that should not be enough to derail the overall economic expansion. The National Bureau of Economic Research’s Business Cycle Dating Committee determines the official start and end dates for recessions. In calling recessions, the BCDC stresses employment and real personal income, both of which have continued to trend strongly higher.

Gauges used to predict recessions have been a little more mixed recently, but most do not suggest a strong likelihood of recession. The yield curve, the single best indicator of recession, remains positively sloped. Construction activity is improving. Jobless claims remain low. The stock market is down, a necessary but not sufficient condition for a recession (the late Nobel Laureate Paul Samuelson once quipped that the stock market had predicted nine of the last five recessions). Still, there is some fear that we may talk ourselves into a recession.

Certainly, if every consumer decided to save 5% or 10% more of his or her income, we would have a depression (by saving more, consumers would be spending less, and that spending is someone else’s income). However, strong job growth, a pickup in wage growth, and lower gasoline prices should continue to propel consumer spending growth – and that’s 70% of Gross Domestic Product. Businesses do have to act on expectations.

Orders for capital goods rebounded in January, but the trend is lower. Much of that reflects the contraction in energy exploration and the impact of slower global growth and a strong dollar. However, firms geared toward domestic demand may have become cautious.

There is plenty of evidence of cash hoarding and delayed capital projects – the key question is whether that will be temporary. Despite financial market developments, the U.S. economic outlook has not changed much – and despite continued concerns about the rest of the world, the U.S. economy is mostly self-contained.

Risks remain weighted to the downside, but the expansion is likely to proceed at a moderate pace. GDP ( contributions) consumer durables nondurables & services bus. fixed investment residential investment Priv Dom Final Purchases government exports imports Final Sales ch. in bus.

inventories 1Q15 0.6 0.1 1.0 0.2 0.3 2.0 0.0 -0.8 -1.1 -0.2 0.9 2Q15 3.9 0.6 1.9 0.5 0.3 3.9 0.5 0.6 -0.5 3.9 0.0 3Q15 2.0 0.5 1.6 0.3 0.3 3.2 0.3 0.1 -0.4 2.7 -0.7 4Q15 1.0 0.3 1.1 -0.2 0.3 1.7 0.0 -0.3 0.1 1.2 -0.1 1Q16 2.1 0.4 1.6 0.2 0.4 3.1 0.2 -0.5 -0.1 2.3 -0.2 2Q16 2.0 0.3 1.5 0.4 0.3 2.9 0.2 -0.2 -0.3 2.2 -0.2 3Q16 2.3 0.3 1.5 0.4 0.3 2.7 0.3 0.2 -0.4 2.4 -0.1 4Q16 2.4 0.3 1.4 0.4 0.2 2.6 0.3 0.2 -0.4 2.4 0.0 1Q17 2.4 0.3 1.4 0.4 0.2 2.6 0.2 0.2 -0.4 2.4 0.0 2Q17 2.4 0.2 1.4 0.4 0.2 2.6 0.2 0.2 -0.3 2.4 0.0 2015 2.4 0.4 1.7 0.4 0.3 3.3 0.1 0.1 -0.8 2.2 0.2 2016 2.5 0.3 1.6 0.2 0.3 3.0 0.2 -0.1 -0.2 2.2 -0.2 2017 2.3 0.2 1.4 0.4 0.2 2.6 0.2 0.2 -0.3 2.4 0.0 Unemployment, % NF Payrolls, monthly, th. 5.5 190 5.4 251 5.1 192 5.0 282 4.9 206 4.8 185 4.7 180 4.7 175 4.7 170 4.8 165 5.3 229 4.8 187 4.8 163 Cons. Price Index (q/q) excl. food & energy PCE Price Index (q/q) excl.

food & energy -2.9 1.7 -1.9 1.0 2.4 2.3 2.2 1.9 1.4 1.8 1.3 1.4 0.8 2.2 0.4 1.3 -0.3 2.5 0.3 2.0 1.5 1.8 1.5 1.7 1.9 1.8 1.8 1.7 2.0 1.9 1.9 1.7 2.1 1.9 2.0 1.7 2.1 1.9 1.9 1.7 0.1 1.8 0.3 1.3 1.0 2.1 1.1 1.7 2.0 1.9 1.9 1.7 Fed Funds Rate, % 3-month T-Bill, (bond-eq.) 2-year Treasury Note 10-year Treasury Note 0.11 0.0 0.6 2.0 0.13 0.0 0.6 2.2 0.14 0.0 0.7 2.2 0.16 0.1 0.8 2.2 0.38 0.3 0.8 1.9 0.40 0.4 1.0 2.3 0.63 0.6 1.2 2.4 0.68 0.8 1.4 2.7 0.92 0.9 1.6 3.1 1.15 1.2 1.9 3.2 0.13 0.1 0.7 2.1 0.52 0.5 1.1 2.3 1.29 1.3 2.1 3.3 © 2016 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved. International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863 2 .