1) 3rd Quarter 2015
Economic Dashboard
EXECUTIVE SUMMARY
• The most recent report on Q2 GDP indicated that
the economy expanded at a healthy 3.9%
annualized rate during the quarter. Growth was
supported by stronger consumer and government
spending, business investment, and inventory
accumulation. Q1 GDP was also revised up from 0.2% to 0.6%.
• Recent inflation data has been muted, as
commodity prices remain depressed. Headline CPI
increased a mere 0.2% in August on a year-overyear basis. Core CPI, which excludes food and
energy, increased at a rate of 1.8%, in line with the
month prior.
• Long-term interest rates remained volatile during
the third quarter, as investors digested news out of
China and speculated about the timing of rate
hikes. The 10-year Treasury yield ended
September at 2.06%, down fractionally for the
quarter.
• The September jobs report was undeniably
disappointing as payrolls rose by only 142,000,
and gains for July and August were revised
downward. On a brighter note, the unemployment
rate held steady at 5.1% – its lowest point in over
seven years.
• The U.S. economy is slowing, but still appears to
be expanding at a moderate pace. However,
recent data out of China has prompted a softening
of expectations for global growth, as the structural
tailwind that was provided by the rapid growth pace
of many emerging market countries has faded.
Gross Domestic Product
Prior Reading
Real GDP QoQ - Q2 (III Est.)
0.6%
Personal Consumption QoQ - Q2 (II Est.)
1.8%
Employment Market
Unemployment Rate - September
5.1%
Nonfarm Payrolls (Change) - September
136K
Initial Jobless Claims 4-Week Avg September
Continuing Jobless Claims 4-Week Avg September
271.8K
2252.3K
Inflation
CPI YoY - August
0.2%
Core CPI YoY - August
1.8%
Core PCE YoY - August
1.2%
Consumer Indicators
Retail Sales YoY - August
2.6%
Consumer Credit YoY - July
6.9%
Personal Income YoY - August
4.3%
Personal Savings YoY - August
4.7%
Consumer Confidence - September
101.3
Business & Production Indicators
ISM Manufacturing Index - September
51.1
ISM Services Index - August
60.3
Industrial Production YoY- August
1.3%
Small Business Optimism - August
95.4
Housing Market
Existing Home Sales - August
Housing Starts - August
S&P Case-Shiller Price Index YoY- July
5.58MM
1161K
4.9%
Leading Indicators
JIM BAIRD
CPA, CFP®, CIMA®
Partner,
Chief Investment Officer
ECRI Weekly Leading Index - September
130.9
Conference Board Leading Economic
Index - August
123.6
Change
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





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Most Recent
3.9%
3.6%
5.1%
142K
270.8K
2235.3K
0.2%
1.8%
1.3%
2.2%
6.8%
4.2%
4.6%
103.0
50.2
59.0
0.9%
95.9
5.31MM
1126K
5.0%
131.1
123.7
2) 2
OVERVIEW
Keeping a continuous pulse on the
growth rate of an economy has never
been an easy task. In the U.S., the
Bureau of Economic Analysis only
releases quarterly estimates for
gross domestic product (GDP)
growth, the predominant measure of
economic growth. However, initial
estimates are subject to further
revisions for several years as more
complete source data becomes
available. Moreover, the National
Bureau of Economic Research
(NBER), a nonprofit organization that
monitors economic conditions
broadly and serves as the official
arbiter of the U.S. business cycle
(calling the start of both recessions
and expansions), typically cannot
declare a turning point in the
economy for several quarters, or
sometimes over a year, after the fact.
At times, their official recession call
has come after the recession has
ended and the economy is growing
again. Gaining a real-time picture of
the current economic landscape is –
at best – a challenging task.
Since GDP is a lagging gauge on the
health of the economy, strategists
and economists tend to gravitate to
more timely measures of the
economic environment, not only here
in the U.S., but globally as well.
Other data and statistics, particularly
those which will impact the
underlying measurement of GDP,
are often used to evaluate both
current and potential future economic
conditions.
One example is the Markit
Purchasing Managers’ Index (PMI),
which collects survey data from
purchasing managers across the
manufacturing sector. Although its
contribution to GDP has declined
over the last few decades, its
cyclicality makes manufacturing
sector a key leading indicator of
economic growth. A PMI reading of
50 or higher typically indicates an
expanding manufacturing sector,
while a reading lower than 50 is
viewed as contractionary.
Historically, when the manufacturing
sector exhibits a sustained trend of
expansionary or contractionary
readings, the overall economy would
be expected to follow suit. As the
chart below illustrates, the recent
trends in global manufacturing data
across most developed countries
remain constructive, as the major
regional indices are all above the
threshold level of 50.
Meanwhile, China’s PMI has
delivered contractionary readings in
recent months, prompting concerns
of a hard landing for the Chinese
Expansionary
60
54
52
50
Contractionary
Index Level
56
48
46
44
42
40
China
USA
Japan
Eurozone
UK
Source: PMFA, Federal Reserve, Markit
Although the strength of recent PMI
readings within the U.S. have
softened, the manufacturing sector in
the U.S. is still expanding modestly.
Other economic indicators also
support expectations for positive,
albeit moderating, economic growth
in the coming quarters. Labor market
conditions remain generally
favorable, as jobless claims remain
quite low and nonfarm payrolls
continue to expand. Consumer
sentiment has dipped in recent
months but remains broadly positive,
supporting continued growth in
consumer spending. Core inflation
remains low but should edge higher
as energy prices stabilize.
While concerns over slower global
growth has risen in recent months
and does create some risk, the full
impact of that slowdown on the U.S.
and other developed countries
remains to be seen. To this point, a
broad range of data suggests that
the U.S. economy has decelerated
after a strong second quarter but
remains on a moderate growth path.
INSIGHTS
DEVELOPED ECONOMIES REMAIN IN EXPANSIONARY
TERRITORY
58
economy. Weaker growth in China,
falling commodity prices, and a
stronger U.S. dollar have contributed
to a selloff in emerging-market
equities and have been key drivers
of heightened risk aversion globally.
Manufacturing conditions have been solid in
the U.S. and other developed regions for
most of the past three years since crossing
into expansionary territory in the Eurozone,
U.K., and Japan in 2013. The outright
contraction in Chinese manufacturing in
recent months has weighed on global growth
estimates and stoked concerns about the
ripple effect of the broader slowdown of
emerging market economies in the U.S. and
other developed economies – particularly
those more reliant upon Chinese imports.
Thus far, recent PMI data suggests that the
manufacturing sector in developed countries
has continued to expand, although the pace
of growth has slowed.
3) 3
GROSS DOMESTIC PRODUCT
Q4 Final
Q1 Final
Q2 II Est.
Real GDP QoQ
2.1%
0.6%
3.9%
Personal Consumption QoQ
4.3%
1.8%
3.6%
GLOBAL GROWTH CONTINUES TO GROW MODESTLY
DESPITE THE SLOWDOWN IN CHINA
20
• The U.S. economy expanded at a 3.9%
annualized rate during the second quarter, as
the most recent estimates suggested that Q1
and Q2 GDP growth was stronger than initially
thought.
• Consumer spending, which remains the largest
driver of the U.S. economy, expanded at a 3.6%
rate during Q2. A strengthening labor market,
cheaper gasoline, and rising home prices likely
contributed to rising optimism and an increased
willingness to spend.
Percent (YoY%)
15
10
5
0
-5
-10
• Slowing growth in China and other emerging
economies has driven a moderation in global
growth expectations. Emerging markets are still
projected to grow more rapidly than developed
economies, although that gap has narrowed.
Growth rates for the Euro area and U.K. are
projected to converge with the U.S. over the
next five years.
China
United States
Japan
Euro Area
United Kingdom
Emerging Markets
International Monetary Fund (IMF) Projections past 2014
Source: PMFA, International Monetary Fund
INFLATION
June
July
August
Consumer Price Index YoY
0.1%
0.2%
0.2%
Producer Price Index YoY
-0.7%
-0.8%
-0.8%
A LARGE GAP BETWEEN SERVICE AND GOODS
INFLATION
4.0
• The Consumer Price Index decreased by 0.1% in
• Weakness in energy prices continue to have a
disinflationary effect on headline inflation. Over the
trailing 12 months, all major energy components have
declined. While the electricity index has fallen just
0.6%, the index for gasoline is down more than 23%.
• Core PCE – the Fed’s preferred measure of inflation –
has remained below the central bank’s goal of 2%
since April 2012. As the chart illustrates, the price
level for core services has been increasing at a
steady rate for the last several years, suggesting that
weakness in core PCE has instead been driven by the
deflationary trend in core goods. The price of goods,
particularly durable goods, has been impacted by a
strengthening U.S. dollar and, more recently, falling
oil prices.
3.0
2.0
Percent (YoY%)
August but rose by a mere 0.2% on a year-over-year
basis. Core inflation edged higher by a modest 0.1%
during the month.
1.0
0.0
-1.0
-2.0
Core PCE Goods
Core PCE Services
Core PCE
Source: PMFA, Bureau of Economic Analysis
4) 4
INTEREST RATES
Treasury Yields as of
9/30/14
3/31/15
9/30/15
3-month
0.02%
0.03%
0.00%
2-year
0.58%
0.56%
0.64%
10-year
2.52%
1.94%
2.06%
FED FUNDS RATE REMAINS ON HOLD
4.25
• Long-term interest rates trended downward during
• At the September FOMC meeting, the Fed once
again left short-term interest rates unchanged, citing
recent global economic and financial developments
as potential headwinds to U.S. growth and inflation.
3.75
3.25
Percent (%)
the quarter as continued equity market volatility drove
a flight to quality. After testing the 2.0% level in
August and September, the 10-year Treasury yield
ended the quarter at 2.06%.
2.75
2.25
1.75
1.25
0.75
0.25
• The FOMC statement and updated “dot plot” (see
-0.25
chart on right) once again carried a more dovish tone
than many expected, but left the door open for a rate
hike later this year. In fact, the majority of FOMC
members still expect the first rate hike since 2006 to
occur by year end, with all but one anticipating the
federal funds rate above 0.75% by the end of 2016.
2015
2016
2017
2018
Longer Run
Target federal funds rate at year-end
Note: Each diamond indicates the value (rounded to the nearest 1/8
percentage point) of an individual participant’s judgment regarding the
appropriate level of the federal funds rate at the end of the specified
calendar year or over the longer run.
Source: PMFA, Federal Reserve
EMPLOYMENT
July
August
September
Unemployment Rate
5.3%
5.1%
5.1%
Nonfarm Payrolls (Change)
223K
136K
142K
• The labor market has been a bright spot in the U.S.
JOB OPENINGS SURGE TO RECORD HIGH IN
JULY
economy but has lost some luster on the back of
the disappointing September jobs reports. Nonfarm
payrolls increased by 142,000 in September, but
the accompanying revisions to prior months limited
the net increase for the month to a mere 83,000.
September – the lowest reading in over seven
years. While labor force participation has been
declining, the number of unemployed persons has
fallen by 1.3 million over the last year.
• Other gauges of labor market health also tell a
positive story. Since 2009, the hiring rate has
trended upward and currently sits above 3.5%, near
its cyclical peak. The job openings rate surged to a
record high in July, eclipsing the rate of hiring, even
as the quit rate edges higher, as more workers
have gained confidence to seek out a better job.
Wage growth remains limited, but an increasingly
competitive environment for employers should
support stronger wage growth as labor conditions
continue to tighten.
4.0
3.5
Percent (%)
• The unemployment rate was unchanged at 5.1% in
4.5
3.0
2.5
2.0
1.5
1.0
Hire Rate
Openings Rate
Quit Rate
Source: PMFA, Bureau of Labor Statistics
5) 5
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Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on
data obtained from recognized statistical services or other sources believed to be reliable. However, some or all information has not been
verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature
constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the
current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any
fundamental or quantitative analysis may not agree.
Sources for the Economic Dashboard include PMFA, Bureau of Economic Analysis (BEA), Bureau of Labor Statistics (BLS), U.S. Department
of Labor, U.S. Census Bureau, Federal Reserve, The Conference Board, Institute for Supply Management (ISM), National Federation of
Independent Business (NFIB), U.S. Department of Housing and Urban Development, National Association of Realtors, Standard & Poor’s
(S&P), and the Economic Cycle Research Institute (ECRI).
Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose
of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should
consult a representative from PMFA for investment advice regarding your own situation.