The Economic Situation, June 2017

Have you ever ridden a roller coaster, a really big one with lots of ups and downs, and wondered if you were nearing another summit to be followed by a stomach-churning downturn, only to learn it was just a momentary deceleration, a prelude to higher ground? Do you recall how the roller coaster speed dropped off as the engine strained to pull the cars to what might become the summit? Yes, you were still climbing, but the pace was slowing down.

The roller coaster analogy may apply as we think about the midyear economy. Our economy has been climbing from the Great Recession for eight years now, but the pace has been uneven and slow, especially in the last 12 months. But is the economic roller coaster nearing a summit, with a recession coming maybe a year from now? Should we fasten our seatbelts and sit low in the seats? Or does this eight-year-old recovery and expansion—weak though it may be—have another surge of energy that will propel it forward? 

Taking a Closer Look: Tweet Uncertainty

When measured by real GDP growth, the economy is down in the dumps. The Commerce Department’s April 28 estimate for 1Q2017 GDP growth came in with a hard-to-detect 0.7 percent annual growth rate, weakened primarily by low consumer spending and inventory cutbacks. This was revised upward on May 26 to a not-quite-so-pale, but still way-below-par 1.2 percent. Let’s face it, there’s a lot of uncertainty out there. Ordinary folks are waiting for word on taxes, healthcare, immigration, travel bans—you name it. Enterprising decision makers face another set of hard questions. Will NAFTA be revised or not? One day it’s yes, the next day it’s no. What about China? Friend or foe? Trade wars with Canada? What about Mexico? Is NATO obsolete or necessary? It’s called regime uncertainty, or maybe we should call it Tweet Uncertainty, and we have plenty of it. One thing about the low first quarter estimate: it makes 2016’s final 1.6 percent growth rate look like boom times. Needless to say, we should probe deeper.

A scan of other important indicators adds strength to the notion that we are approaching the peak of an economic cycle. Take employment growth, for example. We have seen monthly employment gains that exceed 200,000, and the headline unemployment rate has been below 5 percent for 12 months. Help wanted and hiring signs are now commonplace indicators of stronger economic activity. But when plotted, the number of jobs added monthly on a five-month moving average since 2015 has a pronounced negative slope. In multiple conversations with business leaders, I get the impression they are scraping the bottom of the barrel when trying to find qualified workers.

Bank commercial and industrial loan activity, like the overall economy, is also growing, but at a diminishing rate. And in March, the manufacturing component of the Fed’s industrial production index came in with negative growth. Falling total vehicle sales for Ford, GM, Nissan, and Toyota confirmed the weak manufacturing numbers. Viewed together, the path these data are forming is shaped like a roller coaster approaching the peak when viewed from the ground. The path is concave from below. 

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