Smooth Sailing But The Winds Are Calming

Note: This post originally appeared of the FTR blog in November.  Some of the economic indicators have been updated since then, however the conclusions and substance of the analysis  have not changed.

GDP has been above 3% for two straight quarters! Business people are giddy with excitement, as business conditions and confidence are at their highest level since the Great Recession. CEOs all the way down to factory workers are hopeful the economy has broken through seven years of the slow-growth recovery and will get even better in the future.

Early this year, the forward-looking economic indicators pointed to higher growth, or 3% GDP, for part of 2017. This combined with antidotal evidence from various industries was my basis for predicting higher economic growth this year. In this case, the view from the ground, talking with knowledgeable business people, was more accurate than the view from the air, the economists.

But where are we now? Are we headed higher or not? It’s time to revisit the indicators to see how 2018 will begin.

Leading Economic Indicators

The ECRI Weekly Leading Growth Index has been declining since peaking in February. It hit 0.8 in September. That was hurricane related, however, because it recovered to 3.2 in October. Similarly, the Conference Board Leading Economic Index has been slightly weaker than earlier this year, and the storms actually put it in negative (-0.2) territory in September.

Although these indicators have weakened, they are still giving positive readings. This is good news in that economic growth should continue into 2018. However, they are not forecasting stronger growth ahead, but a moderate slowdown.

Manufacturing

The ISM October PMI for manufacturing was a sturdy 58.7, down 2.1 percentage points from September. However, the forward-looking components of the index remain vibrant. The New Order number was at 63.4%, and backlogs remain solid at 55. In addition, customer inventories are regarded as too low.

Factory orders are growing again after flattening out in the summer. Data from the Philadelphia FED show manufacturing activity at a strong and steady rate for the past six months. Most commodity prices are much higher than a year ago.

This data indicates there is solid support for manufacturing activity in the short-term. It also says there is not impetus present which would push things much higher.

Housing

Building Permit data has been basically flat for the past year. The NAHB Builder Confidence Index remains elevated, but hasn’t changed much over the last 12 months. It appears housing with be neither a drag nor a boost to economic growth in 2018.

Business/Economic Confidence

The surveys from Gallup and Moody are still at positive values, just not at the high levels from earlier this year. This is not surprising since expected changes are moving much slower than people anticipated.

Consumers

Consumers are still consuming at favorable rates. Unemployment is low, and hiring is forecast to continue at steady. The Conference Board Help Wanted OnLine measure increased by 81,500 listings in October. However, my measurement of discretionary spending has been very flat since March. This indicates wages aren’t growing much beyond increases in expenses.

Transportation Equipment Market

Both the Class 8 and commercial trailer markets have slowed some after being robust through September. The pause was unexpected due to freight fundamentals remaining strong; however, it is consistent with the trends of the indicators detailed above. Both markets are expected to regain their momentum early in 2018.

Conclusion

Based on the indicators and data, it does not appear the economy can maintain its +3% growth rate in the medium-term. The good news is that even though the numbers have weakened some, they are still in positive territory.

Therefore, the economy should slow very modestly. It looks like we are still locked in a range where GDP increases moderately and then falls moderately. The difference now is that it is fluctuating at a somewhat higher range, peaks above 3%, than previously. So, it is good news, just not great news.

The Economists View

As a double check, the Wall Street Journal Economists Survey predicts a Q4 GDP of 2.8% and a 2018Q1 of 2.4%. The first quarter has been weaker than expected the last few years, so a drop to 2.4% seems reasonable. However, 12% of the respondents are forecasting a Q1 growth of over 3%.
The recent economic news (since this survey) has been very positive. The “bounce-back” from the hurricanes is providing an economic boost. Now 3% GDP in Q4 looks probable.

The Call

We will top 3% GDP in Q4 due to hurricane recovery and then drop below 3% in Q1. The economy should then resume it’s favorite “recovery” range between 2% to 3%. Of course, tax reform is the current wild card.