Keep calm and carry on

Keep calm and carry on

Posted on 10 April 2015

"Though there has been some instability in the data, the US economy seems to be on solid footing"

The recent spate of US data, namely disappointing payrolls, slower manufacturing activity, and unimpressive consumer spending, has left some investors wondering whether the nation’s economy has turned cold. Indeed, the icy temperatures in the tail end of winter did crimp activity to some degree. West Coast port closures did not help the situation either. Both of these factors, though, should be temporary. After last year’s polar vortex wrecked havoc on economic reports, we’ve become adept at separating the fundamental from the fleeting.

Consider 2014’s GDP growth trajectory. The US economy contracted during the year’s frigid first quarter and then promptly rebounded to end the year up 2.4%. Payrolls also followed a similar pattern, with a slow start but a strong finish. We see reasons to believe 2015 will be no different.

  • March’s soft payroll gains look more like a hiccup than a trend. Wage growth picked up 0.3% in March after only rising 0.1% the month prior. Furthermore, US job openings climbed to a 14-year high in February. The increase in employment opportunities, led by construction companies, retailers, and restaurants, indicates that hiring should improve as the year progresses. Finally, jobless claims from mid-March through April 4th averaged 282,250 a week, the lowest level since June 2000.[1]
  • Housing data has surprised to the upside despite unfavourable weather conditions. Pending home sales increased 3.1% in February, reaching the highest level since June 2013. Mortgage applications and household formations are also on the rise.[2]
  • Consumers are spending (selectively), and they have some reserves built up. Consumers have saved a portion of their extra income due to lower prices at the pump. The US savings rate now stands at almost 6%. With warmer temperatures coming and oil prices remaining at depressed levels, consumers may unleash some of that pent up cash in the coming months. In fact, in March we saw annualised auto sales pick up to 17 million after three months of declines.[3]

Though there has been some instability in the data, the US economy seems to be on solid footing. The more difficult question is whether it’s good enough to convince the Federal Reserve to make a move. The minutes from March’s Federal Open Market Committee (FOMC) meeting revealed that several members of the committee saw justification for a rate increase in June given the improved economic outlook; while others favoured pushing it to later this year or even 2016. Though the committee is divided, a move in June is not necessarily off the table. Regardless of when the Fed finally pulls the trigger, what matters is that a divergent path of monetary policy is unfolding across the developed world and we have been adjusting our tactical asset allocation weightings in anticipation of this.

[1] Source: Bloomberg, as of April 3, 2015

[2] Source: Bloomberg, as of April 3, 2015

[3] Source: Bloomberg, as of March 31, 2015

Hans Olsen, CFA Global Head of Investment Strategy

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