Monthly Highlights Following a disappointing first-quarter GDP reading, economic growth rebounded in the second quarter, at a.% annualized rate. The economy recaptured some pent-up demand lost during the excessively cold winter months, and growth expectations for the remainder of the year are solid. Although inflation has shown some signs of firming, price pressures are likely to continue to be subdued in the near term. Headline CPI increased at a 1.7% annualized rate in August, down from a.% reading one month prior. Interest rates continue to trend lower, as the - year Treasury yield has declined by roughly 5 basis points year to date. Similarly, 3-year yields have declined markedly, which has caused a flattening of the yield curve. The economy added, jobs in September, and previous estimates were revised higher. The three-month average of payroll job growth stands at a healthy,. The unemployment rate declined to a post-recession low of 5.9% during the month, while wage inflation remained subdued. Typically, as the economy nears full employment, wage pressures begin to build, although there is only limited evidence of that thus far in the current cycle. Overall, the economy appears on track to sustain a moderate pace of expansion. Indicators for both consumers and businesses have shown gradual improvement in recent months. This should support economic growth as we look toward the final quarter of the year. Gross Domestic Product Prior Reading Change Most Recent Real GDP QoQ - Q (III Est.) -.1%!.% Personal Consumption QoQ - Q (III Est.) 1.%!.5% Employment Market Unemployment Rate - September.1% 5.9% Nonfarm Payrolls (Change) - September K! K Initial Jobless Claims -Week Avg - October Continuous Jobless Claims -Week Avg - September Inflation 95K 7.75K K 1.3K CPI YoY - August.% 1.7% Core CPI YoY - August 1.9% 1.7% Core PCE YoY - August 1.5% # 1.5% Consumer Indicators Economic Dashboard Retail Sales YoY - September 5.%.3% Consumer Credit YoY - August.9%.% Personal Income YoY - August.%.3% Personal Savings YoY - August 5.% 5.% Consumer Confidence - September 93.. Business & Production Indicators ISM Manufacturing Index - September 59. 5. ISM Services Index - September 59. 5. Industrial Production YoY- August.%.1% Small Business Optimism - September 9.1 95.3 Housing Market Existing Home Sales - August 5.1MM 5.5MM Housing Starts - August 1117K 95K JIM BAIRD CPA, CFP, CIMA Partner, Chief Investment Officer S&P Case-Shiller Price Index YoY- July.1%.% Leading Indicators ECRI Weekly Leading Index - September 13.! 135. Conference Board Leading Economic Index - August 3.! 3.
OVERVIEW On Aug. 1 3, some of the world s most influential economic policymakers met for the annual Jackson Hole Economic Symposium sponsored by the Kansas City Fed. The distinctive setting was originally selected to entice former Fed Chair Paul Volcker (an avid fly fisher) to attend in hopes that others would follow. The affair is now viewed as one of the most prominent events in the world of economics each year. This year s theme, Re-Evaluating Labor Market Dynamics, explored the question, Is the persistently high unemployment rate cyclical or structural? The answer may seem trivial on the surface, since a large number of individuals are out of work regardless of the reason, but the conclusions drawn by the Fed could affect future policy decisions. Cyclical unemployment is viewed as short term in nature, the product of a temporary lack of demand; in this case, demand not yet recaptured from the damage caused by the Great Recession. If the elevated jobless rate is indeed cyclical, then accommodative monetary policy should help incite a recovery in demand, in turn pushing the unemployment rate lower without spurring excessive wage growth or inflation. In contrast, structural unemployment is viewed as a longterm phenomenon, the product of a mismatch between the requisite skills demanded by employers and those possessed by the workforce. Unlike cyclical unemployment, which should be recaptured as the economy recovers from the temporary lack of demand, structural unemployment is not generally influenced by the business cycle and requires a longterm shift in the skill set of the workforce to match employer demands. This would imply that the overall jobless rate is likely to remain at somewhat higher levels than historically has been the case, and expansionary monetary policy may not be an effective tool to return the economy to full employment. Like many economic arguments, the right answer can be difficult to ascertain. Even the Fed has reached mixed conclusions, as evidenced by various academic papers it has produced. The lack of wage pressures in an otherwise improving labor market implies the economy may still be suffering from excess slack which would support the lower for longer view. However, the persistently elevated number of longterm unemployed workers and the high percentage of jobs that employers have suggested are hard to fill could indicate that the accommodative policy may be less effective and that the jobless rate has limited room to fall further without creating inflation. The Fed continues to closely monitor the labor market, wage growth, and inflation as it fine tunes its strategy. While market observers broadly expect the Fed to announce the end of QE following its late October meeting, the timing for the first increase in the Fed funds rate remains a question mark. Expectations point to mid-15; however, the Fed will continue to weigh the risks against the benefits as it continues its balancing act. Recent economic data has supported the Fed s shift toward less monetary accommodation, as we ve seen broad-based improvement for business and consumer measures. Consumer credit has risen alongside of confidence levels, helping to boost spending. Businesses appear to be benefiting from the increased demand, as purchasing manager surveys indicate continued expansion in the manufacturing and service sectors. Perhaps most importantly for the Fed, job creation remains solid and inflation pressures remain at bay, as wage growth remains in check, a stronger dollar has pushed import prices lower, and a weak global demand has weighed on commodity prices. Employment to Population (%) EMPLOYMENT SLACK: CYCLICAL OR STRUCTURAL? 5 1 3 1 59 5 - U.S. Employment to Population Ratio Unemployment Rate Source: PMFA, Bureau of Labor Statistics (BLS) Unemployment Rate (%) MONTHLY INSIGHTS Recession throughout 7 9 caused the employment-to-population ratio to decline substantially, while concurrently, the nation s unemployment rate rose. Since then, the unemployment rate has steadily declined, while the employment-to-population ratio remained suppressed. But why? From a structural standpoint, an aging population and a tough job market for new graduates undoubtedly played a role. However, some cyclical effects are also likely at play, which would suggest there may be room for the economy to add additional jobs, even as the overall unemployment rate approaches its long-term average.
3 GROSS DOMESTIC PRODUCT Q Final Q1 Final Q III Est. Real GDP QoQ 3.5% -.1%.% Personal Consumption QoQ 3.7% 1.%.5% Economic growth rebounded at a.% annualized pace in the second quarter. This marks a significant improvement from the first quarter s disappointing.1% contraction. Consensus estimates for third-quarter GDP, according to a Bloomberg survey, are currently forecasting growth of around 3.%. Recent manufacturing data has surprised to the upside, as the one-year change in U.S. factory orders recently surpassed 15%. This overall trend in increasing new manufacturing orders is undoubtedly positive for personal consumption growth, but fueling last month s figure was a surge in aircraft orders an outlier from a historical perspective. QOQ % Annualized Change 1 1 1 RISING DEMAND FOR U.S. FACTORY ORDERS Personal Consumption Durable Goods 1 1 1 - - U.S. Manufacturing New Orders Source: PMFA, Bureau of Economic Analysis, Institute of Supply Management YOY % Change INFLATION June July August Consumer Price Index YoY.1%.% 1.7% Producer Price Index YoY 1.9% 1.7% 1.% The Consumer Price Index declined by a.% seasonally adjusted pace in August. Year over year, the index increased 1.7%, down from.% one month prior. Core inflation printed in line with headline inflation at 1.7%. Both figures have come in below expectations in recent months, primarily due to an uncharacteristically large decline in airline prices during July and August. Globally, inflation results remain mixed. In Japan, aggressive actions by the country s central bank appear to have been successful in breaking the country s deflationary trend. In the Eurozone, however, disinflationary pressures remain strong. As a result, the ECB is widely expected to engage in further economic stimulus, which should be supportive of growth and, consequently, inflation. Percent (%) GLOBAL INFLATION RESULTS ARE MIXED. 5.. 3.. 1.. -1. -. -3. U.S. CPI Japan CPI U.K. CPI Eurozone CPI Source: PMFA, BLS, Organization for Economic Cooperation and Development
INTEREST RATES Treasury Yields as of 9/3/13 1/31/13 9/3/1 3-month.%.7%.% LONG-TERM YIELDS TRENDING LOWER IN 1 -year.33%.3%.5% 3. -year.% 3.%.5% 3. Long-term Treasury yields have been volatile in recent months, falling meaningfully during the month of August and reversing course in early September before continuing on a downward trend. The -year Treasury dipped to.35% in August, its lowest point in over a year. Much to the surprise of most investors, who viewed rising interest rates as the base case scenario, Treasury yields have trended lower this year. Demand for Treasuries continues to be supported by a near-zero fed funds rate, falling yields in the Eurozone and other developed nations, concerns of disinflation and low-growth globally, muted issuance, and heightened geopolitical risks. Yield (%)..... -Year U.S. Treasury Yield Source: PMFA, U.S. Treasury as of 9/3/1 Over the longer term, assuming economic growth continues at a modest pace, higher interest rates remain the path of least resistance. EMPLOYMENT July August September Unemployment Rate.%.1% 5.9% Nonfarm Payrolls (Change) 3K K K The labor market produced strong results in September. Nonfarm payrolls increased by,, while prior months were also revised higher, bringing the three-month average increase in nonfarm payrolls to,. Meanwhile, the unemployment rate ticked down to 5.9%, its lowest reading in almost six years. While average hourly earnings have been modestly trending upward, with a.% increase over the past year, wages have been nearly flat on an inflationadjusted basis. The Fed s decision to raise the fed funds rate remains dependent on continued improvement in job market conditions and maintaining price stability and expectations for future inflation. While inflation data has been firming, and job creation has been solid, wage growth remains muted. Investors, along with the Fed, will be closely watching incoming data to determine if a pick-up in wage growth is on the horizon or if wage stagnation is merely an indication of slack in an economy that remains far from full employment. Fed Funds Effective Rate (%) FED FUNDS RATE AND UNEMPLOYMENT GAP Fed Funds Effective Rate (%) The Unemployment Gap* *The Unemployment Gap is calculated as NAIRU less Unemployment Rate. NAIRU's assumed value is 5.% 3 1-1 - -3 - -5 The Unemployment Gap (%) Source: PMFA, BLS, Federal Reserve Bank of New York
5 Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain. 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 and 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.