Business Cycle Indicators

Posted June 6, 2012 by Editor

[private]Business Cycle Indicators: Softer Messages in Economic Data

Global Indicators

• GDP forecasts for 2012 have stabilized, but risks tilt to the downside on Eurozone anxieties.
• Global PMI data have edged downward with much of Europe showing sub-50 readings.

U.S. Consumer

• Confidence measures more optimistic from late-2011 lows, but still show some hesitation on soft recovery.
• Retail and auto sales show modest growth.

Housing Market

• Single-family starts and new homes sales remain depressed.
• Recovery continues to be uneven across geographic markets.
• Distressed mortgages still elevated, as some households still face foreclosure.

Labor Market

• Non-farm payrolls were low in April (+77K), lower in May (+69K), bringing the three month average to 97K—lower than the standard “replacement level” of 125K.
• The proportion of long-term unemployed is worryingly elevated, and cyclical unemployment may turn into structural unemployment.

Business Conditions

• ISM readings show activity is weakly growing in service sector, and manufacturing activity is even slower.
• Small business sentiment recovered in April on positive earnings reports.

Financial Markets

• Earnings stronger in Q1, but outlook unchanged for the year. Expect markets to react to Eurozone turmoil.
• Defensive sectors (CONS, TELS, UTIL) hold value during the equity market correction. Commodities indices trip on weaker China PMI data.
• Treasuries remain supported by Fed “low for long” pledge while corporate quality spreads trend lower.

Risks to the Outlook

• China PMI data shows weakness, although the soft landing scenario seems likely.
• Europe remains the primary risk to the U.S. outlook. Whether policymakers are able (and willing) to cooperate and preserve the current composition of the Eurozone remains to be seen.

DE Forecast

• GDP: 2.5% to 3% for 2012.
• Unemployment: Labor market improvement slows; 7.7% at the end of the year.
• Interest rates: No change in Fed Funds rate this year. Treasury yields remain depressed on hunt for safe haven assets.
• Equities: Strategically bullish with end of 2012 fair market value for the S&P 500 at 1375-1450—up from 1350-1400 in previous DE forecast.

Business Cycle Indicators 6-6-12[/private]