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Business Cycle Indicators
[private]Business Cycle Indicators: Softer Messages in Economic Data
- 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.
- Confidence measures more optimistic from late-2011 lows, but still show some hesitation on soft recovery.
- Retail and auto sales show modest growth.
- 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.
- 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.
- 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.
- 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.
- 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]