Stand and Deliver: Will the US Economy Rebound as Expected in the Second Quarter?
This year has so far followed last year’s pattern: another bad winter and another bad start to the year.
By now most investors know that U.S. first quarter growth numbers aren’t going to be pretty.
Economic statistics this year have been missing expectations by the largest margin since 2009. As a result, economists’ expectations for first-quarter gross domestic product (GDP) growth have collapsed, to 1.35% today from 3% in November.
That said, most investors view this first-quarter slowdown as a temporary setback, in what they still expect to be a strong year. Economists’ estimates for second quarter GDP growth have actually risen recently, to more than 3% today from 2.8% in January.
However, while the U.S. economy is likely to regain some of its lost swagger by year’s end, an obscure but useful economic statistic released earlier this week — the Chicago FedNational Activity Index (CFNAI) — suggests the second-quarter bounce may not be as strong as many expect.
The CFNAI is a weighted average of 85 national economic activity monthly indicators. In contrast to backward-looking statistics like GDP, it’s a forward looking metric that gives some indication of how the economy is likely to look in coming months.
The March CFNAI reading came in below estimates, negative for a third month in a row and at the lowest level since January 2014.
The reason this matters: The CFNAI has one of the best track records for forecasting the rate of economic activity one-quarter ahead. Over the past 35 years, the level of CFNAI has explained roughly 40% of the variation in the next quarter’s GDP. Indeed, as I’ve mentioned before, the CFNAI is one of the most important economic numbers, in my opinion.
The good news is the current reading of -0.42 isn’t indicating an imminent contraction or recession–by comparison, the reading was -2 on the eve of the financial crisis. But this week’s number does suggest that second quarter U.S. GDP growth should be around 2%. While this isn’t awful, and is in-line with the post crisis norm, it’s a long-way from the +3% growth that most economists are expecting.
It’s possible the March reading will be revised upwards in the coming months. And in any case. investors should never put too much emphasis on any one number. That said, if the March CFNAI does prove to be an early indication of a weaker-than-expected second-quarter rebound, this has several implications for investors.
A softer rebound will give the Fed even more latitude to take its time.
While the Fed is still likely to start raising rates this fall, we may see only a single hike in 2015, rather than two or three.
Low long-term yields.
A weak second quarter would provide even more evidence that long-term yields will remain low.
A stalling dollar.
Finally, softer U.S. growth, particularly in the context of unexpectedly strong growth from Europe, may cause at least a temporary stall in the dollar rally. The silver lining is that while a soft economy will not be great for domestic sales, it would give U.S. exporters a bit of breathing room.
(c) Blackrock Investment Management