Navigating Economic Signals with Optimism

While the markets reacted to all the news last week positively, there were both some positives and negatives when looking at the data.

First the positives: the recent Consumer Price Index (CPI) inflation data was quite encouraging, suggesting a moderation in price increases. The details of the CPI report were also encouraging as one of the key elevated inflation metrics remains shelter inflation and I believe the actual shelter inflation trend is lower than the very lagged Bureau of Labor Statistics (BLS) shelter series. Substituting in more real time data shows both core and headline inflation readings about 2%—right on target for the Fed.

However, several real economic indicators have come in below expectations, raising some concerns about the overall health of the economy. This includes softer retail sales, housing starts, and manufacturing output.

GDP forecasts have thus been adjusted downward. While the initial estimates for Q2 gross domestic product (GDP) were overly optimistic, projecting growth in the 4’s, we’re now seeing revisions bringing expectations down to the low 3’s or even upper 2’s.

There was also a downward revision of Q1 GDP figures, but it’s important to recognize the resilience in corporate earnings despite this softer economy. Companies have generally reported strong results, which is positive that businesses are managing margins well even with more sluggish economic growth figures. We could see a further boost to earnings if the current estimates for Q2 GDP come in on track.