IHS Markit Manufacturing PMI has been rather subdued during June, as new orders and employment growth exhibited a slowdown from a month earlier. Nevertheless, the readings point to a sense of confidence for the year ahead as per survey respondents as the outlook was at its strongest level since February. While Michigan Consumer Sentiment stood at 95.1, 2.1% lower than a month earlier and lowest ever since November 2016, but this reading has shown greater resilience as economists were postulating a reading of 94.5. Reviewed from a long-term perspective, the average index value of consumer sentiment is highest since 2000. In addition, as per recently released data by Bureau of Economic Analysis personal income increased $67.1 billion, or 0.4% during May while personal consumption expenditure growth was slower at 0.1% or $7.3 billion. Analyst do see economic and policy uncertainty as a causal factor for possibly a peaking index, as improved performing economic indicators have been helping the sentiment. For example, the 2.9 gain of the ISM index, amid fading expectations of a fiscal boost either via government spending on infrastructure or tax reforms, is stabilizing the outlook.
There are some reasons for a subpar sentiment. Historical data shows that growth acceleration normally comes during the early phase of an economic expansionary cycle and not during the latter. If this trend is to continue then there is always a possibility that Donald Trump’s fiscal stimulus plans may under-deliver from the presaged 3-4% forecasted growth. There could be multiple factors that could even, in fact, slow down the economy, such as rising inflation, FED continued tightening at an accelerated rate, or an appreciation in the crude oil market in the intermediate term. All combined have an effect on imparting an economic slowdown. Public debt burden has soared by 11% during the last decade and the FED would continue acting consciously to reduce the federal budget deficit, reigning in growth prospects. This approach would remain at odds with the expansionist program that the current administration has in mind.
There is a silver lining though to the current economic expansion that is aiding Trump is that its duration is one of the longest recorded after late 1940’s, the longest lasting for 10 years in 1990. However, the rate of expansion is almost beleaguered and is the slowest recorded since that time at 2.1%. While there are ominous signs, there is a possibility, as per research cited by Applied Global Macro Research, that expansion could linger on for another 2 years because historically recession has been said to occur around 5 years after peaking of non-financial corporations; this occurred during the third quarter of 2014. Others may contend differently, for example, the term structure as of late has been favoring an imminent economic slowdown. Moreover, if bond and stocks stand correlated, with bond acting as leading indicators, Scott Wren of Wells Fargo call for a stalling of the stock market is worth heeding to. The S&P 500 target of 2,330, set last September stands eclipsed, as the index was trading as high as 2,436 last Monday. While some retracements and sectoral shifts are possible, the index may correct slightly in the second half, as investors should target stocks weighted to economic growth, which again airs a sense of confidence on the economic well-being of the US economy, at least in the short term!