Economic Commentary April 2016

Posted on Tuesday, April 19, 2016

March Madness Continues

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By Mel Miller, CFA | Chief Economist

College basketball's "March Madness" captured the hearts and souls of many individuals. To me March Madness is not limited to college basketball. Madness also occurred March 16th in Brussels as suicide terrorists killed 35 innocent people. That attack followed on the heels of the Paris and San Bernardino attacks in November of 2015.

Madness also permeates the Republican presidential debate as the circus atmosphere has expanded to slurs aimed at spouses. Personal security advocates were shocked as the FBI tried to force Apple to program a backdoor into the terrorist's cell phone. As an Economist, I wonder what impact such "madness" has on the economy.

Consumer ConfidenceOne must never forget that personal consumption comprises 70% of GDP (Gross Domestic Product). Consumer spending is the driving force of the overall economy. To the extent that the madness affects the psyche of the consumer and, by extension, Consumer spending, it is critical to study the mood of consumers.

Economists rely on consumer confidence surveys to judge the mood of consumers. The University of Michigan Consumer Sentiment Index and Conference Board Consumer Confidence Index paint the same picture of a consumer losing confidence in the current and future economy. It is not unusual for these indexes to decline in a presidential election year. After all, candidates never share the greatness of the current situation; rather, they tend to focus on weaknesses and talk about how they can make the country "great again."

Labor Participation RateSince a decline in consumer confidence is par for the course in a presidential election year, I worry only when it is validated by declining retail sales. Unfortunately, U.S. Census Bureau monitor of retail sales declined during the first quarter of 2016. In fact, over the last twelve months, retail sales have increased at only roughly the same pace as inflation. Unit expansion is minimal.

Is this negative trend caused by the "madness" or the result of a weakening jobs market? Actually, the labor market actually improved during the first quarter. The labor participation rate, which has been on a downward path since the start of the Great Recession, surprised economists by increasing in March. Workers who, out of frustration, had left the job market, started to return in March-a sure sign of improvement.

U-6 UnemploymentThe all-important Bureau of Labor Statistics U-6 employment measure continues to edge lower. The index includes those unemployed, plus part-time workers who want to work full-time, plus marginally attached workers. It's considered to be the truest measure of real unemployment. The decline from 17.1% to the current 9.8% is a sure sign the labor market is strengthening.

Are there signs of strength in the business sector? Yes and no. The strengthening U.S. dollar and commodity price declines have put pressure on exports. In fact, Alaska, North Dakota, West Virginia, and Wyoming are currently in recession because of declining commodity prices (coal, oil gas, primarily), and Louisiana, New Mexico, and Oklahoma are teetering on the brink. Since prices are likely to stay depressed for a while, the economic health of those states and countries that are dependent on energy sales are not likely to improve.ISM Manufacturing Index

However, there are positive signs in other business sectors. The ISM Purchasing Managers Manufacturing Index actually highlighted a manufacturing reversal in March. While barely above the contraction level, at least manufacturing is no longer contracting.

A falling ISM Purchasing Managers Retail Index is adding to the business sector confusion. The retail sector has been the driving force of the recovery. While still expanding, the retail sector has fallen radically during Q1-2016. The decline in the first quarter is alarming to say the least.


ISM Retail IndexIt should be obvious that the economy is hardly booming. GDP expanded at an above 3.9% annual pace in the second quarter of 2015 and has drifted lower since then. Expanding at 2% in the third quarter of 2015, followed by an extremely weak fourth quarter, as the economy expanded by just 1.4%, this downward trend has accelerated recession fears. The Federal Reserve has declined to raise rates after the initial "lift-off" on December 16, 2015 due to concerns about a weakening economy,

What is the result of this madness? My analysis points to an economy that grew at approximately 1.75% in the first quarter of 2016, well below the average long-term growth rate of 3.2%.

Unfortunately, the madness I highlighted in the beginning is not likely to subside in the second quarter. In fact, there is a high probability that one, if not both, political conventions will be open and contentious conventions. Heightened political uncertainty coupled with continued terrorist concerns will only add to market and economic uncertainty. "March Madness" will continue in the second quarter.

Mel Miller, CFA is Chief Economist and a member of the First Affirmative Investment Committee. He monitors economic conditions and market movements, and keeps the firm and its network advisors current on economic issues.

NOTE: Indexes are not available for direct investment. Mention of a specific company or security is not a recommendation to buy or sell that security. Past performance is never a guarantee of future results.