Economic Commentary October 2016

Posted on Saturday, October 1, 2016

Holding Our Breath as the Election Nears...

By Mel Miller, CFA | Chief Economist

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The Brexit vote in the UK dominated second quarter forecasts, as pollsters predicted British voters would want to stay in the European Union. But they were wrong!

The economic releases showed a slowing U.S. economy prior to the vote. Immediately after those votes were counted, many economists reduced their Gross Domestic Product forecast for 2016. I was one of them. I reduced my forecast to 1.3%-1.7% GDP growth for this year.

The economy expanded at a snail's pace averaging about 1% during the first six months of 2016 (0.8% in the first quarter followed by 1.4% in the second). Economists are wondering if the pace has increased during the third quarter. Perhaps more importantly, we wonder if the uncertainty over the outcome of the presidential election in the United States will cause the economy to derail in the fourth quarter?

Key Economic Indicators

EC- Retail Sales Graphic [#1]Let's examine the key economic data now available the third quarter. It appears that consumers took a breather in Q3. Retail sales were extremely weak following three straight positive months. Gasoline prices were relatively stable, but other categories suffered declines. Could a weakening labor market be the cause?

Growth in hourly wages continues, which is a positive trend that started at the end of 2014. While the long-term upward trajectory remains in tact, hourly wage growth during the third EC- Weekly Wages Graphic [#2]quarter was weaker than the trend. The year-over-year rate of wage increases declined from the 2.7% annual rate in July to the recent 2.4% in August.

A key measure of the labor market is the unemployment rate. At the end of 2009, the rate stood at 9.9%. It's now at 4.9%. Impressive!?

No, not really. The rate had declined to 5% at the end of October
2015. For the last eleven months, the unemployment rate has not improved. It appears the labor market recovery has stalled.

EC- Consumer Confidence Graphic [#3]Consumers appear to be generally optimistic. The slowing labor market and the mudslinging of this political campaign season has not dampened consumer confidence. The Conference Board Consumer Confidence Index recorded a seven-year high in September. Confidence in the economy and in the capitalistic system - especially in light of the massive fraud revelations from Wells Fargo Bank - points to a strong belief in our economic system and hope for the future.

The business sector is not showing quite so much optimism.
Manufacturing is still suffering from the high value of the dollar relative to other global currencies, which hurts
EC- ISM Purchasing Managers Index Graphic [#4]exports. World demand remains weak, as the economies of Europe continue to hover at near recessionary levels. The Institute for Supply Management Index for Manufacturing declined early in the quarter, as did the ISM Service Index, before rebounding in September. Durable goods orders, which is an indicator of future economic activity, have shown improvement during the past three months.

The National Federation of Independent Businesses surveys 800
smaller companies each month measuring such topics as plans to hire additional workers, make capital outlays, increase inventories, EC- NFIB Confidence Index Graphic [#5]and earnings trends. The forty-two year average is 98. The most current reading is 94.4, but the trend is

What About the Election?

The populace is intrigued with the upcoming election - and somewhat unnerved. A record 80 million people tuned into the first debate between the two primary candidates for president. But what impact will the outcome of this election have on the economy? I am not a political economist, so my comments are anecdotal based on a lifetime of studying the markets.

As Donald Trump rose in the polls starting in June, the stock market stalled and volatility increased. Why? The market has been trading on the premise of a Hillary Clinton victory, a Democratic senate, and a Republican house. Clinton's economic plan is a continuation of current economic policy with some adjustments. Trump's tax-cut plan and spending initiatives are more radical compared to the status quo. Any change in expectations generally causes the stock market to decline - at least in the short term.

An unexpected Trump victory could trigger a negative wealth effect which could have a more long-term impact. A negative wealth effect is a psychological phenomenon that causes people to pull back and spend less because they "feel" less wealthy. This could result in a reduction in consumption and a follow-on reduction in production and employment.


The third quarter was definitely "mixed." Wages continued to grow at a moderate rate, retail sales slowed, and consumer confidence rose. The business sector was weak. Both the ISM Manufacturing Index and the ISM Service Index declined during the first two months of the quarter before rebounding in September. The dollar index remained stable, not helping exporters. It was encouraging that durable goods orders, a key business leading indicator, increased at the end of the quarter.

The groundwork for a strengthening second half of the year developed during the third quarter. My analysis shows the third quarter exceeding the 1% average GDP growth rate of the first six months of this year. In fact, third quarter GDP growth of approximately 1.5% seems very reasonable.

But the election could influence economic growth during the fourth quarter. Make sure to vote; every vote will impact the economy!


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.

Indexes are not available for direct investment. Mention of a specificcompany or security is not a recommendation to buy or sell that security. Past performance is no guarantee of future results. Source of data for graphic images in this Economic Commentary: Bloomberg.

The views expressed herein are those of First Affirmative and may not be consistent with the views of individual investment advisors or Broker-Dealers or RIA firms doing business with First Affirmative. Network Advisors may offer securities through various Broker-Dealers and Registered Investment Advisory firms. These affiliations, and all fees charged to clients, are clearly disclosed.