The economy is struggling to regain positive economic momentum, according to recent readings of the Philly Fed’s ADS Business Conditions Index. Is it making any progress?
As the chart below shows, the ADS Index has been trending lower since late last year, suggesting that the headwinds to growth are building.
The index is “designed to track real business conditions” based on six indicators that are a blend of high and low frequency data, i.e., economic reports with frequent and relatively infrequent updates. The latest reading, however, shows an upturn, suggesting perhaps that the slump of late is about to turn.
One clue that the upturn may have legs comes by way the latest outlook for the Philly Fed’s region, where the “manufacturing sector is continuing to show signs of growth,” according to the current update.
In the wake of the Philly Fed manufacturing news, Bloomberg News advises:
Factories keep adding workers and increasing production to replenish depleted inventories and meet rising global demand. Gains in manufacturing may be the spark that ignites a broader economic expansion, leading to increases in payrolls and consumer spending.
“The manufacturing sector has been the one bright spot for the economy in recent months,” said Scott Brown, chief economist at Raymond James Associates Inc. in St. Petersburg, Florida. “Clearly a sustainable recovery will require an improvement in the jobs. We’re right on the cusp of new hiring.”
The opportunity for fresh data supporting (or rejecting) such optimism arrives next week with updates on durable goods orders (Wed), weekly jobless claims (Thursday) and the final estimate of 2009 Q4 GDP (Friday).
The clock is still ticking for a more convincing rebound, particularly with the labor market, which remains weak. But the clock is ticking slower than it otherwise would be if inflation was a threat, which it isn’t, at least not based on the latest reading via today’s CPI report, as we noted earlier.
“Tame inflation is the get-out-of-jail-free card for the Fed,” opines Lou Brien, market strategist at DRW Trading via Reuters. Why does the bell toll for thee in slow motion? “Because as long as inflation stays low or trends lower as it’s doing,” he says, the Fed “can wait for the labor market to come back longer than they would if inflation was to start trending up.” In short, the monetary liquidity flowing can roll on without worry of pricing pressures.
But the ticking may soon pick up the pace, as The Economist yesterday reported:
Dave Greenlaw of Morgan Stanley notes that one component explains all the decline in core inflation: housing. America’s Bureau of Labour Statistics measures the cost of home ownership by what someone would have to pay in order to rent the house he owns. Falling home prices and high vacancy rates are pushing rents down. Since rent and the estimated equivalent of rent for owners comprise more than 40% of the core index, this has a huge impact on the direction of core inflation. When housing costs are excluded, core inflation has actually risen, to 2.6% in February (see chart). Mr Greenlaw predicts that housing inflation will stop falling, spurring the Fed to raise rates later this year.
Maybe, although as Paul Ashworth of Capital Economics also tells The Economist, the weak labor market is the source of the feeble housing market. Unless you expect to see the labor market turn much stronger in the near term, the get-out-of-jail-free card will likely remain intact.
It’s still all about jobs (politically and otherwise), and probably will be for many weeks and months to come.