Your Weekly Economic Update
Below is an excerpt from the “Economic Section” of the Sevens Report originally released on 12.29.14
Economic Update
Last Week
There were two key takeaways from last week’s economic data: First, the U.S. consumer re-emerged in the 2nd and 3rd quarters of 2014, and was the main driver of growth in the U.S. economy during the second half of 2014. Second, the stronger U.S. dollar is starting to have an impact on the economy and we should expect further moderation in manufacturing metrics going forward. Importantly, this moderation in the manufacturing sector isn’t a bad thing as long as the landscape continues to improve for the U.S. consumer. It’s much more positive for the U.S. economy to be led by a resurgence of the U.S. consumer than continued manufacturing growth (because consumer spending is nearly 70% of the U.S. economy).
The key number from last week was the final revision of the Q3 2014 GDP report. Final GDP was 5.0% saar (beating the 4.3% expectation), and the gains were driven by consumer spending. PCE (broad consumer spending) was revised higher to 3.2% from 2.2% while Gross Domestic Purchases (the amount of goods purchased by the country regardless of where the goods came from) was revised to 5.0% from 4.1%.
Again, those who are skeptical of the recovery will point out that a lot of the uptick in consumer spending came from increased healthcare expenses, and that is true. But the bottom line is these are healthy numbers for the economy, and they again underscore the shift we are seeing from a manufacturing-led recovery, to a consumer-led recovery (which again is much more healthy and positive for risk assets).
Case in point, November Durable Goods missed estimates, as the headline was weaker than expected. Meanwhile new orders for Non-Defense Capital Goods Excluding Aircraft were flat month-over-month and the rolling 3-month moving average fell by 1%. The soft Durable Goods report confirmed the lackluster PMIs we saw in November and December. To be clear, it’s not like manufacturing activity is falling out of bed, but we are seeing some moderation due to the stronger dollar, which again is “ok” as long as it’s accompanied by a surging consumer.
From an investment standpoint, this shift from a manufacturing-led recovery to a consumer-led recovery is important, because we can expect continued outperformance from consumer-leveraged names (RTH, consumer finance companies) and, generally speaking, underperformance from industrials with heavy foreign revenue exposure. That isn’t a particularly insightful observation, but it’s something to think about as you plan asset allocations for early 2015. (During the last several years, industrials have soundly outperformed consumer names, so double-check to make sure you’re not too heavy in stodgy, goods-producing, foreign-leveraged manufacturers and industrials.)
This Week
It will be another quiet week given the holiday, but the highlight will be the global final manufacturing PMIs on Friday. That said, the most important manufacturing PMI, China’s, won’t be released until next week. So, focus will be on Europe and the U.S. Specifically, the December “flash” PMIs in Europe showed some small signs of life, especially in Germany, so it will be important not see those flash PMIs revised lower.
Here in the U.S., we can expect some more moderation in the ISM Manufacturing PMIs. But again on an absolute basis, the manufacturing sector is still growing; it’s just losing momentum due mainly to the stronger U.S. dollar.