9. Inflation, or Lack of Deflation
The public keeps hearing that they need to get some inflation. And the saying is that nobody knows what deflation really looks like, but they won’t like it when they see it. The Fed really wants 2.0% to 2.5% inflation. Inflation was nonexistent for all of 2015 and many Consumer Price Index (CPI) readings and other measurements of prices realized were negative. The CPI reading for December (released in January) even smelled of deflation, similar to the October deflationary reading.
With energy and most commodities in a free fall, it’s just real hard to get inflation without companies just keeping all the savings themselves. As of mid-March, after commodities have stabilized and recovered, there have now been two selective CPI readings that breached the 2.0% annualized inflation at the core. That may not be major hope, but it helps to take the negative interest rate fear off the table. It also gives a good floor for if energy prices keep rising, as this could pull all fixed-goods prices marginally higher.
10. U.S. Economic Report Trends
At the end of 2015 and well into 2016, the U.S. economic reports were getting worse, and many recessionary indicators were looking more than just close. There were really more than just six warnings signs at the end of January. Another consideration is that many of the economic readings are still weak, but a focus on better to less-weak is what stands out for the most recent trends, which are pointing to a recession being averted. Again, slow growth. The Philadelphia Fed showed a very unexpected uptick in manufacturing for March. Again, the CPI is very selectively giving 2% or so inflation readings. Household wealth is at record highs, and we have seen evidence of lower credit card debt. The number of millionaires even looks mixed but still at or close to a record.
Unemployment remains under 5%, at least at the official rate, and payrolls have continued to grow more than expected of late. Weekly jobless claims have now been under 300,000 for 54 consecutive weeks, the longest streak since 1973. The Fed lowered its growth targets minimally, but they also simultaneously halved their estimated rate hike forecasts for 2016. Even earlier in March, the Fed’s Beige Book looked and sounded more like slow and pesky growth rather than a recessionary outlook.
11. Transportation as an Indicator
Transportation is a tricky bird for the economy. All the goods that get purchased have to be shipped around the country (or the world) before they get to Joe Public. Raw materials get sent to factories overseas (or in North America), factories ship the goods out by ship or by train, then by truck at the local level. That is why Dow Theory, for industrials and/or transports is still used by many investors. The Dow Jones Transportation Index was last seen up 6% for 2016, after having been down as much as almost 15% in late January.
The iShares Transportation Average (NYSEMKT: IYT) is now up 6.2% as of March 18. The Baltic Dry Index was trading at 473 right at the start of 2016. It had fallen to about 290 by the second week of February. On March 15 it was back up to almost 400 again.
The economy in China has been living far less than up to its potential. Some investors and economists may feel like China should be lumped into emerging market trends, but China is so dominant that it was considered the world’s growth engine for many years. Now imagine when 6% or 7% GDP growth just is not enough. China has taken steps to ease its policies after the Shanghai market went into free fall. The SSE Composite Index was above 5,150 last year and hit a low of about 2,650 in late January 2016. The Deutsche X-Trackers Harvest CSI300 CHN A (NYSEMKT: ASHR) was still down over 13% at $24.16 as of March 17, but this is up almost 16% from the $20.90 low on February 11.
Economists from the International Monetary Fund (IMF) and other organizations, as well as Wall Street strategists, have all learned to brace for China growing at lower rates than its history. China’s gross domestic product grew by “only” 6.9% in 2015, and the IMF suggested that China’s GDP may rise (again, “only”) by 6.3% in 2016 and 6.0% in 2017. Now China’s leadership is suggesting that its economic targets may be next to impossible to not be reached — via new growth drivers being mixed with upgraded traditional growth drivers. Does it matter that we all think (or know) that China’s economic readings can be deemed a bit murky best? Another issue now is that the risks of a major yuan devaluation seems to have been averted, at least for now.