Let’s take a closer look at a few of the indicators on the May 2015 Economic Indicators Dashboard
and decipher what it may mean to the macro environment.
Accessed on 5/18/2015
How do I read this chart?
This dashboard is intended as a tool to set context and perspective when evaluating the current state of the economy.
For each indicator, the horizontal bar shows four things.
Yields are on the move! Although still at historically low levels and outside of the “typical range,” the yield on 10-Year U.S. Treasuries solidly crossed the 2% threshold. The Yield Spread also increased in recent months – up from 1.63 in January dashboard reading. The increase in yield spread means the yield curve is steepening (the yield on 10-year notes are rising faster than 3-month T-bills), which implies an increased expectation for higher interest rates in the future and may also signal an expectation for higher future inflation.
As the economy continues to improve, we expect yields to continue their ascent, bolstered by expectations that the Federal Reserve will act to increase short term rates later this year.
Economic growth (as measured by GDP) was weaker than expected in the 1st quarter, coming in at 0.20%, lower than the 2.20% of 4th quarter of 2014. Prognosticators suggest that slower U.S. economic growth may delay the widely anticipated Federal Reserve hike in interest rates until the end of 2015. We expect economic growth to fluctuate somewhat, but remain positive.
Home prices continue to improve since the beginning of the year. The combination of strengthening demand and still-low financing interest rates continues to drive prices up.
Inflation remains muted. In fact, consumer prices appear to have fallen into negative territory in the year-over-year results. This was largely driven by the fall in energy prices. The expectation is for inflation to remain moderate in the near term; at or below 2%. Russell’s expectation is for inflation to remain moderate in the near term; at or below 2%.
- A blue color band represents the typical range for this indicator. +/- 1 standard deviation of historical values for the indicator fall in this range.
- An orange marker shows the most recent value – the closer the marker is to the blue bar, the closer it is to historically typical conditions.
- A grey area outside of the blue band which shows the range actual conditions.
- An arrow shows the most recent three-month trend indicating if it is moving toward or away from the typical range
The bottom line
Fed-watching has become the favorite activity of market pundits and market participants of late. The biggest change coming to the macro environment is the anticipated move to tightening of the money supply. The Federal Reserve is closely watching the strength of the economy to determine when to begin raising interest rates. If economic indicators shows sign of consistent strength, then it may be time to start unwinding the quantitative easing program currently running in the U.S. If there are signs of weakness in the economy, the Federal Reserve may determine that the economy is too fragile to begin tightening now.
This seems to be the consensus from the last U.S. GDP release (April 29, 2015) and Fed statement minutes (April 29, 2015). Everyone is watching the Fed, and the Fed is watching the economy. Whatever the timing, when the Fed does take action it is likely to get the markets’ attention – at least for the short-term.