3/23/2015
By Jennifer Coombs

The Conference Board’s index of leading economic indicators (LEI) held steady at 0.2% in February from the same level in January, but points to moderate growth in the US economy over the next six months. The Fed’s near zero rate policy helped contribute to the yield spread component being the biggest positive for the index. The next biggest positive was the stock market followed by the credit index which points to healthier borrowing conditions rather than government releases. Consumer expectations in February were also positive, but are likely to reverse to the downside in March given the mid-month decline in the consumer sentiment index. Growth may be slow at the moment, but the index suggests that it’s still sustainable and the slow incline reduces the risk of the Fed raising rates prematurely.

Additionally, slower growth and weakness in various orders were the common denominator for both the Empire State Manufacturing report and, now, the Philly Fed report. In March, the Philadelphia Fed’s general conditions index was little changed at a reading of 5.0 in March versus 5.2 in February. In the orders space, new orders were not much above zero at 3.9, while unfilled orders took a sharp decline to a reading of -13.8 versus February’s reading of a positive 7.3. This weakness in orders points to an overall softness in shipments, which are already at -7.8, as well as employment at 3.5. Price data also indicated a contraction for both input prices, at -3.0, and finished goods, at -6.4. All in all, the indications for March are not positive for the manufacturing sector, which is a sector that the Federal Reserve noted yesterday is being hurt by weaker exports due to the strengthening US dollar. Coupled with the pricing stresses related to oil, we expect that other Fed districts will report equally disappointing results for March.

Lastly, the United States’ current account gap widened quite sharply in the fourth quarter to a deficit of $113.5 billion versus a slightly revised $98.9 billion (from $100.3 billion) in the third quarter of 2014. This ultimately ended up driving the gap relative to the gross domestic product (GDP) up 4 tenths to 2.6%. The culprit once again is the gap on income, which is up $11.4 billion in the quarter and reflects a decline in equity among foreign affiliates. On trade, the goods gap increased by $4.1 billion, but was offset in part by a $1.0 billion increase in the surplus among services. Below is a historical chart of the international trade gap, which still remains well below the breakeven level.

Jennifer Coombs
Wall Street Strategies

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