US Recovery in Jeopardy

Market Trends - 18/01/2016

Recently released data seems to highlight the worst concerns of analysts after figures on retail and manufacturing  appear to foreshadow a broad deceleration in economic activity across the United States.  Consumption, which is one of the mainstays of the American economy saw headline retail sales fall in December with holiday sales growing at the slowest pace since 2008 as financial markets were in turmoil.  Although not a surefire indication that the economy is headed towards a recession, the steep drop off in equity valuations might be signs of a dramatic shift in sentiment amongst investors.  Aside from retail sales which contracted at a -0.10% in December, industrial production has shrunk for the last five months, underlining the increasingly tenuous nature of the economic outlook.  The latest figures released by the Federal Reserve showed industrial output falling by -0.40% in December alongside a revision lower in November’s figure from -0.60% to -0.90%.  One of the main culprits behind the drop in both consumption and output was softness in the energy patch with weaker gas prices driving down retail sales and anemic demand causing mining output to fall.

Aside from employment and inflation, industrial production and consumption remain key indicators of economic health evaluated by the Federal Reserve as it guides monetary policy.  With both of these strong signals of economic activity showing signs of strain, evidence is mounting that the Central Bank might have acted too late in its efforts to normalize monetary policy.  Furthermore, it might be a drag on policy tightening measures expected in the coming quarters, especially now that equity benchmarks are denting investor sentiment.  Moreover, a weak conclusion to 2015 is raising the specter of lethargic global growth.  With the IMF recently revising its own 2016 growth expectations lower, investors are desperately looking for any signs of recovery despite the global headwinds.  While consumer confidence appears robust according to the latest survey data, savings rates are on the rise and disposable income has been largely stagnant thanks in large part to the impact of Obamacare.  Rising healthcare costs for formerly uninsured citizens is the main driver behind current retail weakness despite the perception of confidence amongst consumers.


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