04 May 2012 Slowing Growth

Unless you are Lance Armstrong (or my son-in-law), as your bike slows down, balance becomes increasingly challenging. That’s the picture of where our economy is now – its slowing and investors wonder whether we can stay up or fall back into recession.

The week’s important data have been mixed. Today, the all-important jobs data for last month was released and it was disappointing. Growing jobs are a prerequisite for consumption. Given that our economy is more than two thirds consumption-driven, jobs hold the key for sustainable economic growth.

The government reported that only 115,000 jobs were added in April, following increases of 154,000 in March and 259,000 in February. Analysts were looking for 50,000 more. The good news, on the surface, is that the unemployment rate inched down from 8.2% to 8.1%. Unfortunately, all of the measure’s decline comes as more workers left the labor force in April than were hired. The labor force participation rate slipped to its lowest level in more than 30 years (1981) as the work force shrank by 342,000. The falling unemployment rate is the result, not of improvements in hiring, but of increasing discouragement on the part of the unemployed.

On a positive note, earlier in the week the government announced that personal income and spending beat expectations for March (however, partly due to inflation). March personal income rose by 0.4% following at 0.3% increase in February. The report also showed that consumer spending increased 0.3% in March compared to a 0.9% surge in February.

The business side of the economy continues to carry more than its share of the load, and there are signs of fatigue. The Chicago Fed this week reported that it’s area businesses are doing well for yet another month, but not as well as the month before. The MNI Chicago report indicated a level of 56.2 in April, well above 50 which is the line between growth and contraction. However, it  was six points below March’s level. Of note was the employment section of the report. It was up 1.5 points to nearly 59. According to Econoday, respondents to the survey on net added to their workforces in April, an excellent vote of confidence for the economy’s outlook.

The Dallas Fed, unfortunately, was a little more mixed to mildly negative. Texas factory activity increased in April, but slowed dramatically relative to the month before from 11.1 to 5.6. Other measures showed growth, but at significant rates of decline as well, such as capacity utilization, shipment volumes, and general business activity. Econoday reports that 13% of firms noted improvement in the level of business activity, while 16% noted a worsening. And the company outlook index landed in negative territory, slipping to minus 4.5 after a reading of 9.5 last month.

The nationally-focused ISM Manufacturing data ran counter to the slowing trend which is developing among the regional Feds. It showed rising rates of growth in the manufacturing sector with its composite gain of 1.4 points to 54.8. The report showed that production is strong and manufacturers are adding significantly to their payrolls. Surprisingly, export orders, despite weakness in Europe and slowing in China, are very strong and accelerating.

But, the good news from ISM manufacturing was soon overshadowed by the ISM non-manufacturing composite which represents a considerably larger swath of the economy including; agriculture, mining, construction, transportation, communications, wholesale trade and retail trade. The index slowed to 53.5 from a very strong 56.0 in March. New orders and business activity came in at their lowest monthly growth in six months. The 375 companies in the ISM’s sample added jobs in April at the slowest pace of the year.

Our economy is growing at 2.2% a year, well below it’s potential. The most glaring problem with growth is illustrated by with today’s unemployment report – companies aren’t creating jobs. When people can’t find work and those working fear they may lose their jobs, they buy less and the economy does not grow.

Another equally significant threat of slow growth can be illustrated by our bicycle metaphor. As a bicycle slows, balance becomes increasingly difficult. Small obstacles that might hardly be noticed riding at speed suddenly become hurdles capable of throwing the rider. The global economy faces, not small, but major hurdles in the coming months. Spain, Italy, Iran, US budget negotiations, and potential debt downgrades, to name but a few.

Now is a great time to measure your risk and ensure that you are not exposed to any more than is absolutely necessary to fund your future goals and aspirations. If you are unsure, please give us a call. We can help.