US: Soft data softening – Wells Fargo

The analysis team at Wells Fargo Securities points out that the current US economic expansion, which began in the summer of 2009, is approaching its eight-year anniversary and yet, industrial production (IP) is not currently above its pre-recession peak.

Key Quotes

“This is somewhat perplexing as IP is a primary factor in business cycle dating. Broadly, IP surged due to increased activity in the energy sector, and then tapered in growth as commodity prices fell. At this mature point in the business cycle, a rebound is unlikely in our view.”

“Purchasing manager surveys and measures of consumer and business confidence have hit multi-year highs in 2017. However, the hard data do not necessarily support this heightened optimism. While the hard data, such as IP and factory orders, do support steady growth, April’s ISM manufacturing print of 54.8 marked the third consecutive monthly decline and fell short of consensus expectations. After months of disparity between lackluster hard data and multi-year highs in soft data, there is a convergence underway. In our view, the weaker readings of soft data should not cause fear, as both the hard and soft data still supports growth at a modest pace.”

“Though fleeting, there are occasional glimmers of hope that the hard data could be moving higher. Revisions to hard data in recent months, such as orders and shipments, supports a solid 9.4 percent annualized pace of business fixed investment spending growth. Moreover, while IP has yet to reach pre-recession highs, April’s reading of IP showed the largest monthly increase in three years of 1.0 percent, while factory sector production climbed to its highest level of the current expansion. Should a substantive corporate tax cut come to fruition, we would expect to see strengthening in both hard and soft production data points—however, the inability to pass any major legislation in the first 100 days causes skepticism of the size and scope of any legislation aimed at boosting business investment.”

“On trend, the hard data are firming incrementally and the sugar high is wearing off for business sentiment. What remains is a forecast that is anything but flashy: slow steady growth in the manufacturing sector and gradual firming for industrial production.”