Mixed Economic Signals: GDP Growth Contradicts PMI and BLS Data

Recent economic reports have painted a mixed picture, leaving economists and investors grappling with conflicting signals. While the revised GDP number for the last quarter came in at a robust 3%, indicating strong economic growth, other indicators point to a potential slowdown.

The Purchasing Managers' Index (PMI), a key measure of manufacturing activity, has remained stubbornly below the 50-point threshold for showing an expanding economy over the last few months. August, for example, came in at 47.9. A reading below 50 signals contraction in the manufacturing sector, suggesting that businesses are scaling back production to match a decline in demand.

Further clouding the economic outlook, the Bureau of Labor Statistics (BLS) has revised its labor market and job openings numbers downward every month this year. These revisions indicate that the labor market is probably not as strong as initially reported, adding to concerns about a possible hard landing and not the soft landing most of the financial media is talking about daily.

Experts Weigh In

Economists have different ideas on how to interpret these mixed signals. There are those who believe that the robust GDP growth is a temporary phenomenon, fueled by pent-up demand and government stimulus, and that the PMI and BLS numbers paint a more accurate picture of the underlying economic reality. Others argue that the PMI and BLS revisions are lagging indicators, and that the strong GDP growth is a sign that the economy is on a solid footing.

It is my humble opinion, however, that the GDP number is a broad measure of economic activity, and it is possible that strength in productivity and other areas of the economy that is offsetting the weakness in manufacturing and the labor market.

What we are seeing is a classic case of mixed signals that economists deal with most of the time. Which makes the argument to cut 25-bps, or 50-bps at the next FOMC meeting an excellent debate. One could make a valid case for either scenario, but what is it going to be? Chair Powell has been a little behind the curve according to top economists like Neil Dutta, head of economic research at Renaissance Macro Research. Hence, they will likely do 25-bps, but they should do 50 bps and play a little catch up.

Market Reaction

The mixed economic data has created uncertainty in the financial markets. Stocks have been volatile in recent weeks, as investors weigh the positive GDP news against the more concerning PMI and BLS data. The biggest concern being that some or all the numbers are simply wrong. The bond market has also been sending mixed signals, with yields on long-term Treasury bonds falling, suggesting that investors are anticipating slower economic growth and are already pricing in the lower rates.

Conclusion

I think the FOMC will lower rates next week by 25-bps. What do you think they are going to do? Email me and let me know your answer shawn@smladvisory.com The Federal Reserve is data dependent and will be paying close attention to the data as it considers its next move on interest rates. It is going to come down to the wire so look for the next edition of “Economic Update,” by Shawn Loddy. Until next week, be safe, be well and be happy.