How’s that second-quarter rebound holding up? Well, it’s shaky. The economic reports in the weeks ahead could tell us otherwise, but the numbers published so far for May offer a mixed bag of results for the US economy.
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● US Manufacturing PMI eases to 16-month low in May | Markit
● US Existing Home Sales Fall Short of Expectations In April | Mortgage News Daily
● US Jobless Claims Rise, But Still Point to Growing Labor Market | WSJ
● US Leading Economic Index Climbs 0.7% In April, More Than Expected | RTT
● National activity index less negative in April, Chicago Fed says | MarketWatch
● Consumers’ Expectations for U.S. Economy Drop Most Since 2013 | Bloomberg
● German Business Confidence Weakens In May | RTT

The Chicago Fed National Activity Index’s three-month average (CFNAI-MA3) ticked higher in April, but growth remained below the historical trend for the third month in a row. The latest string of three consecutive negative values represents the longest stretch of below-trend data in nearly two years. Still, CFNAI-MA3 inched up to -0.23 last month and so it remains well above the -0.70 mark that signals the start of new recessions. Nonetheless, growth is still weak by recent standards and so today’s report will continue to stoke debate about the economic outlook.
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Tobin’s Q, a market-valuation metric, is back in the news, in part thanks to a widely read Bloomberg article. The story, published earlier this week, offered the provocative title: “Nobel Winner’s Math Is Showing S&P 500 Unhinged From Reality.” Oh, my, that sounds serious. Or maybe not. As several observers have pointed out (see here, here, and here, for instance), the practical connection between real-world money management and Tobin’s Q is a dicey proposition. It does, however, provide the raw material for dramatic headlines.
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● Fed officials see June rate hike as unlikely: minutes | Reuters
● US mortgage applications drop for 4th straight week | RTT
● Eurozone Job creation at 4-year high as eco. growth slows in May: PMI | Markit
● Further slowing of German private sector output growth in May: PMI | Markit
● China’s mfg. output contracts at strongest rate in over a year in May: PMI | Markit
● Operating conditions in May improve at Japanese manufacturers: PMI | Markit

The three-month average of the Chicago Fed National Activity Index (CFNAI) is expected to slip a bit deeper into negative territory in the April update that’s scheduled for tomorrow (May 21), based on The Capital Spectator’s median point forecast for several econometric estimates. The projection for -0.31 is slightly below the -0.27 reading for March, which reflected a below-average pace of economic growth for the US relative to the historical trend. Only negative values below -0.70 indicate an “increasing likelihood” that a recession has started, according to guidelines from the Chicago Fed. Using today’s estimate for April as a guide, CFNAI’s three-month average is expected to remain at a rate of growth that’s below the historical trend but still above the tipping point that marks the start of a new recession.
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US economic growth has slowed in recent months, but the deceleration to date remains well short of a tipping point for the business cycle, based on a broad set of published reports through April. There’s heightened concern that the economy will remain unusually vulnerable if the weakness persists in the second-quarter. As a result, the yet-to-be published numbers for May could be decisive. Meantime, the current numbers strongly suggest that April wasn’t the start of a new recession for the US. Growth may turn out to be slower than recently anticipated, but it’s not yet obvious that a sluggish pace of expansion will soon lead to a new phase of economic contraction.
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● US Housing Starts in U.S. Surge to 7-Year High as Weather Warms | Bloomberg
● US Government Bonds Hit by Surge in Housing Starts | WSJ
● US Retail Sales Fall in First Two Weeks of May From April: Redbook | Nasdaq
● Dueling Views on the First-Quarter GDP Slump In The US | NY Times
● Japan’s economy grows faster than expected | BBC
● ECB To Discuss Lending Rules For Greece On Wednesday | RTT
● India’s economic growth to surpass China next year: UN report | IndiaToday

Home-building activity in the US rebounded sharply in April, the US Census Bureau reports. After two months of weakness, housing starts revived to 1.135 million units in seasonally adjusted annualized terms. The 20.2% increase in April is the strongest monthly gain since the early 1990s, pushing the number of newly built units to a new post-recession high.
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The US stock market has regained the pole position for the trailing one-year return (250 trading days) among the major asset classes via our standard set of ETF proxies. Vanguard Total Stock Market (VTI) is ahead by 16% on a total-return basis for the past year through yesterday (May 18). The rebound to the top spot comes at the expense of the former leader in last month’s update—US real estate investment trusts (REITs). Vanguard REIT (VNQ) is still sitting on a solid advance of more than 13% for the past year, but the performance edge has dulled a bit relative to our April review.
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