From the latest Morgan Stanley Global Monetary Analyst report…
Friday’s employment report was very disappointing and the recent incoming data (including last week’s ISM report) also suggest that the US recovery has paused. However, our Chief US Fixed Income Economist David Greenlaw believes that we are seeing a temporary soft patch rather than a lasting downturn.
Four factors should help to deliver a 2H rebound. First, recent assembly schedules point to a near-term spike in vehicle production. Second, consumer spending should be supported over the next few months by a pullback in gas prices. Also, we expect a further acceleration in capital spending tied to the tax benefits that expire at year-end and a significant boost from net exports in 4Q. Job growth is key to sustainability. A sustained recovery at this point requires job growth of at least 150,000 per month. Any sign that the underlying trend is slipping below that pace would be cause for concern. We are pushing out the timing of the expected exit sequencing by 3-6 months. The old path was simply looking too compressed, given the emergence of questions surrounding the sustainability of the recovery. Moreover, benign inflation expectations give the Fed some breathing room.
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