The third quarter of 2013 is here, and this week, we’re getting the first look at how the economy is faring so far in the second half of the year.
This is the moment economists across Wall Street have been waiting for.
“Our economists had long predicted weakness over Q2, and expect data to strengthen this summer,” wrote Société Générale head of forex and rates strategy Vincent Chaigneau in a note previewing this week’s data releases. “That should start as early as this week, with the manufacturing PMI seen in the 53 region (a level not seen over the past four months) and [nonfarm payrolls] at 200,000.”
So far, so good – Markit’s U.S. manufacturing PMI survey headline index advanced to 53.7 in July from 51.9 in June, exceeding expectations for a smaller advance to 53.2. (Tomorrow, we get the July nonfarm payrolls report too.)
[The] moment of truth for the economy will arrive in the second half of this year. If ever the US were finally to achieve “escape velocity” it must be now. Significant monetary stimulus, the end of fiscal austerity, a booming housing market, a cheap dollar, and record corporate cash balances mean the US economy should meaningfully accelerate in coming quarters. Our own Ethan Harris looks for 2.0% GDP growth in Q3, 2.5% in Q4 and 2.7% in 2014.
Our investment strategy remains predicated on that outcome. In coming quarters we expect PMI’s to accelerate, job growth and bank lending to improve, higher interest rates to coincide with higher bank stock prices, and US dollar appreciation. We favour assets (such as financial stocks) and markets (such as Europe) that have lagged in the “High Liquidity-Low Growth” world of recent years.
One caveat, though, writes Hartnett:
But structural equity bulls like ourselves should be careful of what we wish for. When the real economy finally stands up, the central bankers will start to stand down. At that point it seems inconceivable that the combination of the end of a 30-year bull market in bonds, the end of a 7-year liquidity boom and a change of leadership at the Fed will not give the markets some serious withdrawal symptoms. The dollar and volatility will be the last assets to surge as the era of Deleveraging closes and an era of Normalization begins.
The next big signal is tomorrow with the release of the July nonfarm payrolls report at 8:30 AM ET. Economists predict 185,000 jobs were created in the American economy last month, down from 195,000 the month before.