WESTPAC: Don't write off the US economy just yet


US economic data – with the exception of January jobs report released last Friday – has been hardly stellar of late.

Measures on activity levels across the nation’s services and manufacturing sectors have disappointed, labour productivity has fallen while household consumption growth has stalled, fanning fears over the current and future health of the US economy.

However, perhaps the worst of data deterioration is now over, at least according to one metric.

The chart below, supplied by Westpac’s New York-based FX strategist Richard Franulovich, measures the percentage of US data releases that have beaten market expectations, providing a broader gauge on the current performance of the US economy.

As it reveals, after falling to abnormally low levels based on the the historic US data performance, it has ticked higher in recent days courtesy of the mixed US jobs report for January.

Franulovich believes that the index “appears to be on the cusp of a recovery”, suggesting that its recent bounce – if sustained over the remainder of February – will trigger a signal for further gains in the US dollar in the period ahead.

Not only will a sustained bounce help support the US dollar based on Westpac’s model, given the relationship between US economic data with benchmark US 10-year treasury yields, it may lead to money moving out of treasuries and into riskier assets such as stocks.

The chart below tracks US 10-year bond yields against Westpac’s US data pulse index, something that Franulovich suggests is “a very close cousin of our US data surprise index”.

“If sustained, a recovery in the complexion of the US data has the capacity to be transformative for markets,” says Franulovich.

“Neither equities nor the USD have tracked the ebbs and flows of the US data as closely as fixed income but at least some of the recent weakness in both can be traced back to deflated growth expectations. Some stability if not outright recovery in the data can be expected to give both equities and the USD a boost going forward. More broadly, a run of stronger data would be a very important tonic for fragile markets.”

Franulovich suggests that an elevated US household savings rate, along with the steady fall in gasoline prices and mortgage rates seen in recent months, “should underpin healthier growth outcomes in the first half of 2016”.

Many will be hoping that his view, amidst growing concern for both the US and global economic outlook, will be right.

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