Big week for data and Fed policy this week.


We’ve seen some slowing in growth lately, but last week’s advance U.S. Gross Domestic Product report was encouraging. Readers of the Monday Morning Minute know that incoming data raised some red flags in the first quarter. Our Fundamental Conditions Barometer peaked with the passage of the tax act in December, declined through the remainder of the winter, and stabilized in April.

According to last week’s report from the Bureau of Economic Analysis, the U.S. economy grew by an estimated 2.3% in the first quarter. This result is lower than the 2.75% rate most economists expected back in February (Blue Chip survey), but was not bad given some weaker readings on consumption and manufacturing recently. In addition, there is reason to expect things to firm up from here as tax cuts flow through to the private sector. We will be closely watching this week’s consumer, manufacturing, and employment data to see if April’s readings point to a “spring bounce” or not.

Meanwhile, a closer look at last week’s advance GDP report reveals important takeaways on the state of the economy.

The Supply Side

Optimism that came with improving global growth in 2016-2017, coupled with tax cuts, is showing up as more investment. Greater growth, optimism, and investment can all be helpful in extending the cycle and boosting profits. On a longer-term basis, investment is a major contribution to lifting potential growth.

According to data on capital formation within the GDP report, we see that private capital formation, a proxy for investment, is estimated to be growing near 4.6% (chart, below). This is a significant improvement from 2016, when investment essentially ground to a halt. Sustaining this trend is important for the market as a whole because it encapsulates critical information about business expectations as a whole.

The Demand Side

Because risk-taking entrepreneurs and businesses of all stripes make plans based on expected demand for their products, it is important to take a look at trends in demand. Buried deep in the report is a helpful measure of this demand. It is called “Final Sales of Domestic Product.” This is a cleaner measure of the demand side of the economy as it excludes inventories and looks at what people are actually spending. Whenever this measure is running below overall production (GDP), businesses might have reason to worry (chart, below).

With signs of steady growth in the economy, coupled with above 50 readings on our WCA Fundamental Conditions Barometer, we expect further growth ahead. And as the Federal Reserve gets set to meet on rates this week, we expect the central bank to affirm their plans to continue rate increases against a background of firming inflation and full employment.


Date Report Period Survey Prior
Mon, Apr 30: Personal Income Mar 0.4% 0.4%
Personal Spending Mar 0.4% 0.2%
Chicago PMI Apr 58.0 57.4
Pending Home Sales M/M Mar 0.5% 3.1%
Pending Home Sales Y/Y Mar -4.4%
Tues, May 1: FOMC Meeting Begins
PMI Manufacturing Index Apr 56.5
Construction Spending M/M Mar 0.3% 0.1%
ISM Manufacturing Index Apr 58.5 59.3
Wed, May 2: FOMC Meeting Announcement
ADP Employment Report Apr 204k 241k
Thurs, May 3: Weekly Jobless Claims Apr 28 209k
International Trade Balance Mar -$56.0b -$57.6b
Nonfarm Productivity 1Q2018 1.0% 0.0%
Unit Labor Costs 1Q2018 3.1% 2.5%
Factory Orders Mar 0.9% 1.2%
ISM Non-Manufacturing Index Apr 58.3 58.8
Fri, May 4: Change in Nonfarm Payrolls Apr 190k 103k
Unemployment Rate Apr 4.0% 4.1%
Underemployment Rate Apr 8.0%
Average Hourly Earnings M/M Apr 0.2% 0.3%
Average Hourly Earnings Y/Y Apr 2.7%
Average Weekly Hours Apr 34.5 34.5
Labor Force Participation Rate Apr 62.9%
Source: Bloomberg



Based on shorter-term expectations, the “tactical satellite” allocation within portfolios is:

Overweight Stocks vs. Bonds

Kevin Caron, CFA, Senior Portfolio Manager
Chad Morganlander, Senior Portfolio Manager
Matthew Battipaglia, Portfolio Manager
Suzanne Ashley, Analyst

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WCA Fundamental Conditions Barometer Description: We regularly assess changes in fundamental conditions to help guide near-term asset allocation decisions. The analysis incorporates approximately 30 forward-looking indicators in categories ranging from Credit and Capital Markets to U.S. Economic Conditions and Foreign Conditions. From each category of data, we create three diffusion-style sub-indices that measure the trends in the underlying data. Sustained improvement that is spread across a wide variety of observations will produce index readings above 50 (potentially favoring stocks); while readings below 50 would indicate potential deterioration (potentially favoring bonds). The WCA Fundamental Conditions Index combines the three underlying categories into a single summary measure. This measure can be thought of as a “barometer” for changes in fundamental conditions.

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