Markets & Economy

Quarterly Market Commentary: First Quarter 2016

QMC_1Q 2016_Page_1Reliably solid growth continues to define the current economic expansion in the U.S. GDP growth increased 2.4% in 2015, a touch better than the 2.2% post-financial crisis average. The Personal Consumption Expenditures component of GDP, a proxy for consumer spending, rose 3.1% for the year, the best reading since 2005. Also, residential investment was up 8.9%, reflecting steady demand in the housing market. Capital expenditure from businesses has been lackluster in commodity oriented sectors, but remains stable in other industries. Oil came into the year sitting at $37 a barrel, but proceeded to decline even further, finally finding a bottom near the $26 mark in early February, a level that was for most unthinkable at oil’s recent high in 2014. Volatility was not confined solely to oil prices though, as global stock markets experienced extreme gyrations through the first three months of 2016. Along with instability in the markets was renewed concern about slowing economic growth, and even potential recession. While it is likely that first quarter growth was subpar, there were a number of positive developments, and the slowdown should prove transitory. The unemployment rate is holding firm at 5%, near post-recession lows. Wage growth has not yet meaningfully picked up but is rising at a modest 2.3% yearly pace. Although with headline inflation up just 1% over that same timeframe, the increase in spending power is greater than it initially appears. A persistent, and legitimate, criticism of the job market’s recovery was the fall in the labor force participation rate (LFPR) to 62.4%, a reading not seen since the 1970s. However, J.P. Morgan estimates roughly half of the decline is due to aging demographics; retirees who have permanently left the workforce. Of course, this leaves another half which must be explained by economic or other factors. It was encouraging then that the LFPR ended the first quarter at 63%. This small percentage change may not seem like much, but over 2 million people have entered the workforce since the LFPR bottomed in late 2015. The manufacturing sector is still in a recessed environment, but perhaps the worst is over. Two major headwinds, a strengthening dollar and tumbling commodity prices, have abated for now.

Read the Full 1Q 2016 Commentary