The longer I have worked in financial economics, the more I have become convinced of three things:
1. PIMCO has had and still has the greatest collection of intellects in fixed income (bonds).
2. Don't bet against Goldman Sachs. If you're on the other side of a trade with them you're in trouble.
3. Bridgewater's cult like corporate culture of meritocracy of ideas, where even the most junior of employees are encouraged to be assertive and discussions about disagreements and mistakes are considered an intentional part of the company's culture, produce some of the best ideas in the investment business.
Speed Reading Version
1. "Today's collection of timely statistics for March suggests that US growth continues to be moderately strong..."
2. "The strength in growth has been broad-based..."
3. "...production has accelerated and both the Philly Fed and Markit PMI surveys pointed to continued improvement."
4. "...suggesting the underlying strength of the expansion is even stronger than what we are seeing..."
5. "Initial Claims in Line with Ongoing Gradual Payroll Gains."
6. "Household Demand Growth Remains Moderate Despite Fiscal Drag."
7. "...collection of stats is consistent with continued, moderately strong growth of about
3% in the US."
Bridgewater Daily Observations -
Today's collection of timely statistics for March suggests that US growth continues to be moderately
strong despite the meaningful short-term impact of fiscal policy. The strength in growth has been
broad-based and the figures released today gave another timely indication that this is continuing:
production has accelerated and both the Philly Fed and Markit PMI surveys pointed to continued
improvement. Employment growth has picked up and the initial claims figures through early March
suggest that the employment growth seen in recent months may continue. And while consumer
confidence remains one of the weakest areas of the economy (and ticked down this month), it has
been steadily improving, and household demand continues to be healthy. This growth has come at a
time when the US economy is experiencing the peak impact official tightening; which is producing roughly
a 1 % drag on growth (suggesting the underlying strength of the expansion is even stronger
than what we are seeing). As we noted in Wednesday's Observations, the current pace of growth
has been sufficient to gradually reduce the excess capacity and normalize conditions in the US
economy, which, if continued, may put pressure on the Fed to reduce the current pace of easing; and
the stats through March suggest little adjustment to that picture.
Thursday's March stat releases offered a very up-to-date picture of what's going on in the US
economy. Even though the combination of the Philly Fed survey and initial claims do not directly
include housing and demand, they have historically provided a pretty good and timely read on the US
economy.
Since the start of the year, most economic stats across the US economy have been
consistent with moderate growth. The timeliest stats through March suggest that this pace of growth
is continuing despite the headwind from the fiscal tightening. Confidence surveys have been a bit
weaker than both actual measures of activity and surveys of activity. But this makes sense given that
things that consumers care about, like employment and house prices remain at low levels despite
some recovery.
A significant number of these stat releases have not only been relatively strong but have also come in
better than consensus expectations. Since the start of the year, our index of economic surprises, a
cumulative measure of economic statistics relative to consensus, has risen steadily.
Philly Fed and Markit PMI Consistent With Continued Expansion in Production. The two timely data
points on production growth that we received today - the Philly Fed and Markit
PMI surveys - both point toward a continued expansion in US production. After lagging behind
economic growth for much of 2012, production growth has accelerated for several months and is now
expanding in line with the rest of the economy. This expansion in production is taking place in the
context of an improvement in both domestic and external demand ... Triangulating across several
measures of production growth, today's healthy Philly Fed and Markit PMI surveys for March are also
in line with the recent improvements in the national ISM manufacturing survey for February as well as
February industrial production growth.
Initial Claims in Line with Ongoing Gradual Payroll Gains. Initial jobless claims have been falling at
a steady pace over the past several weeks and continue to recover
from the highs of the financial crisis. Claims are now close to pre-crisis lows as a percentage of the
labor force.
Household Demand Growth Remains Moderate Despite Fiscal Drag. The broader pattern of
consumer confidence improving off low levels that's taken place over the past
couple of years remains intact despite the recent down tick in the weekly Bloomberg Consumer
Sentiment measure. It makes sense that consumer confidence has not been improving as much as
other recent growth stats because consumer confidence tends to be a function of both the level of
conditions (whether things are good or bad) as well as changes in conditions (whether things are
improving or deteriorating). While conditions have been gradually improving lately, the level of some
conditions that matter to consumers, such as employment and housing, remain well below pre-crisis
peaks.
Real household spending growth is running at roughly 2.5% through February, despite the large fiscal
drag. If the impact of the tax increases were removed, household spending growth would likely be
stronger, by our estimates probably over 3%. Once the impact of the fiscal tightening fades later this
year, the US economy may grow at an even stronger pace.
Today's very timely collection of stats is consistent with continued, moderately strong growth of about
3% in the US. This is, of course, taking place despite the headwind caused by the fiscal tightening
that kicked in at the start of the year, and in the absence of a fiscal tightening, US growth would likely
be even stronger. If current conditions continue, as the impact of the fiscal tightening fades later on
this year the US economy looks poised to grow at a reasonably strong pace.
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