Economic data mixed entering 2016

While U.S. gross domestic product was up 2% in the third quarter of 2015, other data finished the year more mixed.

The consumer looks good, with solid consumer confidence and a reasonably healthy jobs market, as evidenced by weekly jobless claims remaining below 300,000 for the past 10 months. However, manufacturing data in the United States is relatively soft. The Institute for Supply Management (ISM) Manufacturing Survey finished 2015 in contraction for the second month in a row. This is the first time the indicator has been in contraction for two straight months since 2009.

For now, we believe the healthy consumer will continue to support the U.S. economy, but there are some key indicators we are watching as we begin the year. The recent ISM Manufacturing Purchasing Managers Index (PMI) report was disappointing and we will be watching subsequent months’ reports to determine if this reflects our expectation for a temporary slowdown to work off excess inventories. The December U.S. employment situation report will be released on Friday and should indicate whether the labor market remains healthy and supportive of the U.S. consumer.

Lastly, we will be watching wage inflation, which is a key ingredient in supporting consumer spending.

For Europe and Japan, economic data has been somewhat more encouraging. Manufacturing PMI surveys ticked up for the fourth quarter and inflation appears to have stabilized, as have leading economic indicators. Continued monetary stimulus appears to be helping to stabilize these key economies and lift growth modestly.

The next key indicator this year will be further structural reform to help prevent future problems. For Europe, we will be watching for steps toward shared fiscal obligations and holding the line on border controls. For Japan, the key will be reforms in labor markets and immigration to lift potential GDP growth.

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Robert L. Haworth, CFA, is a senior investment strategist and Darrell Behnke is the Madison market leader for the Private Client Reserve of U.S. Bank.

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