Economic Update: Looking for a rebound following 1Q weakness

U.S. manufacturing data remained soft last week, leading market pundits to question whether the economy is really going to rebound from first quarter weakness.

A flash estimate of April manufacturing surveys indicate growth in activity slowed for the month. Durable goods orders, excluding the volatile transportation sector, slipped 0.2% in March, indicating further softness. The headline report was up 4%, due primarily to extremely strong aircraft orders, which were up more than 100% for defense-related aircraft and more than 30% for non-defense aircraft.

The slowdown in energy investment for the United States, as well as lingering effects from the West Coast port strike, may mean softer industrial activity lasts through April. In our view, the solid jobs market and soft inflation should lead to ramping consumer spending later this quarter, potentially heading to a rebound from what could be modest economic growth in the first quarter.



April flash Purchasing Managers’ Index (PMI) reports for Europe, Japan, and China all weakened. Monetary policies for all three areas have become easier over the last three months, which should lead to a modest lift to economic activity in future months. Japan and the eurozone have announced significant quantitative easing (QE) programs, and we may see additional policies put in place to support growth. China cut the required reserve ratio for large banks to 18.5% from 20% at the start of the year, and liberalized default and trading policies.

The stimulus in Europe and Japan should improve inflation prospects and enhance economic activity modestly over the coming quarters. For China, the changes in policy fit a path of transition toward more market-driven polices as part of its transition from an investment-driven growth model toward a balance with consumption.

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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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