The US economy may not be as strong as it appears

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Stoyan Nenov/Reuters

With the Federal Reserve stepping up rhetoric about a possible interest rate hike, market watchers are using the opportunity to take a look at the health of the US economy.

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Thus, the UBS macro strategy team put together a chart of major indicators for the US economy and where they stand compared to the last time the Fed raised rates in December and where they were two years ago.

Overall, the chart from Daniel Waldman and company does not make the US economy look very encouraging.

UBS' argument is that for the Fed to raise rates, the economy has to look substantially better or at least not worse than the last time they hiked. Thus, the Fed should stay on hold (and Waldman and co. think that they will).

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UBS

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The strategists believe that a strong jobs report on Friday could help cover the Fed if they do want to hike rates in September, but the rest of the economic data isn't that good.

"Although labor market data is key, one additional positive employment report is unlikely to completely change investor sentiment on US growth, which has softened relative to both late 2014 (when the dollar started to rally) and late 2015 when the Fed last hiked," said Waldman and co.

A few caveats here. First, these are just a handful of indicators that UBS selected. Wage growth, personal consumption, new home sales and other indicators of economic strength have set cycle highs since the last Fed meeting.

Second, payroll growth is expected to slow as the labor market nears full employment since the number of available workers declines. So a headline decline isn't a terrible disappointment.

Third, there's an argument to be made that inflation has been weighed down by temporary factors.

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Fourth, the manufacturing number is actually worse than the chart indicates with the latest reading coming in at 49.4 on Thursday, which is back in contractionary territory. So the UBS chart doesn't look great, but it isn't the fullest of pictures either.

Regardless, it's not as if the economy has been gangbusters since the last time the Fed hiked rates and that may keep them on hold.

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