Economic Reports Scorecard
Concern about recession is growing again as formerly strong portions of the economy turn down. The last two weeks brought reports of new weakness in the labor market, continued slowing in construction and renewed weakness in manufacturing. Auto sales were also weak based on the reports from individual manufacturers. The state of auto sales is frankly a bit confusing. The income and spending report – one of the few positives of the last fortnight – showed a big jump in auto sales and the official report showed an SAAR of 17.4M. However, that is down from 17.8M last year and some of the manufacturers showed big drops. Ford said sales were down 6% and estimated that US industry sales were down 8%. GM sales plunged 18%, Toyota down 9.6%, Honda down 4.8% and Nissan down 1%. Fiat Chrysler had a gain of 1% on gains in Jeep sales. With numbers like that one wonders how the total number was only down 2.2%. And oh, by the way, despite that spending report showing a big gain, inventories remain a big problem for the industry.
Construction spending also came in less than expected and down 1.8%. That is, however, after several months of big gains and upward revisions. Nevertheless the year over year rate of change is down to 4.5% from 8% last month. Housing and construction continue to be the brightest part of the economy – which isn’t say much – but it is starting to look like the last man standing. Manufacturing reports showed renewed weakness after a pop higher last month. The Chicago PMI slipped back below the 50 level and the Dallas Fed survey plunged to -20.8 proving the shale bust isn’t over. The ISM manufacturing survey surprised to the upside but you know you’re in a slowdown when 51.3 is a surprise. Factory orders did rise 1.9% but take out a surge in aircraft orders and you’re left with a drop in core capital goods orders of 0.6% and a non-durables gain of 0.4% that reflects nothing more than a rise in gas prices.
Even the services side of the economy managed to disappoint with the ISM report showing a drop to 52.9 versus an expectations of over 55 and an employment component that was the weakest part of the report and less than 50. I won’t rehash the employment report again except to say that the ISM wasn’t the only report confirming the labor market weakness. The Labor Market Conditions Index – an amalgam of 19 labor market indicators and the one Janet Yellen told us to watch for clues about Fed policy – fell to a cycle low of -4.8, it’s fifth straight negative reading. And last month was revised from -0.9 to -3.4, not an insignificant amount.
The JOLTS report also showed weakness. Job openings showed a decent gain from last month – only after last month was revised lower one might add – but the hiring rate fell. The year over year change in job openings is falling rapidly:
Productivity is still negative after a revision, a further indication that hiring isn’t anywhere near the top of companies’ to do list. And in a sign that corporate profits probably aren’t about to re-accelerate – as Wall Street currently expects – unit labor costs rose 4.5. It is looking more and more as if margins have peaked for this cycle.
Let’s end with a couple of potential positives since this is getting depressing. The trade report showed a rise in both exports and imports for the month, something we haven’t seen in a while. Caution is warranted though as the year over year change is still negative and this is just one month. The personal income and spending report, as mentioned earlier, was fairly positive and home prices rose again according to Case Shiller. The wholesale inventory to sales ratio dropped from 1.36 to 1.35 – not much but in the right direction. And finally Challenger reported a big drop in layoffs. Not a lot of positives but probably enough that we shouldn’t panic – yet.
Stocks may finally be recognizing this weakness with a minor down week but bonds haven’t hesitated to incorporate a gloomy view of future growth. The 10 year Treasury yield dropped 26 basis points since the last update, a huge move when the rate has a 1 handle.
The most common “explanation” for the drop in Treasury yields is that with foreign bonds trading at even lower levels makes the US 10 year the only game in town. I prefer the Occam’s Razor explanation; the drop in yields means what it always means – nominal growth expectations are falling. The dollar’s action does not support the notion that the demand for Treasuries is coming from frustrated foreigners either. The dollar index has also had a tough couple of weeks, not what you would expect if investors are really shifting from Bunds or JGBs to Treasuries:
It isn’t just inflation expectations that are falling either. The 5 year TIPS yield fell 20 basis points and remains firmly in negative territory.
The yield curve flattening continues as the long end of the curve remains firmly bid – and still with considerable short interest by the way – even as short rates continue to reflect some probability of a Fed tightening before year end. Shorting Treasuries, picking a bottom in yields, is turning out to be every bit as difficult as it has been to do the same in JGBs – a new widowmaker trade.
Credit spreads continued to narrow since the last update but still not enough to break the trend. Most every other region of the world has seen spreads tighten to a larger degree but then those markets are not nearly as liquid as the US – which isn’t nearly as liquid as it once was – so maybe that isn’t as significant as it seems. We certainly haven’t seen anything in the international economic data that would support the view that the global economy ex-US is getting better. Nor have we seen indications in foreign stock markets of the same. The last few days it appears the US junk market may be peaking again but so may see soon how the international markets respond to renewed US weakness.
One last negative for the economic bulls is the action in gold which resumed its uptrend after a generally sideways correction:
The growth slowdown appears to be accelerating but I’m not making any bold statements about the future just yet. What data we have so far points to the old standby 2% growth path for Q2. Based on the movements of the bond and currency markets one could be excused for trying to jump ahead and declare this something more than it is. But this economy has shown a peculiar resiliency, a persistence of low growth. And stocks, at least for now, are still expecting something better than the bonds. At some point bonds and stocks will have to start agreeing on the economic outlook but apparently not just yet. Which one is right? Bonds? Or stocks? Optimists or pessimists? Maybe the right answer is neither.
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