KEY DATA: Durables: +1.2; Ex-Transportation: +0.1%; Capital Spending: -0.7%/ Existing Home Sales: -1.2%; Prices (Over-Year): +2.8%/ Philadelphia Fed (Manufacturing): -21.1 points/ Claims: -23,000
IN A NUTSHELL: “With housing and manufacturing slowing further, it appears the bloom is off the economic expansion rose.”
WHAT IT MEANS: We are still one week from getting the first reading on fourth quarter 2018 GDP, but things are not looking up for the number. In a report delayed by the government shutdown, durable goods orders rose solidly in December. However, much of that gain was derived from a 28.4% surge in nondefense aircraft orders. The rest of the economy, excluding Boeing, didn’t do nearly as well. Motor vehicle orders rebounded and demand for fabricated metals was up, but there were negative signs on the computers, communications equipment, machinery, electrical equipment and primary metals components. But most troubling, the indicator of private sector investment spending, capital goods orders excluding aircraft and defense, fell sharply again. Whatever business spending boom we got from the tax cuts looks like it has dissipated. Also, backlogs are declining and inventories are growing faster than order books, which isn’t a great sign for future capital spending.
A second indicator of growing economic weakness was the report by the National Association of Realtors that showed existing home sales continued to fade in January. Yes, it was bitterly cold, but the slowdown has been going on for a year now and there is no indication that the latest data are anything but a continuation of that trend. Housing prices are rising slowly, further reinforcing the belief that the sector is soft. Finally, despite the weakening demand, inventories remain well below healthy levels. It is hard for buyers to find a house they want given the low level of supply.
If the slowdown in housing and manufacturing were not enough, the Philadelphia Fed’s February report on regional manufacturing activity turned negative for the first time in nearly three years. However, we shouldn’t read too much into this report as the weather was brutal, hiring remained strong and the outlook for the future held up quite well.
Finally, unemployment claims declined back to what are more normal levels last week. I had warned that the data were volatile due to the government shutdown and cold weather, and that looks to have been the case.
MARKETS AND FED POLICY IMPLICATIONS: The economy is coming off its tax-induced sugar high. No surprise there, except it might be a little quicker than expected. The biggest concern is that the tax cuts didn’t bring forth nearly the gains in capital spending that many had hoped for. Economists had warned that would likely happen, but we still held out hope that the past, limited reactions to tax cuts by businesses would not be repeated this time. Well, this time was just not different. The Fed, in the minutes of the January 29-30 meeting released yesterday, made it clear that it would be cautious going forward. The members did remind everyone that increases in rates could not be ruled out if there were a rebound in growth and inflation. Hardly anything new there. What was new was a clarification of the balance sheet normalization process. The run down is likely to end later this year at a level above what was expected. The members want to build in some flexibility, which makes sense, especially since this is new ground for the Fed. For investors, the data don’t paint a picture of strong growth going forward. Again, economists warned that the likelihood of an extended period of 3% growth was small and that too appears to be coming true. I guess we can be right every once in a while.