KEY DATA: LEI: +0.8%/ Phila. Fed (Manufacturing): +19.7 points/ Empire State Survey: +8.1 points/ Claims: +4,000
IN A NUTSHELL: “More good economic data, but again, they seem to be powered by mild weather.”
WHAT IT MEANS: My decision to buy snow insurance (a snow blower that is now collecting dust) is working out quite well. It looks like we will not have any snow in Philadelphia this month and we have had less than one inch so far this season. I love it! My insurance plan is even helping drive what on the surface looks like a rebound in the economy. Housing is having a great winter and that, at least in part, powered a sharp rise in the Conference Board’s January Leading Economic Indicators index. The huge decline in jobless claims, which is slowly unwinding, also played a major role and most of the components were up. The LEI had declined in December and was up minimally in November, which is why I raise doubts about the sustainability of the increase. What the seasonal factors giveth, they ultimately taketh away.
Still, I will take the strong numbers while we have them, especially given the problems that China, Europe and the developing nations are having given the coronavirus. It hasn’t just been housing that has benefitted from the winter. It looks like the manufacturing sector is improving as well. Both the New York Fed’s Empire State Index and the Philadelphia Fed’s Business Outlook Survey jumped in February. Orders soared and backlogs went from shrinking to increasing in both manufacturing surveys. But while optimism rose in the Mid-Atlantic region, respondents were slightly less positive about the future in New York.
The historic low jobless claims numbers are slowly moving back up to what was the “normal” level we saw during most of last year. I say “normal” because they remain incredibly low.
MARKETS AND FED POLICY IMPLICATIONS:It is hard to take the strong economic data as clear indicators of an economic rebound given the confounding factors of warm weather and the coronavirus. Yes, builders are having a great time, but it is likely they are simply bringing forward some construction that they would normally due during the spring. If that is the case, and I suspect it is, we could see some pretty ugly data during the March through June period. As for manufacturing, it is hard to know where all this new demand is coming from. Firms are not likely seeing stronger foreign demand in this epidemic restrained environment. Indeed, we are already seeing signs that the world economy has slowed and who knows what is the true condition of the world’s second largest economy, China. And there are no major indications that households are suddenly spending a lot more. Thus, investors may want to operate in a vacuum and hope that the coronavirus goes away quickly, but that is a risky approach. The Fed sees the virus risks as real, but has no idea at this point the extent of the potential damage. For now, I will enjoy being outside when I am usually bundled up in my house and hope that the virus gets brought under control quickly and the “see no evil” investor is right in continuing to pile into the markets.