KEY DATA: Orders: -0.2%; Ex-Aircraft: -2.5%; Capital Spending: +1.1%/ Pending Sales: +5.2%; Over-Year: +5.7%/ GDP: +2.1% (Unchanged)
IN A NUTSHELL: “Other than housing, there is not a lot of oomph in the economy.”
WHAT IT MEANS: Yes, it is all about Covid-19, but the economic data keep coming in and they provide a picture of the state of the economy just in case the virus strikes the U.S. hard. Today’s key number was durable goods orders. Demand for big-ticket items were off in January slightly, but the decline was kept to a minimum because civilian aircraft orders surged by 346%. I prefer to take out aircraft, as rising or falling orders for civilian or military planes don’t usually translate into changes in production in the near term. When you do that, demand for big-ticket items was off sharply. But the other details in the report indicate that business investment is holding in but not booming. The best measure of capital spending, nondefense/nonaircraft orders, rose solidly, after having declined in December. Orders for machinery, computers and metals rose. However, demand for communications equipment, electrical equipment and vehicles were down. With backlogs flat for the past two months, it is not clear we will see any pick up in production.
The strongest sector, at least for now, is housing and pending home sales jumped in January. The National Association of Realtors’ index rebounded from a large drop in December. The index level is solid and points to an uptick in home sales over the next couple of months.
The Bureau of Economic Affairs released its second estimate of fourth quarter growth and it was unchanged from its initial calculation. There were only small revisions to a number of components. Consumption and investment were a little lower, the trade deficit a touch wider and inventories were somewhat higher. Inflation was even slower than initially thought. None of the changes should alter economists’ view of first quarter growth, which is already muddled by the coronavirus.
MARKETS AND FED POLICY IMPLICATIONS: It is hard to look at the current economic data and assume the past is prologue. Let’s face it, the coronavirus is the economic story and the way it plays out will determine if the U.S. economy continues its record expansion or comes to a crashing halt. The potential for a recession, though, depends upon the strength of the economy going into a possible coronavirus outbreak and the extent of any outbreak in this country. Right now, economic conditions are solid enough to withstand a mild epidemic (if there is such a thing). But growth is not so strong that if there were a major outbreak, the economy would keep on ticking. The likelihood is that the first quarter growth will come in somewhere between 1.5% and 2%. Consumers are still spending and with housing hyped by the weather, any slowdown in business investment and exports should be overcome.
The impacts of the virus could start showing up with a vengeance in the second quarter. The housing gains, which were driven by weather, should unwind. Exports could be cut and the lack of tourism is likely to wreck big-ticket retail and to some extent, export services. Business investment could also be hit quite hard. If the virus worsens through the spring, spending on structures and equipment could be brought to a halt. That would add to the problems in the energy sector. With prices way down, investment plans are already being slashed and the lower energy prices go, the greater the cutbacks. This looks like an insidious virus and you cannot build a wall around the U.S. to keep it out. The best we can do is prepare the health system to handle it and while that would up health care and government spending, you can forget business and consumer spending. We might stay out of a recession if there is only a mild outbreak in the U.S. If not and it lingers, a recession is likely – and the Fed would be able to do little to stop it.