KEY DATA: Durables: -5.1%; Ex-Transportation: -1.2%; Capital Spending: -4.3%/ Pending Sales: +0.1%/ Claims: -16,000

IN A NUTSHELL: “Once again, manufacturing has assumed the role as the weakest link.”

WHAT IT MEANS: While the economy may be growing due to decent consumer spending and a fairly solid housing market, the strong dollar, low oil prices and uncertainties overseas have combined to crater the manufacturing sector. Durable goods orders fell sharply in December, marking the fourth decline in five months. That is not a good trend. Yes, the volatile aircraft industry was off sharply, but that doesn’t tell the whole story. Just about every major category recording a drop in demand. Indeed, only electrical equipment and appliances was up. The measure that best indicates business demand for capital spending fell significantly as well. Confidence in the corporate sector has faltered with the difficulties many firms are facing in international markets. With orders slowing, order books are thinning and that is not a good sign for future production.

On the housing front, the National Association for Realtors’ Pending Home Sales Index rose minimally in December. This is a leading indicator of existing sales that should close in the following couple of months. The warm December weather brought out buyers in the Northeast but nowhere else. The index has been slowly moving downward since July and that could signal a more moderate home sales increase this year than the 6.5% rise recorded in 2015. However, the biggest impediment seems to be supply and with prices continuing to rise, we could see more homes coming on the market in 2016.

Unemployment claims fell sharply last week after having moved upward during December and early January. That rise, which has occurred before, caused some pundits to claim the labor market was weakening. Well, it is not. The less volatile 4-week moving average has not moved up significantly and remains in a range that has persisted since last spring – and when adjusted for the size of the labor force it is still near historic lows.  

MARKETS AND FED POLICY IMPLICATIONS: The Fed says it will watch and weigh all incoming data to determine when the next rate hike will occur. Today’s numbers don’t argue for anything happening right away. Tomorrow we get the first reading on fourth quarter GDP and it is likely to disappoint. So, for the Fed to have some cover to move again in March or April, we need to get better data on the economy and inflation. Tomorrow, the fourth quarter Employment Cost Index is released. If that points to accelerating labor expenses, as I suspect it will, the focus of attention could move back to the labor market. Regardless, investors are fixated on oil and it will require some outsized economic numbers to change that.