Yesterday’s somewhat weak economic releases add to a pattern of recent tepid results from a number of economic indicators, and suggest that an economic slowdown is gathering steam even before the end of QE2.
We cite the following as evidence.
Existing home sales for April were down 0.5% to 5.05 million as compared to 7.2 million at the peak. Inventories of homes for sale increased to a 9.2 months, the highest since December while prices were down 5% from a year earlier.
April housing starts dropped 10.2% to 523,000, barely above the recession lows, and below any level prior to 2008. According to the National Association of Home Builders (NAHB) traffic of potential buyers was still extremely low. Keep in mind that this is an organisation that usually puts a positive spin on any results.
While weekly initial claims for unemployment insurance declined to 409,000 from the prior week, the number has now been over 400,000 for six straight weeks after a period of coming in below that level.
The Philadelphia Fed Index for May fell sharply to 3.9, losing 39.5 points in the last two months. This is also well below the 1st quarter average of 32.9. Both new and unfilled orders dropped significantly while inventories also declined, indicating that the inventory buildup that helped support the recovery may be moving back in line with demand, which has been growing less than production.
Consistent with the above, April industrial production was flat. It is likely that production, which had consistently been running ahead of demand, is being reduced as inventories that were depleted during the recession have now caught up. This also may explain the higher level of initial claims.
The Empire State Manufacturing Survey was also down 9.8 points to 11.9, the lowest level since December. This index therefore confirms the Philly index and suggests similar lower results from the ISM manufacturing index.
The April index of leading indicators declined 0.3%. While one month does not make a trend it was the first monthly drop since last June, and fits in with what other indicators seem to be telling us.
Similarly, the ECRI Weekly leading indicator has been down for three of the last five weeks and has been about flat since mid-December after rising steadily from the recession lows. This is indicative of at least a pause in coming economic growth, and perhaps something worse.
April core retail sales increased only 0.2%, and were probably flat to slightly down when adjusted for inflation. Higher income from reduced social security withholding was more than offset by higher gasoline prices, tepid wage increases, high unemployment, lower home prices and recessionary levels of consumer confidence. And this is happening even before the end of QE2, which has been keeping the economy afloat since November.
The April Small Business Survey, after rising weakly from recession lows, has now dropped 3.1 points in the last two months. Even at its most recent high it was below any level in its history prior to 2008. Key segments that declined were plans to increase employment and capital expenditures. In addition the number expecting sales to rise also dropped.
In addition to the domestic concerns cited above, the global picture is also not looking too rosy. ECRI's long leading indicator of global industrial growth peaked last August at 0.7 and stood at 0.1 in March. ECRI managing director Lakshman Achuthan stated 'There's a downturn in global industrial growth in clear sight'. EU production fell in March and retail sales have been flat for six months. In the UK there's been no GDP growth for six months. Japanese GDP dropped 3.7% annualized in the 1st quarter and 3.0% in the 4th. Note that the earthquake occurred on March 11th, toward the end of the quarter, so cannot be fully blamed for the 1st quarter and not at all for the 4th. Industrial output in all of the BRIC nations seems to be slowing, and current monetary and fiscal policies suggest more to come.
All in all it seems to us that the odds are high that a domestic and global economic slowdown is already in place. In the U.S. the slowdown is happening with only six weeks to go before the end of QE2, a program that has been a major prop for even the tepid recovery we've undergone so far. For the stock market nothing seems to matter until, suddenly, it does. Recall 1999 and 2007 when the market stayed high despite the obvious problems that were there for all to see. The S&P closed today at virtually the same level it first reached on February 9th, and is most likely in the process of forming a top. In our view the potential breakdown is close at hand.
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