The problems in the US economy may be more widespread than we think

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Markets received the clearest sign yet that something is wrong with the US economy earlier this week.

Markit Economics’ flash services purchasing manager’s index (PMI), a gauge that measures changes in activity levels from one month to the next, fell below the 50 level in February for the first time since October 2013, indicating that activity levels across the sector were contracting.

As a sector that accounts for about two-thirds of US economic output, it was a worrying development, particularly given weakness in the nation’s manufacturing and energy sectors in the preceding months.

Chris Williamson, chief economist at Markit, suggested that the result points to “a significant risk of the US economy falling into contraction in the first quarter”.

While he’s not calling anything as sinister as that, John Lonski, chief economist at Moody’s Capital Markets Research, is also concerned with what’s he’s seeing from the US economy at present, suggesting that all is not well with business activity outside of the hard-hit oil and gas sectors.

The chart below, supplied by Moody’s, explains his concern.

It tracks annual growth in business sales, and Lonski reckons it’s troubling.

“January’s moving 12-month sum of core business sales (excluding sales of identifiable energy products) may rise by merely 1.8% year-over-year, which would be its weakest showing since the 0.8% annual rise ended July 2010,” says Lonski. “Worse yet, recessions were in effect when core business sales’ yearlong sum previously first slowed to 1.8% from their cycle peaks in November 2008 and June 2001.”

While he doesn’t believe that a recession in the near-term is likely, Lonski suggests that business spending will need to accelerate to avoid a more pronounced slowdown in the economy.

“Though a recession is unlikely over the near term, business sales outside of energy warn of subdued paces for both capital spending and hiring activity,” says Lonski. “Looking ahead, the annual growth rate of core business sales may need to approach and remain above 3.5% in
order to avoid a more pronounced deterioration of business activity.”

The Atlanta Fed’s GDP “nowcast”, a forecast model that provides an official estimate of US GDP prior to its actual release, currently predicts that the economy grew at a seasonally adjusted annual rate of 2.5% in the first quarter of 2016.

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