The economic landscape continues to present a series of unsettling updates, as reflected in the latest figures from the ADP Employment Report and the ISM Manufacturing Index. In both reports, the indicators have taken a marked downturn. This troubling news follows a series of disappointing reports from yesterday, which raised further concerns about the economy’s trajectory. Close examination of these developments suggests we may be entrenched in a pattern of negative macroeconomic news.
In the past month, bonds in the U.S. and emerging markets, along with Real Estate Investment Trusts (REITs), have experienced gains, while stocks and commodities have taken a step back. This reaction is not surprising considering the increasing fears of an economic slowdown. Additionally, our proprietary Global Market Index (GMI), which is a passively weighted mix of major asset classes, recorded a decrease of 1.1% in May.
A trio of economic reports released this morning adds fresh insights into the current macroeconomic outlook, yet all three point towards increased uncertainty about whether the economy can sustain positive momentum in the forthcoming months.
U.S. Home Prices Likely Continued to Decline as Housing Stalls
Bloomberg | May 31
U.S. home prices are expected to have dropped in March by the most significant amount in 16 months, signaling that residential real estate will continue to hinder economic growth. According to Aaron Smith, a senior economist at Moody’s Analytics Inc., “Weak demand and a flood of discounted sales of distressed properties have considerably affected prices.” He added, “It’s challenging to remain optimistic about the economy’s outlook while house prices continue to fall.” The anticipated backlog of foreclosures suggests that prices may remain low, discouraging builders from initiating new-home construction projects.
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Data from the U.S. Bureau of Economic Analysis indicates that disposable personal income and personal consumption spending saw increases last month. However, when adjusted for inflation, this nominal rise diminishes to zero for income and reflects only the slightest increase for consumption. This income and spending report is expected to provide fodder for both bearish and bullish analysts moving forward.
The latest report on initial jobless claims indicates a potential stall in the economic recovery. The April surge in new unemployment filings raised red flags, and although the influx has slowed this month, the data remains confined to a range that suggests only weak economic growth at best.
New orders for durable goods experienced a significant decline last month, dropping by 3.6% in April on a seasonally adjusted basis, according to the Census Bureau report. This marks the largest monthly decrease since last October’s 3.7% drop. Given the renewed concerns over economic deceleration, this news is particularly unwelcome. Additionally, the breadth of April’s orders decline offers little ground for statistical optimism. Nonetheless, the annual trend remains positive, which provides some reassurance. The previously high growth rate in new orders over the past year was not sustainable, making this slowdown somewhat expected.
The Launch of QE3
OilPrice.com | May 24
The new QE3 translates to a “RISK OFF” trade, as QE2 directed $600 billion into stocks, commodities, oil, gold, and silver. Since April 29, fears regarding sluggish economic growth have prompted a mass exit from these asset classes. Essentially, the same $600 billion that flooded into risky markets is now rapidly retreating. The influx of capital is apparently migrating towards the Treasury bond market, indicating that we have entered a new bullish phase for bonds since February, with the ten-year Treasury yield dropping from 4.10% to 3.10%. If this “RISK OFF” trend persists—or accelerates—we could see ten-year yields plummet to between 2.0% and 2.5% by the end of summer.
St. Louis Fed President James Bullard has recently critiqued the notion of core inflation, which excludes volatile food and energy prices. In a speech given last week, he stated, “The core is rotten.” He challenged the popular notion that core inflation serves as a reliable predictor for future headline inflation, categorizing this belief as misguided and erroneous.
### Summary
These articles outline a pattern of economic challenges and mixed signals from various sectors, highlighting growing concerns over recovery and growth in the U.S. economy. They provide insights and analyses that are crucial for understanding the current financial landscape, emphasizing the need for vigilance as macroeconomic indicators shift. The reports evoke a cautious perspective on the future, underscoring the complex interplay between various factors influencing economic health.