America’s Industrial Downturn Won’t Throw the U.S. Into Recession, Probably While industrial retrenching drags on economic growth, here’s why it has yet to derail the expansion
U.S. industrial production, the Federal Reserve’s gauge of manufacturing, mining and utility output fell 1.8% in the first quarter, from a year earlier.
That’s an ominous sign.
Industrial production has never plunged so deeply in a year that didn’t include a recession, according to records dating back to 1919.
But this time should be different. While the industrial retrenching over the past year has been a drag on economic growth, it’s yet to derail the expansion. (…) What appears to be happening is the industrial sector is contracting, while the broader economy is inching forward.
That could be for several reasons. First, the U.S. economy is now driven by consumer spending mostly on services, including housing, health care and transportation. Second, manufacturing is not the employment engine it was once. Less than 10% of U.S. workers are employed by factories, down from a third just after World War II.
Third, the industrial production decline is largely driven by an unprecedented drop in mining, a category that includes oil and gas extraction and coal production. Mining output fell 12.9% in the first quarter from a year earlier, the largest annual drop on records back to the 1970s. (…)
Manufacturing output, meanwhile, expanded 0.6% from a year earlier in the first quarter. That’s historically weak growth outside a recession, but still a gain. (…)
But American consumers have propped up factories through car purchases, which touched a record high last year.
As long as job gains and modest pay increases give consumers the ability to spend, the risk of a near-term recession could be held at bay.
- Americans have had much ability to spend in the past year. They have rather saved.
- Recent Services PMI surveys have been historically weak.
- Car sales could have seen their cyclical peak at the end of last year. Annualized sales peaked in November and are down 8.5% since then. The supply of used cars is expected to surge in 2016-17.
The Conference Board’s LEI has plateaued recently even though it has yet to exceed its previous cyclical high…(Chart from Doug Short)
Pending sales of previously owned homes, reflecting contract signings, rose 1.4% last month from February, the National Association of Realtors said Wednesday.
The sales index climbed to 110.5, the highest level since last May. An index of 100 is equal to the average level of contract activity during 2001, which the NAR considers a “normal,” or balanced, market for the current U.S. population.
Economists surveyed by The Wall Street Journal expected pending home sales to rise 0.5% in March.
Pending sales in March climbed 1.4% compared with a year earlier.
Trends remain uneven across the country as Haver Analytics shows:
The large South market is showing better stats lately while the West is clearly slowing amid sharply rising house prices. Sales in the West have dropped in 4 of the last 5 months and are down 10.1% since October of 2015.
Fed Signals No Rush to Increase Rates Federal Reserve officials left short-term interest rates unchanged and signaled they plan to move cautiously, citing a mixed economic backdrop and lingering concerns about low inflation.
(…) Policy makers want to give themselves room to act at their June 14-15 gathering should they see enough encouraging developments, without signaling to investors that action is likely. Among the concerns: lingering worry over low inflation at home, slow-growing overseas economies and the potential British exit from the European Union. [The U.K.’s referendum over whether to stay in the EU is scheduled for June 23, a week after the Fed meets]
The Fed’s caution underscores how policy makers still lack confidence they can move away from extraordinary easy-money policies without undermining the fragile U.S. expansion and knocking the global economy off balance. (…)
“Labor market conditions have improved further even as growth in economic activity appears to have slowed,” the statement said. It noted household spending has diminished even though real income has risen and consumer sentiment remains high. (…)
Officials on Wednesday expressed less worry than they did in March about risks to the U.S. from a slowing global economy and market turmoil overseas, although they remain watchful. They struck a line from their March statement on the risks posed by the international situation. Instead, the Fed said it “continues to closely monitor inflation indicators and global economic and financial developments.” (…)
What the Fed Statement Signals and Why (Mohamed A. El-Erian)
Yen Surges After Japan Central Bank Stands Pat on Policy The Bank of Japan brushed aside calls for additional stimulus despite new data that showed falling prices, a decision that sent the yen up and Japanese stocks down.
The Nikkei Stock Average closed down 3.6% at 16666.05 after rising in the morning on anticipation of further BOJ action. The yen, which had stood at around 111.70 to the dollar just before the central bank’s statement, quickly rose to around 109.20 and later was trading at around 108.15.
BOJ Gov. Haruhiko Kuroda said the central bank held fire at a policy-board meeting that concluded Thursday because it wanted to allow more time to see the effects of thenegative-rate policy it put in place in February. Under the policy, the central bank charges 0.1% on some deposits held by commercial banks.
“At this meeting, we judged that it was suitable to look more closely at the extent to which the effects of our policies are sinking in,” Mr. Kuroda said.
However, he was more emphatic than usual about his preparedness to act at any time to ease policy if conditions require it.
“There is plenty, plenty of room to push down the negative rate,” Mr. Kuroda said. “There is no change in our approach that we are going to do whatever is necessary.” (…)
Prices excluding fresh food slumped 0.3 percent in March from a year earlier, the most since April 2013, the statistics bureau announced. That compares with a forecast drop of 0.2 percent in a Bloomberg survey. Excluding food and energy costs, inflation was 0.7 percent. (…)
A bull market that has been derided as fake, doomed and history’s most-hated just earned a new title: the second-longest ever.
Dodging and weaving through three 10 percent drops in the last 19 months while avoiding the 20 percent decline that denotes a bear market, the advance that began seven weeks after Barack Obama’s first inauguration in January 2009 has now lasted 2,607 days. That matches a rally from 1949 to 1956 which straddled the presidencies of Harry Truman and Dwight D. Eisenhower. Only the dot-com bubble of the 1990s lasted longer at 3,452 days. (…)
Bulls and bears divide on how that happened. To optimists, the 210 percent rally in stocks is justified by a commensurate expansion in earnings, achieved by managers focused on efficiency and cost cuts by the experience of the financial crisis. Pessimists see a market that rose only in proportion to the trillions of dollars in liquidity injected by the Fed. (…)
Stocks are stuck in their longest period of stasis since the rally began, going 11 months without posting a 52-week high. Fallow periods lasting longer than 12 months are poison to chart analysts, who view them as an indication of waning momentum over the long term. In the past, deep losses have not only signaled the end of bull markets but also foretold recessions. (…)
At the same time, the bull market has been nothing if not resilient, posting a series of rebounds from selloffs starting in October 2014 that rank with the sharpest in history. During the first quarter, the S&P 500 reversed an 11 percent slump for the biggest turnaround since 1933. In the previous two routs that ended in September last year and a year earlier, the index jumped about 10 percent in a month. (…)
Americans have been sellers of equities since 2007, slashing stock holdings by $2 trillion, data compiled by Fundstrat Global Advisors LLC show. While the pace of the liquidation is unprecedented since 1956, that represents a huge pool of potential demand, according to Tom Lee, the firm’s managing partner. Investors’ exodus during the decade that started in 1979, the year when BusinessWeek featured a cover story titled “The Death of Equities,” preceded a 400 percent rally in the 1990s. (…)
“Historically, if you’re looking for a model of what kills bull markets, it’s a combination of over-valuation and over-ownership,” Stone said. “You can argue with me on the valuation side, but we never got the last person who puts their money in. Because it’s a mistrusted bull market, you continue to get people to finally capitulate.” (…)
“A lot of reasons to hate this expansion and bull market, and yet it keeps on going,” said Joy. “Certainly most of the money has been made. Certainly we’re closer to the end than the beginning. There is probably some chance that we see higher prices down the road, but all depends on earnings.”
Indeed, it all depends on earnings.
- Earnings beats have been particularly abundant this season, with 78% of companies surpassing bottom-line estimates. This is the best showing since 1Q10. Unfortunately, disappointments from a number of large index names have been among the misses.
- 227 companies (56.7% of the S&P 500’s market cap) have reported. Earnings are beating by 3.7% while revenues have surprised by 0.2%.
- Expectations are for a decline in revenue, earnings, and EPS of -1.5%, -8.5%, and -6.2%. EPS is on pace for -4.6% (-5.2% yesterday), assuming the current beat rate for the remainder of the season. This would be +0.7% excluding Energy.
Thomson Reuters’ tally shows EPS down 6.9% in Q1 (was –7.1% yesterday).
Dogfight: Airbus and Boeing
Disappointing sales for the Airbus A380 superjumbo a decade ago made many in the industry think that its manufacturer had made a big mistake in opting for giant aircraft. Boeing’s focus on smaller planes, such as the 787 Dreamliner, seemed more sensible. Not any more. In January, Boeing wrote down $885m from its plane programmes and announced that it was cutting production targets for the 747 and 777. Yesterday, it revealed falling first-quarter profits, down to $1.22 billion against $1.34 billion in the same period last year. It blamed Airbus’s keen prices—but Boeing’s own poor cost-control is a bigger factor. A big write-off for the 787 looms. For its part, a weak euro (and a tighter grip on costs) has helped the European manufacturer to tally up more orders for its planes since 2012 than its American rival. When Airbus reports its results today, analysts will expect better things. (The Economist)