US Economy: Cooler than Consensus

The rebound is over, and we can’t just blame the dreadful winter weather. Much recent data have been disappointing. Even though I believe they are not bad enough to be recessionary signals, they do suggest that the recovery going forward may be a bit blander than hoped.

First, let’s take a look at the positives,  concentrated in the labor market: 

• Employment indicators have been trending strong
• Wage growth is fairly steady
• Unemployment rate has been moving down
• Small businesses are signaling greater willingness to hire

That is all well and good but these shouldn't blind us to other, less upbeat, data.

Here’s a quick review:

• Manufacturing production rose only 0.2% in January, while the Bloomberg Consensus expected 0.4%
• Single-family housing starts and permits for new construction fell in January
• Applications for new mortgages and refinance applications fell sharply in recent weeks, despite very low mortgage rates
• Construction spending for December rose a moderate 0.4%, while the market was expecting a gain of 0.7% according to Bloomberg Consensus expectations
• December trade balance was significantly worse than expected as real imports surged 3.5% and real exports were flat
• Retail sales (excluding autos) fell 0.9% in December and January
• December's personal spending fell 0.1% in real terms

Let’s take a look at the Citigroup Economic Surprise Index:

This index measures economic news by looking at the historical standard deviations of data surprises: what was the actual data release, compared to the expected Bloomberg survey median?  A positive reading of the Index suggests that economic releases are, on balance, beating consensus. A negative reading indicates that economic releases are, on balance, pessimistic compared to consensus.

As you can see below, as of mid-February, the Citigroup Economic Surprise Index is competing with the worst observations since the depth of the last recession. While the actual data has not fallen to recessionary depths, the disappointments have been as bad.
 

I think consensus got ahead of itself, expecting much better data. It is understandable that consensus was upbeat because the second and third quarters of 2014 were stellar. Alas, those stellar results were, in our view, largely a temporary rebound from the very depressed first quarter of 2014. With the rebound over, the economy is returning to more normal growth, growth that is reasonable but cooler than the consensus was hoping for.

As data disappointments piled on since the start of the year, it is not so surprising that Treasury yields fell to such low levels for a while, with the yield on the 30-year Treasury bond falling to a record low 2.22% on January 30.

It wasn't just the disappointing US data to blame for falling Treasury yields: the tense situations in Greece, the Ukraine and with ISIS in the Middle East likely also played a role. In fact, it was amazing how well the stock market did, all things considered. Finally, the US dollar rallied despite disappointing US data simply because data was so much worse elsewhere.

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