Rough Going for Economy, Stock Markets

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The data on manufacturing continues to be mixed, which is a heck of a lot better than the months of dismal news we had until the last month or so. It looks like the manufacturing recession might be forming a bottom and could be a boost to economic growth later in 2016.

Manufacturing is benefitting from several factors. One factor is that manufacturing fell so much in the last year that it couldn’t drop much more. More importantly, the key headwinds it has been fighting are shifting.

The crash in commodity prices, especially oil, was the major problem. Many manufactured products are devoted to producing, refining or otherwise working with oil and other commodities. When commodity prices crashed, commodity-based companies slashed their capital spending. The recent recovery in commodity prices helps stop the cutting.

The dollar also declined from its recent highs. The rising dollar made manufactured U.S. products more expensive to overseas buyers, so sales declined.

Economies outside the United States were weak and declining. That also put a crimpin sales. In the last couple of months, economic activity perked up in a number of other nations, especially the emerging economies that tend to be dependent on commodities.

I’m not looking at a major boom in U.S. manufacturing in the near future. But even modest growth will contribute to overall U.S. growth and increase our modest economic growth just a little higher.

The Data

Let’s start with that mixed manufacturing data.

The PMI Manufacturing Flash Index declined slightly, but it still is above 50, which indicates expansion in the sector. Even so, Friday’s reading was barely above 50 and is the lowest reading on that index since September 2009.

The Dallas Fed Manufacturing Survey showed good news for the second consecutive month in its Production Index component. It has been positive for two months now, and new orders shot up this month. Even so, the General Activity Index, which is the broadest measure in the survey, was decidedly negative for the 16th consecutive month.

The Richmond Fed Manufacturing Index followed last month’s record-setting increase with a second consecutive big increase. The components of the index were strong across the board.

Yet, Durable Goods Orders were mixed. The headline number showed a solid increase after a sharp decline the previous month. But the increase was less than expectations. Also, the increase was due largely to a jump in defense goods. Motor vehicle orders declined, and core capital goods were flat.

Let’s turn to housing. Most of the data indicate that housing slowed a bit so far this year, but it still is growing. Last month’s new home sales were revised higher to make it one of the best months since 2008. So, it’s no surprise that this month’s number was a little lower. Even so, total sales of new homes are solid. One negative in the report was that prices declined 3.2%, so they now are down 1.8% for 12 months.

Home prices increased again, according to the S&P Case-Shiller Home Price Index. But the increase was the lowest since last October. It puts the 12-month increase at 5.4%.

Pending home sales increased 1.4%, much higher than expectations. And that follows last month’s strong 3.4% increase. But after those two strong months, the 12-month increase is only 1.4%.

The service sector improved a bit, with the PMI Services Flash Index rising to 52.1. This indicates expansion, but some components of the report were weak. This report is consistent with other indications that the overall economy is growing, but at a slower rate than last year.

Consumer Confidence, as measured by the University of Michigan, declined a little. But it remains in the range it has been bouncing around for the last six months. While the current conditions components of the survey were positive, the decline was due to lower expectations for the next six months.

No one should be surprised by the first estimate of first quarter gross domestic product (GDP), which pegged growth at 0.5%. I don’t pay much attention to the report for several reasons. Firstly, it is backward-looking. It’s also an estimate that is subject to revisions, sometimes substantial revisions, over time. Plus, it measures only a portion of the economy. Most of the report was positive. Growth was hampered primarily by two factors. One factor is a sharp decline in nonresidential investment. That’s the result of the weakness in manufacturing and drop incommodity prices, especially energy. The other factor is a decline in exports. That was due to a rising dollar and generally weak global economy. Early indications are that the second quarter is likely to be better.

New unemployment claims increased by 9,000. That still leaves them near the lowest all-time levels, and the four-week average is the lowest in 42 years.

The Markets

It was a volatile five days with little overall change for most indexes. The exception was the Russell 2000 index, which rose 0.8% by around midday Thursday. The S&P 500 was about even for the five days. The Dow Jones Industrial Average lost about 0.2%, and the All-Country World Index lost a fraction more. Emerging market stocks fared the worst, losing about 0.4%.

Bonds had a volatile, mixed week. Long-term treasuries declined most of the weekbut rose sharply on Wednesday after the Fed implied it wouldn’t increase interest rates for a while. They declined again Thursday morning for a loss of about 0.4% for the week. Investment-grade bonds gained a fraction. Treasury Inflation-Protected Securities (TIPS) rose about 0.6%. High-yield bonds rose about 0.9%.

The dollar lost about 0.8%. It took a deep dive Thursday morning, following the Bank of Japan’s announcement that it wasn’t going to increase its stimulus. Japan currently has negative interest rates.

Commodities had another good week. Energy-based commodities gained over 2%. Broader-based commodities and gold each returned 1% over five days.

Some Reading for You

Baby Boomers might be moving the stock market, but in a different way than pessimists expected 10 years ago.

Here’s an argument that there aren’t any good gold analysts or investment models.

This is an interesting history of the time Donald Trump took action against a stock analyst.

I comment and link to these and other items on my public blog at http://www.bobcarlson.net.

Sincerely,