Monday Update: The Slowdown Continues

Posted by Brad McMillan, CFA, CAIA, MAI

Find me on:

This entry was posted on Nov 2, 2015 10:48:15 AM

and tagged In the News

Leave a comment

Monday updateLast week was a busy one for economic data. And the numbers, which I’ll cover in this Monday update, along with expectations for this upcoming period, continued to show the effects of a slowdown in the third quarter.

Last week’s data

New home sales showed a surprise decline of 11.5 percent to 468,000; expectations were for a much smaller decline of 0.6 percent. Although this is a decline from a multiyear high in previous months, and the absolute level remains healthy, the size of the decline is worrying. Longer-term trends remain positive, however, and the strength of both starts and existing sales suggests this may be an outlier. Nonetheless, it will bear watching.

Durable goods orders declined as expected by 1.2 percent, but the decline in the previous month was revised downward from 2 percent to 3 percent, which is concerning. Excluding transportation (and the volatile aircraft sector), the news was better, with a 0.4-percent decline, which was better than the previous month but below expectations. Overall, these numbers suggest that the headwinds from a strong dollar and weakness elsewhere in the world continue, but that the situation has started to stabilize.

The Conference Board Consumer Confidence survey dropped back to a three-month low of 97.6 from the previous month’s 102.6, below the lower end of expectations. The decline appears to have been driven by deterioration in employment expectations, which is consistent with recent slower employment growth. The longer-term trend remains positive, however, and the current number remains at a reasonably healthy level.

The first estimate of gross domestic product (GDP) for the third quarter came in at 1.5 percent, slightly below expectations and down significantly from the 3.9 percent of the previous quarter. Looking into the details, the decline was due primarily to a drag from inventories, which subtracted about 1.4 percent from growth this quarter after rocketing up in the previous two quarters. The underlying trends continue to look solid, with consumption growth at 3.2 percent and personal disposable income growth at 3.5 percent. Despite the poor headline number, the real message is much less discouraging.

Personal income and spending numbers were also released last week. Income dropped more than expected, from a growth rate of 0.4 percent to a rate of 0.1 percent, on the back of two months of weaker-than-usual employment results. Spending also declined from 0.4 percent to 0.1 percent, but this is at least partially due to lower gasoline prices. These numbers are consistent with the theme of slower but continuing growth and are not yet at worry levels.

Finally, the Federal Reserve surprised the markets for the second month in a row with a statement that was much more hawkish and positive about the economy than expected. Despite the weakness of recent data, the Fed essentially ignored it and made a point of noting that a rate increase at the next meeting remained possible. After some thought, markets reacted well to the more positive view on the economy.

With last week’s data supporting an overall slowdown, what will this week’s data tell us about whether it is likely to continue through the fourth quarter?

Expectations for this week

The ISM Manufacturing survey, released on Monday, is expected to remain close to breakeven, or at 50.0, down slightly from the previous month’s figure of 50.2. As noted above, some data suggests that the manufacturing sector is stabilizing, and this release will provide a good idea of whether this is the case.

On Tuesday, the international trade balance for September will be released, with expectations for a significant improvement to –$42 billion, after last month’s very weak –$48.3 billion. This improvement should reverse the decline in August and indicate whether net exports are likely to be a drag on the economy going forward.

On Wednesday, the ISM Non-Manufacturing survey is due. This survey covers about seven-eighths of the economy and is expected to decline slightly, to 56.5 from the previous month’s 56.9, but to remain in expansion territory. This is in many ways an important number, as the robust service sector has offset the weakness in manufacturing for the past quarters.

On Friday, the employment report—the most important data for the week—is released. After two disappointing months, job growth is expected to rebound to 180,000, and wage growth is expected to move back to 0.2 percent from flat. Supporting evidence—low unemployment claims and strong business surveys—suggests that hiring should move back to healthier levels.

  Subscribe to the Independent Market Observer

Upcoming Appearances

Tune in to Bloomberg Radio's Bloomberg Businessweek on Friday, February 28, at 3:45 P.M. ET to hear Brad talk about the market. Stream the show live at https://www.bloombergradio.com/, listen through SiriusXM 119, or download Bloomberg's app, Bloomberg Radio+.

Tune into Yahoo Finance's The Final Round on Thursday, March 12, between 2:50 and 4:00 P.M. ET to hear Brad talk about the market. Exact interview time will be updated once confirmed. Watch at finance.yahoo.com

Subscribe via E-mail

New call-to-action
Crash-Test Investing
Commonwealth Independent Advisor

Hot Topics

Have a Question?

New Call-to-action

Conversations

Archives

see all

Subscribe

Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly into an index.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.  

Third party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®