It has been a week of dismal economic data releases. On Monday, the Chicago Fed released its National Activity Index (CFNAI), a weighted average of 85 monthly indicators. The CFNAI is intended to provide a real-time statistical measure of coincident economic activity. That latest reading came in at -0.45, well short of the 0.20 estimate from economists. The weak April reading pushed the all-important three-month moving average to -0.12. When the three-month moving average falls below -0.70, the likelihood that the U.S. economy has entered recession is strong.
On Tuesday, new home sales and the Richmond Federal Reserve Manufacturing Index came out. New home sales beat expectations, but housing is still in the basement. April’s seasonally adjusted new home sales totaled 323,000. More homes were being sold at the trough of the 1970 recession than were sold in April. And, in 1970, the U.S. population was only two-thirds what it is today.
The Richmond Fed’s manufacturing survey looked no better. The index plummeted. Economists were expecting a reading of 9, which would have signaled continued expansion, but the Fed index came in at -6, signaling the opposite—contraction. The monthly decline in the index was the largest since December 2008. New-order volume fell from +10 to -15, and the order backlog and utilization index also fell sharply.
Durable goods orders came out on Wednesday and they, too, fell short of expectations. Excluding transportation orders, economists were looking for monthly growth of +0.5%. Actual monthly growth came in at -1.5%.
On Thursday, initial claims for unemployment were released. The market was looking for claims to fall to 404,000 from last week’s 409,000. Instead, claims rose to 424,000. This week marked the seventh consecutive week that jobless claims have been above 400,000. The four-week moving average is now clearly in an uptrend.
The Federal Reserve told us last month that the softness we saw in the economy in the first quarter was transitory. It was blamed on bad weather, the earthquake in Japan, and geopolitical events in the Middle East. That hypothesis now seems in doubt. Data released for April show that the second quarter is off to a slow start.
The bond market isn’t buying the Fed’s explanation either. The bond market is telling investors that waning economic momentum is more than transitory. Ten-year treasury yields continue to fall. After peaking at 3.73% in February, 10-year rates have dropped to 3.08%. The key level to watch is 3%. If bond investors push yields below 3%, a more serious slowdown could be on the horizon.
Jeremy Jones, CFA
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