Ambiguous US Data Has Ominous Undertones

Mixed data provided little in the way of clarity as traders and investors pondered an aggressively hawkish Fed and slowing US economic momentum.

Orders for durable goods fell more than expected in February, data out Thursday showed. The 2.2% decline was the first in five months, and nearly quadruple the expected drop, although that’s a somewhat misleading way to conceptualize of the headline. This series is (very) volatile, and the range of estimates was -3.1% to 1.4%.

Far more importantly, non-defense orders ex-aircraft dropped 0.3% for the month, following a 1.3% January gain. It was the first core decline in a year (figure below).

Shipments rose 0.5%, a less enthusiastic showing compared to the prior month.

Although one month doesn’t make a trend, the Fed doesn’t need a sudden deceleration in capital spending. That’d be a decidedly poor omen, especially given the potential for rate hikes to exacerbate any burgeoning weakness.

Meanwhile, jobless claims dropped to the lowest since 1969. A 28,000 WoW decline took the headline initial claims print down to 187,000 (figure below).

The headline is now (slightly) lower than the rock-bottom prints observed just prior to the Omicron wave, only this time around, it’s harder to “blame” seasonal distortions. The four-week moving average fell to just 211,750.

Ostensibly, this is a positive development, and that’s surely how the White House will spin it. But it also underscores the notion that the US labor market is still experiencing a severe supply-demand mismatch.

At the same time, I suppose you could argue that what counts as “runaway inflation” (a relative term in the developed market context) is compelling the jobless to seek work, especially considering the distinct possibility that price pressures are poised to worsen as the impact of the commodity rally works its way through.

Additionally, note that although the pace of home price appreciation is now cooling, the property boom manifests on a lag, which means shelter inflation is almost sure to get worse before it gets better.

Ultimately, Thursday’s data did nothing to challenge (let alone change) the narrative. At the current juncture, that’s not necessarily a good thing.


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10 thoughts on “Ambiguous US Data Has Ominous Undertones

  1. I would like to believe that the aggressive chatter from Fed officials was a pre-meditated campaign to frighten the private sector into tightening conditions for them. So far their “screaming” does appear to be working.

    Alas, when you look at the #1 cheerleader for choking the economy that theory is questionable at best. This grouchy old man vividly remembers Bullard’s ranting and raving during the Great Financial Crisis. He was only surpassed by Jim Cramer recommending that we should all move into our parents’ basements and start growing our own food.

    So it may just be that Fed members and staff are too enamored of the models they toiled over at graduate school before heading straight to a career at the Fed. Blindly following models built on sand is all they know.

    To paraphrase Professor Prof. Dave Jennings (Donald Sutherland) in Animal House: “Hey I’m serious! It’s my job!” he called out as his students ignore the homework he was trying to assign.

  2. “Although one month doesn’t make a trend, the Fed doesn’t need a sudden deceleration in capital spending. That’d be a decidedly poor omen, especially given the potential for rate hikes to exacerbate any burgeoning weakness.”

    Again, why? Maybe I am stubborn or dumb but I don’t get why inflation going away b/c demand cools off (i.e. it was ‘transitory’ after all, just on a longer timeframe and more painful scale than expected) is a problem.

    What’s so great about raising rates per se? And engineering a recession to kill off inflation is kind of like taking a hammer to crack a nut. It’ll work, but couldn’t we do better?

    Coz if inflation costs Biden the election, then a recession is unlikely to help him win it…

    1. I am hearing talk of another extension of the student loan moratorium (currently set to expire May 1, 2022) until early 2023 to help with elections.
      It’s all about the money. I don’t agree with student loan forgiveness-but that might be the lesser of evils.

      1. FWIW, I don’t particularly agree with loan forgiveness either and given Biden (lack of) popularity, it’ll hardly be enough to win anything let alone the Presidential election…

  3. There’s nothing to stop corporations from price-inflating all that extra money right out of consumers pockets. The less money they have, the less leverage they have over labor terms. This seems like its always been the theory behind “transitory” inflation — prices will inflate til we get to the steady-state of pre-covid economics (i.e. workers get the minimum they need to survive, corp america takes the rest).

    Without some sort of regulatory backstop to protect consumers new purchasing power, or without investment in capacity-expanding infrastructure to soak up that new demand, this was inevitable. I mean, businesses are not incentivized to expand productive capacity when they can see that the policies which put more money into peoples pockets are temporary.

    I really can’t get a solid read on the Fed. I alternately think they know this and have resisted jacking rates prematurely, and then sometimes get the feeling they don’t know this and truly think that they’re carefully managing a ‘soft landing.’ Depends on which member has most recently made public comments, i guess. Maybe the board as a whole has no idea.

  4. H – Regarding your point about labor supply and demand, we don’t have enough capable and will people to do all the work that our country needs. Do we even have sufficient laborers to complete all of the infrastructure work that the Transportation Department has just made available for bids?

    Whether we are democrats or republicans, we need to have people to do this work and, obviously, many other jobs. Immigration is a practical and necessary answer.

      1. One smaller factor supporting your thesis comes via an article in the March 21st Bloomberg Businessweek. The backlog of work permit RENEWAL applications has risen to over 500,000. Those people are pulled out of the workforce for up to a year.

        We were promised that limiting immigration would raise wages for US workers. Guess what? It worked!

  5. An inflection point is probably near if not here. A slowdown in growth is necessary and desireable- a major pullback is not. Powell seems intent on hiking 50bps, and he has company on the FOMC for sure. But I will give them the benefit of the doubt- if growth slows down significantly, they will slow or stop tightening. I am worried about the decline in UST bond market liquidity. If the Fed actively pursues QT, that looks like a large unforced error. Better off using policy rates to slow things down.

  6. Weaker industrial production is a feature not a bug. For the Fed’s tightening to “work”, something has to weaken.

    If I’m the Fed, I’d rather see weakening in industrial, capex, asset prices, shelter prices, etc than in jobs, wages, consumer spending, etc.

    From my investor point of view, weaker industrial measures are expected not (negative) surprises.

    Fed is very aware of the problem with shelter prices. I have to think targeted QT of MBS is top of mind at FOMC.

    No matter how much Powell downplays longer-maturity yield curve measures like 2Y-10Y in favor of shorter-maturity measures, I also have to think Fed would prefer not to see clear inversion out on the curve. I don’t know enough about UST liquidity measures to have a view of whether those will prevent targeted QT of longer-dated UST.

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