KEY DATA: Leading Indicators: -0.1%/ Philly Fed: down 0.7 point/ Claims: 352,000 (up 4,000)
IN A NUTSHELL: "Growth is continuing but a spring slowdown looks to be in place."
WHAT IT MEANS: The data that have been coming out lately point to a softening in the economy and today was no different. First, the Conference Board’s Leading Economic Indicator fell slightly in March. Does that mean a downturn is in the works? No. The gauge of future growth had jumped in January and February so one decline is not the end of the world. Still, weakening housing permits and falling consumer expectations are warning signs that we may be in for some sluggish growth numbers this spring. That outlook was reinforced by the slight easing in the Philadelphia Federal Reserve’s survey of manufacturers. The index eased back and the level is just about at the cut point for growth. Worse, demand is weakening, order books are thinning and firms are starting to cut back on workers. With expectations of the future also off, this report has to raise some concerns that the nation’s manufacturing sector may be starting to feel the impact of the higher taxes on households and the cutbacks in government spending. Still, the economy is hardly falling apart. Jobless claims ticked up but the level is consistent with moderate job gains. It appears that the surge in claims we saw a couple of weeks ago may have been an aberration. It is likely that the weak 88,000 March job rise will be revised upward and April’s increase will be in the 175,000 range.
MARKETS AND FED POLICY IMPLICATIONS: The economic data are softening and that is having a strange impact on the equity markets: Investors just might be thinking that growth actually matters when it comes to stock prices. Okay, maybe I am going too far. After hitting record highs, a stock pull back only makes sense without underlying support from the economic data. But weak numbers are not always getting the knee-jerk positive reaction they had been. Yes, these numbers support the view of many at the Fed that the end of the liquidity surge is nowhere in sight. But if two percent growth is the worst we get with sequestration and tax increases, what will we get once the economy adjusts to those negative factors? Clearly, the momentum we had has been slowed. But the continued growth points to a fundamentally decent underlying economy that is just waiting to break out if Washington just gets out of the way.