Weak U.S. Economic Reports in Line With Fed’s Warning about Downside Risks

Red flags were raised on Thursday, following the release of disappointing U.S. economic data. The news comes just one day after the U.S. Federal Reserve identified downside risks to the U.S. economy in the minutes from its January Monetary Policy meeting. This risk included “the possibilities of a sharper-than-expected slowdown in global economic growth, particularly in China and Europe, a rapid waning of fiscal policy stimulus, or a further tightening of financial market conditions.”

The U.S. was not the only major economy showing weakness. Disappointing reports were also seen in Australia, Japan and the Euro Zone.

U.S. Durable Goods

In the U.S., new orders for durable goods unexpectedly fell in December amid declining demand for machinery and primary metals. The bad results pointed to a further slowdown in business spending on equipment that could dampen economic growth.

The Commerce Department said on Thursday Core Durable Goods Orders rose 0.1% versus a forecast for a 0.3% gain. The previous month was revised lower to -0.4% from -0.3%. Durable Goods Orders rose just 1.2% versus a forecast for a 1.6% rise. The previous month was lowered from 0.8% to 0.7%.

Philadelphia Fed Manufacturing Index

The Philadelphia Fed Manufacturing Index fell to negative 4.1 in February, its lowest level since May 2016, from 17 in January. This was well-below the expected reading of 14. Any reading below zero indicates worsening conditions.

The sharp drop in the data suggests the U.S. is now succumbing to the global industrial shutdown. However, some believe the drop reflects the effects of the government shutdown. Therefore, we could expect a rebound in current conditions in March.

Flash PMI Data

Data on manufacturing and services went in opposite directions, sending a mixed message about current economic conditions.

Flash Manufacturing PMI came in at 53.7, lower than the 54.9 forecast and previous read. Flash Services PMI rose to 56.2, better than the 54.4 estimate and 54.2 previous read.

The drop in manufacturing sentiment took the index to its lowest level in 17 months, while representing declining momentum in the industrial sector. The services data rose to an 8-month high.

Existing Home Sales

According to the National Association of Realtors, existing home sales ran at a 4.94 million seasonally-adjusted annual rate in January. Additionally, sales of previously-owned homes were even lower by 1.2% than the 3-year low they hit in December. They were also 8.5% lower than a year ago.

The housing market may have dodged a bullet when rates were rising, but if the economy continues to weaken then it may take another hit. Furthermore, demand may drop further in 2019 in reaction to the change in the tax law that reduced the tax-advantage of mortgages.