A Soft Patch for the Economy?
Up until yesterday, the bulls have been able to counter each and every advance by their pesky opponents with one very simple argument: The economy was improving at a pace that exceeded expectations and with the Fed “on the case,” there was no reason to expect that the economy would falter. And the fact that Mr. Bernanke has made it clear that ZIRP (zero interest rate policy) will continue for some time yet provided an impetus to continue to play the dollar-carry trade. As such, any and all bad news has been met with a “what me worry?” attitude.
Although there have been some very minor signs that could support the fear that the resurgence of the European debt crisis, the spike in oil in reaction to the difficulties in the Mideast, and the triple tragedies in Japan might cause the economy here at home to pause, up until yesterday, these fears were just that as there was little data to support the concern.
While one report does not a trend make, the fact that the ISM Non-Manufacturing Index (which is designed to reflect the state of the services sector in the U.S. economy) came in well below the expectations and the New Orders component fell to 52.7 from the 64.1, which was the largest dive since data- gathering began in 1997. In short, since the ISM/PMI data are the most widely followed reports in terms of economic health, the report gave the bears a reason to be (well, okay, at least until the dollar starts falling again).
In addition, the report may have caused some of the nervous longs to wonder if the double-dip game was about to begin again. Since the beginning of the current bull market cycle, the only fly in the ointment in the market’s steady comeback has been the worry that the economic recovery will be (a) short- lived and (b) susceptible to setbacks since the job recovery has been less than robust. Thus, the only corrections that we’ve seen since March 2009 have been triggered by worries that the economic recovery is stalling out.
It is not my intention to suggest that this one report should be viewed as an indication that the economy’s upturn is about to change course. However, we do need to recognize that the batch of negative headlines seen over the past few months may have impacted the psyche of the consumer just a bit. The bulls will argue that this is now old news and that any weakness in the data should be viewed as a hiccup, which, technically speaking is a step below a “soft patch” and nothing even remotely close to a slowdown or double dip.
As you might expect, those seeing the glass as containing nary a drop of liquid are currently saying that the ISM Non-Manufacturing is an indication that a “hiccup” is indeed underway and that we may soon be talking about something more along the lines of a “soft patch” for the economy. To which, I’d like to say, here we go again.
Turning to this morning… The bears seem to be trying to make their presence felt once again this morning on the back of the surge in weekly jobless claims. Thus, we will be watching to see if the dip-buyers emerge later today.
On the Economic front… Initial Claims for Unemployment Insurance for the week ending 4/30 rose by 43K to 474K. This was above the consensus estimate for 407K and last week’s total of 431K. Continuing Claims for the week ending 4/23 came in at 3.733M vs. 3.646M and last week’s 3.641M.
Next up, U.S. Nonfarm Productivity in the first quarter rose by +1.6%, which was above the estimates for reading of +21.2%. (Q4: +2.6%, Q3: +2.4%, Q2: +1.9, Q1: +3.9%). On the inflation front, Unit Labor Costs were reported to have risen +1.0% versus the expectations for +0.8%. Q4′s reading was revised down to -1.0%.
David D. Moenning
Editor: The Daily Decision
