The second quarter is well underway, meaning economists and market watchers are keenly attuned to the possibility of what has become a distressing annual rite for the U.S. and global economies:
A spring slowdown.
As predictable as the sprouting of crocuses, every year for the past three years the economy has slowed down and the stock market has slumped.
Adding to the worry is that recent economic data from the U.S. and abroad has been mixed at best. For every report suggesting activity has taken two steps back, it seems we get one showing a step forward.
Overseas, China — the engine of global growth — saw its economy slow sharply in the most recent quarter, and by much more than economists were expecting.
True, the U.K. just reported that it narrowly avoided slipping into a triple-dip recession, but given that growth is barely above breakeven, the practical effects are more psychological than anything else.
More worrisome is that even Germany — the mighty European core — is starting to show signs of weakness, with key manufacturing surveys revealing signs of contraction.
Given that Europe is China’s biggest trading partner — and much of the European Union has either stalled out or is in recession — this can’t be too much of a surprise. But it is alarming nonetheless.
And with so much weakness abroad, it could be only be a matter of time before the effects are felt in the U.S.
Recent U.S. data have been almost predictably mixed, if shading toward the negative. But we’re not definitively in a slowdown just yet. For a better understanding of where the economy looks to be headed, here are five key economic indicators to keep a bead on:
Weekly Initial Jobless Claims: At least you can put the Thursday’s reading on new unemployment claims firmly in the “one step forward” column. The latest figures fell to a five-year low. On the downside, week-to-week numbers are noisy, making the four-week moving average a more reliable sign of what’s happening in the labor market. Still, this high-frequency indicator gives a good idea of what’s transpiring on the hiring front, and the moving average has indeed correlated closely with the broader market.
Manufacturing Data: Signs of slowdown or recession usually show up first in the manufacturing sector, which is why the market follows action there so closely even though the service sector makes up the great bulk of U.S. economic activity. With a reading above 50, the recent Markit U.S. Flash Purchasing Managers Index (PMI) is still expanding — but it also fell to a six-month low. The Institute for Supply Management March’s PMI survey also showed expansion, but just barely. It slipped 2.9 percentage points from the prior month. The next survey will be released May 1, and the market will be watching closely. So should you.
Durable Goods: This monthly report details new orders for durable goods, which include higher-priced, longer-lived things like cars, turbine engines and home appliances. Thus, it gives insight into future economic activity and, by extension, the direction of corporate sales and profits. The fact that durable goods and durable goods (excluding the volatile transportation sector) fell sharply in the latest report — and by much more than forecast — elevated concerns that we’re facing yet another spring slowdown.
Retail Sales: Consumer spending accounts for about 70% of all U.S. economic activity, and retail sales comprise about half of that total. As such, monthly retail sales offer insight into whether consumers are parting with their hard-earned dollars — and where their money is going. A rise in retail sales is usually a good indicator of the health of consumers, unless it’s predominantly driven by higher gas prices, which leaves less discretionary income for everything else. Retail sales also are the place where any effect of higher payroll taxes will show up, since most folks’ take-home pay has gotten smaller.
Economic Surprise Index: The Citigroup Economic Surprise Index offers one-stop shopping to see how various economic data are measuring up against economists’ average expectations. Importantly, the Citi Surprise index has marked the spring peaks in both economic and market momentum in recent years, notes Jeff Kleintop, chief market strategist at LPL Financial. More troubling, the trend in the index has been weakening for more than a month, and it recently turned negative. That’s not a good sign, suggesting expectations may have become too high, Kleintop says.