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June's pile of bad US economic data, and what it means


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June's pile of bad US economic data, and what it means

It's been more than a decade since the last recession decimated the U.S. economy, but signals are growing that the current record run of growth could be coming to an end. President Donald Trump's trade battles are starting to show up in the economic data, but it's not clear yet whether it will be enough to push the Federal Reserve to cut interest rates, or even push the economy into a contraction.

Here's all the bad, mainly, news:

Manufacturing looks weak.

The Empire State Manufacturing Index, released on June 17 posted a record decline of 26.4 points to minus 8.6, the worst reading since October 2016. New orders were at minus 12.0, the worst since January 2016.

The Philadelphia Fed Business Outlook Survey, released on June 20, was not much better. The General Business Conditions Index slumped to 0.3 from 16.6, missing a consensus estimate of 11.0. However, away from the headline number, the news was not so bad. New orders slowed only slightly to 8.3 while unfilled orders climbed to 10.2 from 2.2.

The PMI Manufacturing Index for May was 50.5 with new orders in contraction, their weakest performance in 10 years, data published June 3 showed. The ISM Manufacturing Index, released on the same day, missed estimates with a 52.1 reading, the weakest since October 2016.

SNL Image

Employees at the Volkswagen plant in Chattanooga, Tenn., work on the assembly of Passat sedans. Source: Associated Press.

However, manufacturing expanded 0.2% across the U.S. in May, in line with expectations, according to a monthly index released by the Federal Reserve on June 14. Still, manufacturing and mining both weighed on the headline industrial production number, which showed 0.4% growth.

More evidence that manufacturing isn't as bad as other data suggests comes from the Fed's Beige Book, released June 5, which showed sentiment in the sector was "generally positive."

Services growth is slowing.

The PMI Services Index for May slumped to 50.9, the lowest level since February 2016, from 53.0 in April, reflecting softening domestic and foreign market with business confidence and growth in new orders both at three-year lows. A reading above 50 shows expansion.

Counter evidence comes from the ISM Non-Manufacturing Index, which came in at a better-than-expected 56.9 for May, data published June 5 show.

Inflation is below target.

The U.S. core PCE price index, the Fed's favorite measure of inflation, has been below the bank's 2% target since January and is predicted to have stayed at 1.6% in May, according to a Reuters poll.

Inflation expectations are diving.

Both consumer and market expectations of inflation have fallen sharply. Consumer's long-term inflation expectations dropped 0.4% to 2.2% in May, the lowest reading in 40 years, University of Michigan's Consumer Sentiment Survey showed on June 14. Tariff uncertainty over Mexico and particularly China is the main driver of the decline, the accompanying report said.

Five-year breakeven rates, a market gauge of inflation, have fallen to as low as 1.45% on June 17, the lowest since Jan. 2 and the worst downward stretch since 2016.

On the other hand, Atlanta Fed Business Inflation Expectations for the coming year crept up to 2% in June from 1.9% in May, a report showed June 12.

The labor market looks fragile.

The U.S. added just 75,000 jobs in May, well below the consensus estimate of 180,000, and readings for the two prior months were revised downward. Weekly jobless claims data suggest the May non-farm payrolls numbers could have been an aberration.

New jobless claims fell to 216,000 in the week ended June 15, from 222,000 the prior week, close to the 12-month mean of 220,000. But they did not predict May's slump either. All eyes will be on June's data, slated for release on July 5.

The hiring and hiring plans components of Morgan Stanley's June Business Conditions Index both fell 5 points in June to a level of 50, which it said raises the risk that weakness in labor demand will seep into July.

International trade is suffering.

Exports fell 2.2% in April to $206.8 billion, as the U.S. trade deficit narrowed slightly to $50.8 billion from a revised $51.9 billion in March. The decline in exports was led by a $2.7 billion drop in capital goods to $44.7 billion.

Leading indicators point to slower growth.

U.S. leading indicators for May came in at zero on June 20, following a revised 0.1% in April. That indicates that growth will moderate to about 2% by year-end, report publisher Conference Board said.

Morgan Stanley's Business Conditions Index suffered its biggest drop on record in June, falling 32 points to 13, the lowest reading since December 2008, and well short of the 33 level that signals real economic growth.

A recession in 2019 remains unlikely.

Scott Hoyt, senior director for Moody's Analytics, said the U.S. economy is still riding existing momentum and there are too few imbalances to make a recession imminent. But an all-out trade war with China could change that, he said.

Trump has signaled a desire for a deal to end the ongoing trade conflict, but a breakdown in talks between the two nations this spring has many analysts unsure that a permanent detente will be reached this month.

"As we run out of workers and employment growth slows, economic growth will slow and the risk of a trade war or other policy mistake tipping the economy into recession will grow," Hoyt said in an interview.

An escalation of the U.S.-China trade war to include the final $300 billion of Chinese imports could tip the U.S. toward contraction, but it may take a number of shocks to come together simultaneously to cause a full-blown recession, Rajeev Dhawan, the director of the economic forecasting center at Georgia State University's Robinson College of Business, said in an interview.

"It's a little bit of an unknown to say which problem will come when," Dhawan said. "Shocks are unforecastable. Who could have predicted the May 30 escalating tariffs on immigration?" he said in reference to President Trump's threat to impose duties on Mexican imports unless it curbed illegal immigration to the U.S. "That's the exact definition of a shock. It is usually the unexpected that wreck the economy."