Caution Signs in Recent Data

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Caution signs in the data out the past week. Perhaps most pertinently, U.S. durable goods orders fell 2.1% MoM in April as expected. Nondefense orders and shipments — which are GDP proxies for monthly forecasters — were weaker than expected at -0.9%. For nondefense orders and shipments, the YoY growth rate is 2.5%, down from 13% 18 months earlier. The Markit PMI also slumped to 50.9 for the composite — a level consistent with growth below 2%. Slowing growth expectations can be seen from the bond market. Rather than just looking at the shape of the yield curve, consider that the whole curve (except for 30-year bonds) is yielding less than the Federal funds target rate of 2.38%. Historically, that has presaged a downturn in an average of 15 months.

Surprisingly, confidence measures remain strong, which could mean that the current lull is just the economy catching its breath after a fast move to the upside. While I support that idea, the canary in the coal mine for breaking trend growth to the upside is investment measures such as durable goods. The key for the future is higher productivity. With the labor force shrinking but confidence high, the final determinant will be capital formation. So far so good, but the data are suggesting a potential turning point.

Please follow business investment on page 71 of the Global Perspectives book.

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