Is the economy stuck in neutral?

New numbers coming out will help explain whether recent signs of slowdown are just a passing phase, or a harbinger of a deepening trough.

By StreetAuthority Mar 5, 2014 1:02PM
Image: Construction workers (© image100/Corbis)By David Sterman

For investors who focus their investment strategies with regard to the broader economic backdrop, the next few weeks are likely to get a lot of attention.

A slew of key data points may help investors better assess whether recent signs of slowdown are just a passing phase, or a harbinger of a deepening trough for the world's largest economy.

Each week, economists at Morgan Stanley (MS) incorporate fresh data points to update their models for GDP growth. At the end of January, these economists predicted the U.S. economy would grow around 2.3 percent in the first quarter. That figure is roughly in-line with the fourth quarter of 2013's GDP growth rate (which was recently revised down from 3.2 percent).

But over the past month, Morgan Stanley's forecasts have been steadily trimmed. Thanks to weak construction spending, slow retail sales and a low level of housing starts, they now think the economy is on track to grow just 0.7 percent in the first quarter. To put that in context, the U.S. economy has grown less than 1 percent (on an annualized pace) only once in the past 11 quarters. In the third quarter of 2011, the economy almost slid back into recession, before regaining its footing in subsequent quarters.

Frozen out
To be sure, some of the slowdown is attributable to frigid temps in the eastern U.S. Who wants to go shopping when the mercury falls to zero? That's why U.S. Federal Reserve Chairman Janet Yellen and others believe an eventual return to spring-like temperatures will enable the economy to rebound.

Yet you shouldn't under-estimate the lasting damage that this cold spell may have. For example, many consumers are experiencing an alarming spike in heating costs, which is draining their savings accounts, and therefore taking a bite out of future domestic consumption. "More costly energy consumption has drained an estimated $20 billion from consumers' discretionary budgets in Q1," predict economists at Citigroup (C).

Slowing employment trends are also sapping confidence. As a result, economic weakness, especially in the form of consumer spending, which still accounts for the majority of domestic economic activity, may slump into the second quarter as well.

To be sure, the stock market seems to be ignoring the economy at the moment. Though the S&P slid more than 2 percent on the first day of trading in February (to 1,742), it managed to rebound an impressive 6.7 percent for the rest of the month.

Are investors buying stocks because the economy is weak? After all, an extended period of weakness would lead to Fed to keep its foot on the gas with the current stimulus program. Yet it bears repeating that at this extended phase of the bull market, a backdrop of greater economic growth and less Fed stimulus is greatly preferable to weaker economic growth and more Fed stimulus. Some Fed governors believe that stimulus should end soon to avoid any asset bubbles.

Citigroup's economists have taken note of the disconnect between the economy and the market in February: "There are likely to be some tests for confidence at least in February data due out over the next four to six weeks," they wrote in a Feb. 21 note to clients.

Here are three crucial data points you need to track in coming weeks.

1. Non-farm payrolls
(Out Friday, 8:30 a.m. ET)
Consensus forecasts suggest that the U.S. economy added 113,000 jobs in February. Look for the media to quickly cite the weather as a negative -- and perhaps temporary -- factor. Trouble is, the job market showed signs of slowing back in December, before the deep freeze took root.

Though it's unwise to put too much emphasis on any specific monthly report, the three-month average already slipped to its lowest level in 18 months in January. And if the consensus figure proves correct, the three-month moving average will have fallen to less than half the rate seen back in November, 2013.


2. National Fed. Independent Businesses (NFIB) Optimism Index
(March 11, 7:30 a.m. ET)
This key confidence gauge has been rising for the past few months, to 94.1 in January, although as the NFIB noted in last month's report, the rate of growth has been slowing. Still, the figure is up nicely from the 88.9 reading a year ago. The NFIB's economists warn that the 2013 rebound may not have legs: "A huge share of the growth was in inventory building, nice while it is happening, but usually followed by sub-normal production later as excess stocks are worked off. That will depress activity in the first half of 2014."

Even if the next few readings remain in the 90s, that's still little reason for cheer. The NFIB index has been below 100 for six straight years, which is the longest period of sustained weakness in three decades.

3. Federal Open Market Committee (FOMC)
(March 18-19)
As noted earlier, the market's impressive gains in February may have arisen from expectations that the Fed will alter course at this upcoming meeting, letting the stimulus program stay at current levels for a while to come.

But the Fed has been trying to signal to markets that it won't alter course -- at least not yet.

Two weeks prior to this two-day meeting, the Fed will be digesting the latest reading from the Beige Book, which provides a snapshot of economic activity among the various Fed regional districts. Again, even if the Beige Book reading shows weakness that doesn't mean the Fed will respond. Instead, they will likely push off any potential change in policy until the following meeting, slated for early May. Will investors be disappointed and lock in profits if the Fed fails to move in mid-March? Time will tell.

Risks to consider: As an upside risk, sluggish demand in winter could unleash a pent-up wave of spending in the spring. The key is for the economy to avoid a more serious downdraft before then, which would sap consumer and corporate confidence.

Action to take:
It's too soon to sound the alarm bells for the U.S. economy. Economists at Citigroup, for example, predict that we'll get past this growth scare, and the economy will rebound to a 3.5 percent growth rate in the second quarter. They predict an especially impressive rebound for housing starts and housing sales. "Residential investment will gain momentum with double-digit gains in the back half of the year."

Also, if the economy rebounds in the second quarter, retail sales should get a strong lift as consumers become less cautious. Automakers would be among the stocks investors should be focusing on, if they believe that consumer spending is likely to build as we head toward summer.

David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

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80Comments
Mar 5, 2014 1:45PM
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Lerner Takes the 5th

The foocking Batch should be fired and her pension taken away.

Your 5th Amendment rights do not include the right to refuse to answer questions put to you by your employers (congress/citizens). You can not refuse to answer our questions and expect to keep your job. If you do not answer our questions you should be fired with no benefits, no severance and no pension. Everything in your workspace should be confiscated until an investigation can be completed. Your choice, answer the questions or exercise your right and be fired.

Mar 5, 2014 1:46PM
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Oh but what a buzz kill you are.  Just let em eat cake.  This entire culture is now in denial.  Just find a bigger lie to tell than the last one and everything will be okay for another day week month. I agree we are in a compressing deflating economy and emerging markets will dry up as they run out of the arbitrage American money.  But why act like such an adult sap?  Everything is okay America, besides if we get into trouble we can just borrow a little bit more.  We are in an airplane at 40,000 feet and have run out of gas.  The engines have now stopped but don't worry America hasn't crashed in 80 years so why worry now?
Mar 5, 2014 1:57PM
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As long as Obama and the democrats are in office, there will be no recovery, PERIOD.

Enjoy your 6th, 7th and 8th annual "Recovery Summers"...   But don't expect any economic improvements under this regime.  Socialist and communist solutions will not make things better.


Mar 5, 2014 2:35PM
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The Obama administration made a huge mistake when they thought the country was at the point where green energy solutions would take hold and drive the economy. We are 50 years away from that happening. That was too long of a wait for the progressives. They decided to reinvent the way the consumer spends their money. They thought "If green energy is too expensive, and we can't bring the cost of that down, we must force an increase in what people use so they voluntarily switch to green energy".

 

Here we are. Energy costs are sky rocketing and absorbing the middle classes disposable income. No one in the progressive movement cares because those high costs will drive consumers to switch to green energy. And we wonder why there is no money to drive the economy? And we wonder why the rich are getting richer? The rich are heavily invested in what we consumers are paying for. It'll never end if we don't rethink how involved we want the progressives in our lives and the nations economy.

Mar 5, 2014 2:47PM
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When the WWII generation passed out of power, things began to go right down the drain. The new world view has prevailed and instituted: derugulation of banks and wall street, mass job shipping to foreign countries and the resulting loss of wages, benefits, pensions, and power of the American worker, multinational corporations now run the world.  

Mar 5, 2014 2:57PM
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It's a no brainer that a lot of folks don't get. Business now has an incentive to cut costs and reduce headcount as much as possible just to stay afloat. They are presently sitting on their hands and waiting for the business climate to change. Translation-no growth.

The worst part of it is that the population by and large believe the rosy picture being painted on the network newscasts. LOL

Mar 5, 2014 2:49PM
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If the economy were stuck in neutral, there might be hope.  It seems to me to be in reverse.  But, the UN envoy is NOT STUCK in Ukraine!  The Russians put their ashes out!  And John Kerry AIN"T STUCK there either!  He is mouthing from Paris! The whole world must be laughing at the dumbashes in washington right now!
Mar 5, 2014 3:45PM
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As a biz owner, I will not hire, invest or risk anything - not with the most anti-business administration in American history.  There's a lot more regulations and much higher taxes - and for all of you who say that regulations and taxes don't affect a business or their go forward strategy - you are fools.  And please, no stupid comments about the stock market - we all know it's been artificially inflated by the Fed.  You want jobs, invoke change in November.
Mar 5, 2014 2:37PM
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I posted this in the Income inequality article.. Seems it should belong here:

 

Well if we would have attempted a jobs bill in 2009/2010 maybe we could have fixed a part of healthcare. Or, if we would have fixed illegal immigrants from taking construction jobs we could fix jobs and healthcare.. Funny how that all seems to be tied together..

 

The 35 year old elephant in the room is the advent of cheap labor in the construction industry. When I was a teenager, I went from fast food to construction as a way to get above the poverty line.. Learned to run equipment. Then went in the Navy, came back out after 4 years and resumed construction. During the early 80's, it became clear that cheap labor was being used in place of hard working American's.. Thank goodness I had my GI bill and went back to school!! Supposedly, that was to be addressed in 86'/87' when we had our first big MASS Amnesty. the promise was, we will fix the boarder, we will fix labor.. Didn't happen. So when the Great Recession came, we could not fall back on construction jobs as they did for the Great Depression..

 

The rate at which our young men, Black,White,Hispanic (Legal),Korean, Japanese, etc etc are having to endure unemployment (+21%) should be an indication that jobs and immigration need to be addressed in order to bring back good paying jobs for these young men..

Mar 5, 2014 3:59PM
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I always believed a community organizer with no real world job experience would be the solution to all of our problems.   It can't be possible that he has no idea what drives the economy, could it???   Gotta go now.  I need to see my butcher about my tax returns. 

 

 

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Democrats and Liberals won't be toasting to their success until the economy completely crashes and EVERYONE is without work.

Mar 5, 2014 2:35PM
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Obamaville's Indian summer of recovery

Mar 5, 2014 4:20PM
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Hey Hannity my company has been profitable since day one and for the last 6 years, and unlike you, I actually make the decisions.  If I hire someone for 100k, yeah it's tax deductable but I also pay payroll taxes, ACA taxes, and other fees.  Even after the deduction, the majority of the cost comes out of my pocket.  If you work for an investment co., you may want to go back to school for finance training.
Mar 5, 2014 3:57PM
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Businesses are not Democrat propaganda machines paying the media to get them votes - businesses won't publicize that they cut back or didn't hire due to higher taxes, regulations, etc such as ObamaCare.   Cutting back employees for these reasons isn't popular and could threaten their business.  This silent job death is here now and getting worse - though you won't read about it in the news.
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Not so. The economy is thriving. Look at all the public sector jobs that have been created. Osama Care for example: More IRS agents to look into your personal affairs, attorneys to make sure the doctors are in compliance, accountants to figure out the new complex coding and billing system, more construction to add on  to the waiting rooms ,lol,. EPA jobs to further the dismantling of American self dependence. Shovel ready jobs, not so much. And most important of all,   the manufactures of  ammo and guns in preparation of the revolution,
Mar 5, 2014 2:41PM
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Putin's Crimea is America's Guantanamo Bay.

 

Mar 5, 2014 5:46PM
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Lets review, FDR held the country back for 10 yrs. Carter was able to ruin it before there was all the new technology. Clinton rode the coat tails of Reagan , he built the new house and billary moved into it. Bush 2 was an appeaser, he would have gave the girl in jersey who sued her parents whatever she wanted. Think a government like that girls parents would be great!!! Then comes the smiling clown.  Think there was a movie about that , CLUELESS.   The troubling part is he is purposeful and doing this on demand from those who control him.
Mar 5, 2014 3:52PM
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I am confused again. We have people obsessed with social issues in Washington and at the state level. There is rarely if ever any conversation on jobs. In addition we need to look at voting on a jobs bill. All this an yet the people keep being duped into arguing amongst themselves about the very issues I mention when what we really need is movement forward on the government doing what it can to boost jobs.

Obama has put forth a jobs bill and as usual it was killed in congress. Another idea I thought had merit was when he wanted to institute a tax break for companies producing and hiring people in the US. While increasing taxes on those companies that export jobs. This idea was also killed in congress.

We seem to want to blame anyone accept the actual culprits here. The corporations and their big money patriots have raped this country and the people in it for decades now and yet there is never any mention of the  corporate responsibility.

I could go on but I won't.

Also, confusing to me

Mar 5, 2014 4:54PM
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BARRY THE BURRO:Go cry in your beer at the trailer park.I`m off to the VFW.Just think, I

put my life on the line so losers like you can suck up the food stamps and welfare.You wouldn`t

last 1 day at Paris Island before somebody smashed you into the ground like a sand fly.LATER !

Mar 5, 2014 6:55PM
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Hannity, I basically said some of the same stuff to SLIM....

I really have to question how successful of a business person he or she might be...?

I don't know what happened to the post, it may have cancelled or lost in la-la land.??

***edited: it came back.

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