If Services Stumble Too, There Truly Is Nothing Left

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Includes: RINF
by: Alhambra Investment Partners

So much for the services savior? The worries about manufacturing weakness spreading are spreading. It's maddening only because it was entirely predictable, maybe even inevitable. If consumers aren't buying goods, and they aren't, it is not because they are otherwise healthy (in financial terms) and have only just recently decided they have in the aggregate accumulated enough stuff. The economy just doesn't work that way outside of some cartoons.

After both non-manufacturing PMIs came in much weaker than expected, especially the ISM, the word "spreading" or some variation of it was in every commentary.

Bloomberg:

Service industries expanded in January at the slowest pace in nearly two years, raising the risk that persistent weakness in manufacturing is starting to creep into the rest of the U.S. economy.

The Institute for Supply Management's non-manufacturing index fell last month to 53.5, the lowest since February 2014, from 55.8, the Tempe, Arizona-based group's report showed on Wednesday. Readings above 50 signal expansion. The result was less than the 55.1 median forecast in a Bloomberg survey. [emphasis added]

Barron's:

The worrisome data came from the Institute for Supply Management's non-manufacturing survey for January, which came in at 53.5 when economists predicted 55.1. Last month the index was at 55.8.

While it is still above 50, which signals expansion, the slip has investors worried that the weakness in manufacturing is spreading. [emphasis added]

The Markit Non-manufacturing PMI was particularly blunt, especially in raising the specter of "cyclical" slowing.

January data highlighted that U.S. service providers started the year with a further slowdown in output and new business growth. At the same time, survey respondents indicated a relatively subdued degree of confidence about their prospects for growth over the next 12 months, with firms linking this to heightened uncertainty about the wider economic outlook…

Reports from survey respondents suggested that softer new business growth was the main factor weighing on service sector output in January. Moreover, a number of firms noted signs of a cyclical slowdown in client demand, driven in part by greater caution about the economic outlook. [emphasis added]

That interpretation rests not on where the Non-manu PMI is now, but rather the trend that is instead almost certainly developing as it relates to where the Manufacturing sector is pulling the economy. In short, it increasingly looks like there is no "manufacturing recession" as just such an idea was always incongruous. If manufacturing is in recession, then it is but the leading indication; the great warning.

So far, suspicions about where all this is going have only been confirmed, even if it takes Janet Yellen and commentary predicated upon her stunningly obdurate view a lot longer to get there; and to expend a lot of nonsense, especially about the unemployment rate, to obtain acceptance. The FOMC will be muttering BLS statistics even as the economic walls cave in on them, financial first. As I wrote yesterday:

The Fed raised rates in federal funds but everywhere else curves continue to collapse. Eurodollar markets today were unenthused by George's fundamental observations, with the curve now the equivalent of more than four rate "cuts" just since last July when all this really got rolling . The interpretation of that is nothing good for the economy, here and elsewhere, for this year and beyond. It needs to be pointed out, also, that the collapsing eurodollar curve (and other curves of raging RHINO) has been proven correct so far; the oral and written flagellations of economists have been nothing but surprised by all of this.

Last year was nothing like what it was supposed to have been, leaving this year with recession far more a part of the discussion than the scheduled parade.

It isn't just eurodollar curves, however, as any number of market prices and indications continue to suggest (subscription required) not just confirmation but more in the same unfortunate direction. The progression at least in terms of excuses and alternate but absurd explanation was just as predictable, now working much closer toward completion.

1. Dollar doesn't matter, indicates strong economy relative to the world
2. Dollar matters for oil, but lower oil prices mean stronger consumer
3. Manufacturing slump doesn't matter, only temporary
4. Manufacturing declines are consumer spending, but only a small part
5. Manufacturing declines are becoming serious, but only from overseas
6. Maybe domestic manufacturing recession too, but the rest of the economy is strong especially services
7. Rest of the economy might not be as strong as thought, but only an "earnings recession."
8. Maybe full recession, but only a small probability.
9. …