Putting the Weak Philly Fed Numbers in Context

by: Edward Harrison

Yesterday at 10AM ET the The Federal Reserve Bank of Philadelphia released its general economic index. The data were not good as the index came in at 8 for June down from 21.4 the previous month. Because numbers above zero signal economic growth, the data confirm that we are still in a technical recovery. Moreover, the Empire State Manufacturing State for New York registered a slight improvement in its general business conditions index. The June data came in at 19.6, its 11th consecutive month above zero. The bottom line is both data sets show an expanding economy.

Obviously I have been downplaying the double dip talk that has escalated since the ECRI data last week because I don’t see a double dip as imminent. On the other hand, I do think the data point to a serious slowdown ahead and that US policymakers should be worried about the exacerbating impact of the European credit crisis and fiscal austerity. Moreover, US jobless claims numbers were weak at 472,000 initial claims. It will be hard for consumer spending to expand unless more private sector jobs come online.

In my view, the immediate worry is not the economy per se then. Rather it is that earnings and economic expectations are too high. I expect a weak second half. In line with these expectations, the economic data are starting to come in below expectations. This was certainly the case with both the Philly Fed and Empire State surveys. And companies are starting to ratchet down their forward earnings guidance, FedEx being the most notable example.