Weekly Economic Vital Signs - Nothing Matters But The Virus Now
Summary
- This is a weekly series focused on analyzing the previous week’s economic data releases.
- The objective is to concentrate on leading indicators of economic activity to determine whether the economy is strengthening or weakening, and the rate of inflation is increasing or decreasing.
- This week we examine new home sales, durable goods orders, the second estimate for Q4 GDP and personal income and spending.
- Looking for a helping hand in the market? Members of The Portfolio Architect get exclusive ideas and guidance to navigate any climate. Get started today »
New Homes Sales
New home sales continue to be a bright spot for the US economy, as sales in January soared to an annualized 764,000 homes, which is up 7.9% from the prior month and 18.6% over the past year. The median sales price has risen 14% over the past year to 348,000, and there is a 5.1-month supply based on the current sales pace. I suspect that the recent plunge in 10-year Treasury yields, which may drive mortgage rates to record lows, will be enough stimulus to keep this party going.
Durable Goods Orders
Durable goods orders rebounded in January from two dismal months, declining just 0.2%, but when we exclude transportation orders, the number improves to an increase of 0.9%. This improvement may be short-lived when we see the full impact of the coronavirus on business supply chains in the coming month.
Orders for nondefense capital goods excluding aircraft, otherwise known as capital spending, rose 1.1%. The shipment of these goods used to compute GDP also rose 1.1% in January, which ends a string of negative months. That will be a positive contributor to Q1 growth. Again, this improvement is likely to be short-lived, as the deceleration in the rate of economic growth picks up.
Q4 GDP
There were no meaningful changes in the second estimate for the rate of economic growth in the fourth quarter of last year. It remained at 2.1%. Consumer spending growth was revised modestly lower from 1.8% to 1.7%, as was business investment. Inventories and net exports were revised modestly higher. The core rate of growth, which excludes inventories, net exports and government spending, rose a very weak 1.3%. That is down from an average of 2.5% over the past two years.
Personal Income And Spending
Personal income was up a better-than-expected 0.6% in January, but downward revisions to prior months reduced the net gain to 0.3%. Spending rose just 0.2%, which was below expectations, and downward revisions to prior months left the net gain at just 0.1%. Over the past year, income is up 4.% and spending is up 4.5%. The PCE Price Index was up 0.1% in January and has risen 1.6% year-over-year. The core rate, which excludes food and energy, is up 1.6%. The Fed would like to see this number over 2%, but I think that’s a mistake with the current rate of inflation eliminating all of the gains of weekly take-home pay for those who are dependent on average hourly earnings.
Conclusion
Our financial markets are now at the mercy of the conronavirus. Unfortunately, our economy is very dependent on our financial markets. We have the Federal Reserve to thank for that dependency. I’ve said more than once that my greatest concern for 2020 was that the Fed had fueled a surge in stock prices that was so far divorced from economic fundamentals that an inevitable reversion to the mean would reverse the wealth effect. The subsequent collapse in confidence would come at a time when our debt-laden economy is barely growing. The Fed will have minimal firepower to address the downturn with monetary stimulus. The federal government will be equally impotent considering it just implemented a massive tax cut and faces $1 trillion deficits. We are about to find out if my concern was a valid one.
The coronavirus was the trigger that started the reversion to the mean for financial asset prices. I don’t think that reversion will be over until we see a bear-market decline of 20% or more in the S&P 500 index. That is a best-case scenario on the basis that the virus is contained on a global basis in the coming weeks. If the virus is not contained in weeks, and it continues to spread throughout the US, then I think the market decline will be prolonged and a recession will follow. There is simply no way to predict what will happen moving forward with this epidemic, and the longer it lasts, the more damaging it will be to the rate of economic growth.
Last week we suffered the fastest correction of 10% in the stock market in history. This will weigh on consumer sentiment in the weeks and months to come, and it should sharply curb the rate of consumer spending growth. At this stage, I think a recession in inevitable. Recessions are healthy exercises in that they rid the economy of excesses that have built up during the expansion. The primary excess today is not in the real economy, but in our financial markets. Resolving that excess will present opportunities for investors as we look beyond 2020.
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This article was written by
Lawrence Fuller has been managing portfolios for individual investors for 30 years, starting his career at Merrill Lynch in 1993 and working in the same capacity with several other Wall Street firms before realizing his long-term goal of complete independence when he founded Fuller Asset Management.
He is the leader of the investing group The Portfolio Architect, which focuses on an overall economic and market outlook that complements an all-weather investment strategy designed to produce consistent risk-adjusted market returns. Features include: Portfolio construction guidance, access to an “All-Weather” model portfolio and a dividend and options income portfolio, a daily brief summarizing current events, a week ahead newsletter, technical and fundamental reports, trade alerts, and 24/7 chat. Learn More.
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The Portfolio Architect is published as an information service. Lawrence Fuller, the publisher, is also the Managing Director of Fuller Asset Management, a Registered Investment Advisor, which is unaffiliated with this Marketplace service. While this service includes opinions about buying, selling and holding a wide range of securities, the publisher is not acting as an investment adviser or providing advice or recommendations to any particular subscriber. Any investment recommended should be made only after consulting with your investment advisor or completing your own due diligence. There are risks involved with investing including loss of principal. Mr. Fuller makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals or the strategies discussed by will be met.
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