The Economy: A Look Back and What’s Ahead (3.24.14)

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Last Week

The major question for the market remains: “Was the slowdown in economic activity in Dec/Jan largely the result of the awful weather?” Last week the February and March data further implied the answer is “Yes,” and that’s a good thing for the stock market.

The first two data points from March, the Empire State manufacturing survey and Philly Fed survey, both bounced back from weak February readings. They imply we’re seeing a modest bounce-back in manufacturing activity this month in those two regions (again implying the soft Jan/Feb readings were weather-related).

Turning to the FOMC, you know by now the Fed:  Dropped its “quantitative” forward guidance and abandoned the 6.5% unemployment and 2.5% inflation thresholds, and replaced them with opaque, “qualitative” forward guidance.  Additionally, there was  an “upward drift” in the “dots” as 10 of 16 Fed officials believed the Fed Funds rate would be at or above 1% by the end of 2015, compared to 7 in December.  Finally, Yellen’s “6 months” comment about when rates would start to increase after QE ended was also taken as “hawkish.”

But, all that aside, not a lot really changed with regard to the Fed.  Tapering is expect to continue at the pace of $10 billion each meeting, and perhaps the expected date of the first increase in interest rates moved slightly forward from July/August 2015 to May/June 2015, but it’s not like that is a monumental shift.

Finally, last week’s housing data continued to disappoint, as both housing starts and existing home sales missed estimates and remained sluggish. The housing recovery is ongoing, and the data last week again got a “pass” because of weather. But while other measures of the economy have stabilized in Feb/March, the housing recovery continues to lose steam.  It’s a not a problem yet and likely we’ll see stabilization in the coming months, but it remains something to watch.

This Week

The most important number to watch this week already passed, as we got the Chinese flash manufacturing PMIs last night (and the European numbers this morning).

But, the March U.S. flash manufacturing PMI comes at 10 this morning, and we’ll want to see improvement similar to what we saw in Empire State and Philly last week (so, it doesn’t have to recoup all of the Jan/Feb decline, but the market will want to see the number improve, again implying weather was the reason for the steep drop over the past two months).

Outside of the flash PMIs, most of the other economic reports will continue to shed light on whether the dip in economic activity was weather-based.  Durable goods, (Wednesday) will be second-most-watched number this week, and jobless claims (Thursday) will also receive some attention for the first time in months. The recent trend has been downward in claims and, if it continues, people will start to think we’re seeing incremental improvement in the labor market.

Final Q4 GDP and Personal Income and Outlays come Thurs/Fri, respectively, but they shouldn’t move the market much. Finally, we get more insight into housing via new home sales (Tues) and pending home sales (Thurs).  As mentioned, housing seems to be the one sector not showing a bounce-back in February. While that’s likely weather-related, it’ll be encouraging to see some decent data points, especially out of pending home sales.