Global Daily – US economy turning up again

by: Peter de Bruin , Maritza Cabezas

140327-Global-Daily-Insight.pdf ()
  •  US capital goods shipments suggest investment was soft in Q1…
  • …but business surveys signal the economy is set for a rebound…
  • …and our economic surprise index looks to be turning up
  • Concerns surrounding China’s economy triggering policy response

US durable goods orders rise more than expected,…

Durable goods orders rose by 2.2% in February, following a 1.3% drop the month before. This was considerably stronger than the consensus of a 0.8% gain in orders. However, most of the strength in orders was concentrated in the volatile transportation orders, which were up by 6.9%. Indeed, outside transportation, orders rose by a meagre 0.2% after a 0.9% increase in January. Given December’s deep drop in ex. transportation orders, this had the effect of lowering the %3mo3m annualised growth rate to -2.8%, down from -0.4% in January. Trends in ex. transportation orders tend to lead manufacturing output, but we suspect that the weakness at the moment is mostly a reflection of the harsh winter weather, and that ex. transportation orders will rebound significantly in March again, once the weather normalises.

…but investment part of the report is weak

More worryingly, the investment part of the report was weak. Capital goods orders fell by 1.3% in February, while January was revised down from 1.7% to 0.8%. Admittedly, capital goods shipments, rose by 0.5% in February, but this was more than offset by January’s shipments being revised down by six tenths to -1.4%. This suggests that investment in durable equipment in Q1 will be weaker than we initially estimated, which most likely is the effect of the ending of certain expensing rules last year. The outlook for investment is sound. Profit margins are at record-high levels, the economic outlook is considerably healthier than a year ago, and uncertainty on the fiscal front has been greatly reduced.

Still, the economy is about to accelerate sharply

While the weakness in capital goods shipment data had the effect of lowering our Q1 GDP tracker by three tenths to 2.2%, the monthly data flow has slowly but steadily started to strike a stronger tone over the past month. Indeed, our US surprise index has started to move higher since the end of February. While it is not a spectacular improvement, a bottoming out in the surprise index, in the past, has often been accompanied by higher yields, a rise in the dollar, and an improvement in stock markets. We think that the data will continue to surprise on the upside over the coming weeks, as we are likely to see ongoing payback for the soft economic activity during the unseasonably harsh winter and as strong cyclical drivers take over. Indeed, the Markit Services PMI rose from 53.3 in February to 55.5 in March. Strikingly, the business expectations sub-index jumped from 73.4 to 78.1, which also signals that corporate investment is likely to strengthen considerably going forward.



China’s authorities responding to dark clouds

Investor jitters about China’s outlook, from the property market to banks and leverage continue to mount. Concerns further increased after a property developer in East China’s Zhejiang province announced some days ago that it could not repay its debt. Premier Li mentioned earlier this month that the government will regulate the housing market “differently in different cities to take into account local conditions”. Prices in the property market have slightly declined in the past two months. To have a better assessment of the risks, the government has also announced that it will extend the annual property survey to more than 300 cities, compared to the 70 cities carried out until now. Meanwhile on Tuesday, a tiny rural bank, suffered a deposit run causing more unrest. This suggests that the government will have to speed up the deposit insurance scheme, which was originally planned to be announced before the end of this year. We expect the economy to pick up in the coming quarters helped by the introduction of stimulus measures (more details surrounding the new urbanization plan are likely to be released) and stronger advanced economy demand.