It's weaker profits vs. stronger consumers
Don't look now, but the U.S. economy is slowing again. And that could spell trouble not only for the stock market but for the job market as well.
On Thursday, durable goods orders fell 2.8 percent month-over-month and core orders fell 1.8 percent, much worse than expectations for a 0.5 percent decline. At least initial weekly jobless claims came in at 265,000, below the consensus estimate and marking the 55th consecutive streak below 300,000 -- the longest since 1973.
Still, the durable goods data led the Atlanta Fed to downgrade its first-quarter GDPNow forecast to just 1.4 percent from 1.9 percent previously (chart below). Moreover, the final read on fourth-quarter 2015 GDP growth released on Friday came in at 1.4 percent. While that's up a bit from the earlier estimates, it's down from the 2 percent result posed in third-quarter 2015 and a clear drop-off from the 2.2 percent average growth rate seen in the first three quarters of 2015 and the 2.4 percent advance seen in 2014.
The problem, it seems, is that strength in consumer spending (primarily on services) is being outweighed by a slowdown in corporate profitability and factory activity. Much of this is the result of lower crude oil and commodity prices as well as the dampening effect a stronger dollar has had on the value of foreign corporate earnings. Economic instability in China and Europe hasn't helped, either.
And more recently, based on survey responses to the March manufacturing PMI report that missed expectations by the most since 2013, concerns are rising about the increasingly contentious U.S. presidential campaign.
Looking ahead, Wells Fargo analysts warn that if "profits remain depressed, the prospects for (capital spending) and hiring will come under greater pressure." Business outlays on equipment declined at a 2.1 percent annualized pace last quarter, for context.
All of this is a problem for stocks because the S&P 500 has been tracking the ups and downs of the economy with a slight lag (chart above). With stocks contending with overhead resistance going back to late 2014, the drag from slower economic growth could result in a retest of the January-February lows in the months to come.
If we're going to see a positive surprise, it will depend on consumers. In fourth-quarter 2015, personal consumption expenditures increased at a 2.4 percent annualized rate. Residential fixed investment grew 10.1 percent, up from 8.2 percent in the third quarter.
So, keep an eye on the personal income and consumption data for February when it's reported today after the long Easter holiday weekend.