Wednesday, November 26, 2014
(Note: Mark Vickery will be putting together this note on Friday, December 28.)
Stocks will likely discount this morning’s mixed economic data and maintain the positive momentum of recent days in an otherwise light-volume session ahead of the Thanksgiving holiday. Keep in mind, however, that lower volumes can magnify volatility.
We have some other economic data on tap for release a bit later, but the overall tone of this morning’s Durable Goods, Personal Income & Spending and Jobless Claims readings is on the weak side. These reports run counter to the view that the U.S. economy was on the cusp of graduating to a growth pace that is higher than what we have become used to seeing in the recent past.
This notion was strengthened by the very strong GDP growth readings in the last two quarters. Please recall that we saw the Q3 GDP growth rate revised higher on Tuesday to +3.9% from the originally release +3.5% pace; GDP growth was an even impressive +4.6% in Q2.
Today’s data isn’t bad — it’s just not good enough. For example, the Durable Goods report looks pretty good on the surface, but it becomes far less impressive once you drill a bit deeper. The ‘headline’ durable goods reading came in better than expected, largely a function of strong order flow for Boeing (BA). Excluding transportation, however, durable goods orders came in weaker than expected.
Non-defense capital goods orders excluding aircraft, generally considered a proxy for business spending, also came short of estimates. The key takeaway from this report is that capital spending trends in the economy continue to be on the weak side. Business spending has been weak for quite some time and hasn’t played its due role in this recovery, despite the steady improvements in the labor markets and very strong corporate cash levels.
This morning’s consumer spending data doesn’t show any sign that households are spending the windfall from lower oil prices. Spending was up +0.2% in October vs. estimates of +0.3% gain. On the plus side, however, the prior month’s -0.2% decline was revised higher to an ‘unchanged’ reading. Incomes grew a lower than expected +0.2% vs. estimates of +0.4% gains as well.
The Jobless Claims data this morning also moved in the wrong direction – by moving back above the 300K level. Initial claims went up a bigger than expected 21K last week to 313K from the prior week’s revised 292K and estimates of 286K. The 4-week moving average, a relatively more stable reading, remains below the 300K level.
On tap for release a little later is the final Consumer Sentiment reading for November, the October New and Pending Home sales reports and the Chicago PMI survey. No major surprises are expected from any of these readings, but this morning’s reports run counter to the view that the economy’s growth momentum is accelerating. That said, the Jobless Claims and the Durable Goods reports are notoriously ‘noisy’ on a week-to-week basis. It is never advisable to draw major conclusions from one period’s data, but that’s particularly the case for these two reports.
Happy Thanksgiving!
Sheraz Mian
Director of Research
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