U.S. Economy Weakens: GDP Estimates Chopped, Factory Orders Fall

July 6, 2016United Statesby EW News Desk Team

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Lower factory orders and a lower growth expectation show cracks in America’s already slow recovery.  Factory orders for manufactured goods fell 1% in May, according to a new report by the Census Bureau. That is a sharp reversal of April’s 1.8% growth for new orders of manufactured goods. Meanwhile, shipments were almost flat, down from the 0.4% increase in April.

Inventories for manufactured goods also fell, after falling virtually every month over the last year.  The biggest declines in new shipment orders were in transportation equipment, which fell 5.7% in May. Large American companies, such as Caterpillar, which builds and exports transportation equipment for foreign firms and governments, are particularly exposed to this loss.

The decline in shipments may have encouraged the Atlanta Federal Reserve’s GDPNow model, a real-time analysis of economic data that predicts GDP growth for the current quarter. Now the GDPNow model expects just 2.6% growth in the second quarter, down from 2.7% growth estimates a week ago. The GDPNow model has lowered growth expectations several times this year, as revisions and weaker-than-expected economic data drove down the model’s results.

Since the global financial crisis of 2007-2009, economists have been expecting a return to normal growth rates. Nine years after the crisis began, growth remains far below its prior levels, leading noted economist and former presidential advisor Lawrence Summers to declare the world is in a state of “secular stagnation” in which growth rates may never return to their pre-crisis levels.

Economists have largely dismissed Summers’s hypothesis, although many of his theories are otherwise respected. Improving growth rates in recent months encouraged some economists to dismiss the secular stagnation idea as fearmongering, including the Federal Reserve, who prominently and confidently proclaimed America’s economy fully healed in December, when it began raising interest rates—with promises of further interest rate hikes as the labor market continues to strengthen in 2016.

Since then, weak data showing low job growth and growing unemployment claims demonstrates that America’s job market is not as good as it would first appear. Additionally, global risks from Britain’s departure from the European Union and lower growth rates in emerging markets have given economists pause; even inspiring Fed chairwoman Janet Yellen to publicly suggest interest rate increases would remain on hold.

The Fed continues to focus on both growth and inflation rates in its monetary policies, but market participants expect the Fed to keep interest rates unchanged until 2018.

Markets declined at the beginning of trading this week, with America’s first trading day showing declines for all indices. Weakness was particularly acute in Europe, while the British pound continued to fall to nearly $1.31 against the United States dollar.

U.S. Treasuries have also fallen to record lows as expectations for future economic growth decline.

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