The Week in Review: U.S. Economic Data Turns Sour

A substantial number of economic indicators suggest greater weakness in the American economy, as Americans struggle with rising prices, lower demand, and higher default rates.  Jobless claims rose to 278,000, above expectations of 270,000 claims, reaching their highest point in a month, and services demand fell to contraction for the first time since 2013. At 49.7, the services PMI fell to its lowest level since 2010, below expectations of expansionary demand.

A substantial number of economic indicators suggest greater weakness in the American economy, as Americans struggle with rising prices, lower demand, and higher default rates.  Jobless claims rose to 278,000, above expectations of 270,000 claims, reaching their highest point in a month, and services demand fell to contraction for the first time since 2013. At 49.7, the services PMI fell to its lowest level since 2010, below expectations of expansionary demand.

At the beginning of the week, the Chicago Federal Reserve announced its PMI reading fell to 47.6, driven by a steep decline in production, while prices paid fell to the lowest level since the height of the financial crisis in 2009. Likewise, the Chicago Fed reported employment fell to its lowest level since 2009, although roughly half of companies said lower oil prices were helping business thanks to lower freight and transportation costs.

Even weaker data came from the Dallas Federal Reserve, where low oil prices were having the opposite impact. Production, capacity utilization, new orders, and the broad manufacturing outlook were all sharply negative, with only production and outlook improving. The weakness in oil was largely cited as the cause for the decline, although the survey also saw that wages rose slightly, even as raw material prices and finished good prices fell. Income growth was also seen to be decelerating.

Home Prices, Construction Jump

With salary growth low and manufacturing activity falling, housing prices have risen again thanks to consistent demand and weak building growth. Housing prices rose 6.9% in January on a year over year basis, according to CoreLogic, who also predicts home prices to rise 5.5% in 2016.

The increase in home prices may also be spurring construction spending, which surprised economists with a 1.5% month-over-month increase in January, with the bulk of spending and growth coming from the private sector. Housing construction rose 7.6% on a year-over-year basis in January, while higher increases were found in lodging, office, educational, and communication sectors.

Some economists predicted the growth as higher travel rates, low office occupancy rates, and continued expansion in telecommunication demand would result in more spending on buildings for those sectors.

Weak Manufacturing

In addition to the Federal Reserve studies earlier in the week, the Institute for Supply Management reported that PMI remains contractionary, at 49.5. While that was an improvement from 48.2 in January, the ISM noted that new orders were flat and supplier deliveries fell into contraction, while backlogs and production were the sources of strength.

With weak manufacturing data from several corners, the Federal Reserve’s Beige Book acknowledged that there is weakness in the economy, with flat manufacturing and low demand from the energy sector remaining a challenge. While the Fed asserted residential real estate sales are rising and labor market conditions are improving, the Fed also said consumer spending remains weak.

Weakness in the energy sector has also led Moody’s to predict defaults in 2016 will soar to 4%, the fastest rate in 7 years. “Although credit quality declined throughout 2015, the magnitude of ratings downgrades widened significantly in the fourth quarter. These factors combined with the sharp increase in defaults and rising investor caution, indicate that the credit cycle is turning,” said Moody’s Senior Credit Officer Sharon Ou.