The Number of the Week Is 22.1
(Bloomberg Opinion) -- Did the poor economic data this past week just blow the narrative out of the water for the stock bulls? It would be premature to provide any definitive answer, given that much of the data covered February, when harsh weather disrupted many parts of the U.S. But that doesn’t mean we can’t start asking some tough questions about the strength of the economy and its impact on financial markets.
The whole thesis underlying the epic rebound in equities from the pandemic-era lows last March — as well as the recent slump in demand for safe assets such as U.S. Treasuries and gold — has been that unprecedented fiscal and monetary stimulus would supercharge economic growth. Indeed, the median estimate of more than 60 economists surveyed by Bloomberg is for gross domestic product to expand 6.1% this year, the most since the early 1980s, propelling corporate earnings higher.
Given we’re only at the end of the first quarter and the $1.9 trillion stimulus plan has just started to be deployed into the economy, there’s no reason to doubt those estimates just yet; it’s just that it couldn’t come soon enough. Citigroup Inc.’s surprise index, which falls when data comes in worse than forecast and rises when it does better, has dropped to its lowest since June, bottoming at 22.1 on Wednesday. Not only that, but this month’s decline is the steepest since the early days of the pandemic last March.
The week started off on the wrong foot when the Federal Reserve Bank of Chicago said Monday that its National Activity Index for February fell to minus 1.09 from a positive 0.75 in January. A reading of positive 0.72 was expected. With this measure, a level below zero indicates a contracting economy, which had not happened since April. Also that day, the National Association of Realtors said home sales for February tumbled 6.6%, far outpacing forecasts for a 3% drop.
Also falling below estimates by a concerning amount were new home sales, durable goods orders, the advance goods trade balance and personal spending. Granted, those numbers were for February, when Texas froze and the heavily populated Northeast suffered a string of snowstorms. But that doesn’t mean the data should be discounted immediately.
With new home sales, it’s true that bad weather most likely kept many buyers out of the market, resulting in the 18.2% plunge, which was the sharpest since 2013. Still, that doesn’t explain the big drops in the South and West. Maybe the numbers suggest that either the large price gains in housing are starting to turn off potential homebuyers or that everyone who wanted to purchase has done so already.
There’s an alternative explanation that is more favorable to the bulls: The dearth of inventory is holding back sales, making the issue one of supply constraint rather than weakening demand. The durable goods report on Thursday seemed to back up the bullish narrative. Yes, orders fell 1.1%, the first drop since April and well below the forecasts for a gain of 0.5%. Auto production was weak particularly, most likely due to a global shortage in semiconductors.
As FHN Financial Chief Economist Christopher Low pointed out in a note to clients, the economy looks to be bumping up against supply constraints. This is not a bad problem to have because it speaks to supply not keeping pace with booming demand. Even so, it also could act as a serious drag on the economy. Here’s how Andrew Husby of Bloomberg Economics summed it up in a research note on Wednesday:
The supply side of the economy is dynamic, and should catch up over the coming months, but persistent delays would restrain the strength of some categories of spending in the GDP accounts. This could blunt the degree to which massive fiscal impulse is immediately reflected in hard economic data.
Supply constraints in the economy are no small issue for investors. If companies can’t meet orders, they can’t book sales. And if they can’t book sales, they will have a harder time meeting earnings estimates. After surging from less than $164 a share at the start of January to about $171 a share in mid-February, analysts’ earnings estimates for members of the S&P 500 Index have flatlined, ending the week at just below $173. It’s probably no coincidence that the S&P 500 is little changed since mid-February.
No one seriously doubts that economic growth will be impressive in 2021. The data for next week is forecasted to be strong, specifically when it comes to the Institute for Supply Management’s manufacturing index for March and the monthly jobs report. If either of those disappoint, expect the debate over whether the recovery is sustainable to heat up as well as a much rougher ride for the stock market.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Robert Burgess is the Executive Editor for Bloomberg Opinion. He is the former global Executive Editor in charge of financial markets for Bloomberg News. As managing editor, he led the company’s news coverage of credit markets during the global financial crisis.
©2021 Bloomberg L.P.