A factory worker selects white oak barrel staves at the Brown-Forman Corp. cooperage facility in Louisville, Kentucky, U.S. (Photographer: Luke Sharrett/Bloomberg)

Weak Investment Leads Signs of Cooling Momentum in U.S. Economy

(Bloomberg) -- Weaker-than-projected reports Wednesday on business investment, consumer confidence and the job market signaled the U.S. economy is shifting into a lower gear, leaving less cheer as Americans head into the Thanksgiving holiday weekend.

Orders placed with U.S. factories for business equipment were little changed in October, missing forecasts for a third month, Commerce Department figures showed. An index of consumer sentiment fell to a three-month low in November, according to a University of Michigan survey, while the Labor Department said filings for unemployment benefits rose last week to the highest level since late June.

Weak Investment Leads Signs of Cooling Momentum in U.S. Economy

While another report showed sales of previously owned homes advanced in October, it was the first increase in seven months, a reminder that housing also may have peaked amid rising borrowing costs and high prices. With stocks erasing the year’s gains, the boost from tax cuts possibly ebbing and President Donald Trump’s trade war set to escalate, the latest data collectively point to a moderation in economic growth this quarter -- and beyond, if the weakness persists.

“The economy is losing momentum,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. That “isn’t surprising, but nothing alarming at this stage,” and is in line with his forecast for slower growth this quarter than in the July-September period, when gross domestic product expanded at a 3.5 percent annualized rate.

Investors see the Federal Reserve as still on track for a widely anticipated quarter-point interest-rate hike in December, its fourth such move this year. At the same time, the pace of tightening in 2019 looks less certain as growth cools and the benchmark rate nears the theoretical, so-called neutral level that neither stimulates nor restrains the economy.

U.S. stocks were higher on Wednesday following two days of steep declines, as technology shares rebounded. Yields on 10-year Treasuries were also up though were still near the lowest level since early October.

Economists surveyed by Bloomberg expect growth to slow to a 2.6 percent pace in the fourth quarter, following the best back-to-back gains since 2014. It’s forecast to keep moderating, reaching a 2 percent rate in late 2019. The Atlanta Fed’s GDPNow tracker, updated after Wednesday’s data, predicts fourth-quarter growth of 2.5 percent.

What Our Economists Say...

The durable goods report suggests that the weak third-quarter investment print is more likely a trend than a one-off surprise. Momentum in core shipments -- a direct feed into investment in quarterly GDP -- decelerated last month, signaling that weakness from the third quarter is carrying over into the final quarter of the year.

-- Tim Mahedy, Yelena Shulyatyeva and Carl Riccadonna, Bloomberg Economics

Here are the details of Wednesday’s economic data:

  • Non-military capital goods orders excluding aircraft -- a proxy for business investment -- were little changed after a 0.5 percent decline in September that was worse than previously reported. The median forecast in a Bloomberg survey called for a 0.2 percent gain.
  • The University of Michigan’s sentiment index dropped to 97.5, the lowest level since August, from the prior month’s 98.6. The median estimate of economists was 98.3, which was also the preliminary reading released earlier this month.
  • Jobless claims increased by 3,000 to 224,000 in the week ended Nov. 17, potentially reflecting holiday-related volatility and California wildfires in what otherwise has been a strong labor market.
  • Existing-home sales rose from the prior month to an annual rate of 5.22 million, the National Association of Realtors said. While that narrowly exceeded economists’ projections for sales of 5.2 million, the pace was down 5.1 percent from a year earlier, the biggest drop since 2014.
Weak Investment Leads Signs of Cooling Momentum in U.S. Economy

“The main signal from all the data in aggregate is that growth peaked in the second and third quarter,” said Michael Gapen, chief U.S. economist at Barclays Plc. “What I would caution is that, that doesn’t mean a recession is tomorrow.”

Gapen said that unlike in the previous recession, a downturn in housing is likely to be more a symptom of a cooling economy than a cause. And even with the latest weakness, the factory-orders data are still showing “pretty decent growth,” just not as strong as before, he said.

©2018 Bloomberg L.P.