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Robert Genetski: Tentative Signs of Economic Weakening

By Robert Genetski, Heartland Institute

The Week That Was

There are several tentative signs the economy weakened in April. For the first time in over a year, the ISM business survey shows the overall index for service companies slightly below breakeven with a reading of 49.4.

The alternative S&P survey shows service companies activity slowing to just above breakeven. The S&P survey also shows a decline in both new orders and employment. Both surveys detect some weakening in the service sector.

Yesterday’s weekly unemployment data were higher for both initial unemployment claims and insured unemployment payments. These numbers are highly erratic so modest weekly changes are often not very significant. Even so, after signs of a potential weakening in both business surveys, further signs of weakness will reignite expectations for lower interest rates.

Things to Come

Tuesday’s wholesale price report will be a prelude to Wednesday’s CPI report. Wholesale prices will be up sharply due to last month’s spike in oil prices.

Wednesday’s April CPI report also will bring bad news. The Cleveland Fed’s estimate calls for a large 0.41 percent increase in the overall index and 0.31 percent for core. As with wholesale prices, oil will be the main force driving inflation. If the Fed’s estimates are correct, year-over-year inflation rates will be 3½ percent for both the total and core CPI numbers.

Wednesday’s April retail sales also will be interesting. Retail sales data have shown weakness with gains of only 3 percent to 4 percent over the past year. For the six months ending in March the annualized gains were only 1 percent. However, wages and salaries were up 6 percent (annualized) in the six months ending in March and 6 percent over the past year. With wages increasing faster than sales, we expect sales to catch up to wages in either April or May with gains of ½ percent or more each month.

Also on Wednesday, Homebuilders will report their Index for early May. For March and April, the Index was a barely positive 51. We expect the increase in mortgage rates likely moved the Index down a notch.

On Thursday the Fed reports its April manufacturing index, which has remained stable for over two years with a reading of 100. We doubt there will be any significant change in April.

Market Forces

Stocks came back strong this past week with the S&P500, Dow and Nasdaq each increasing by roughly 3 percent.

The main impetus for the gains came amid tentative signs the economy is slowing. Markets responded with lower interest rates and stock prices moving higher.

All three major indexes went back above their 50-day moving averages. Breaking through this key resistance level left technical indicators as neutral. The next major technical improvement will be for the 10-day and 21-day averages to move above the 50-day averages.

Stocks and financial markets remained news dependent. This coming Wednesday’s April CPI report will incorporate the effects of a 5 percent monthly increase in oil prices. The Cleveland Fed estimates the overall CPI will rise by 0.41 percent (5 percent annualized rate), and bringing both total and core year-over-year inflation rates to 3½ percent.

One positive inflation note is how oil prices have declined to $79 from a monthly peak of $85 in April. This will ease inflation numbers for May.

Near-term market trends will continue to be news driven. So far, the stock market has had a strong upward bias. Good economic news is viewed as good for stocks because profits will be higher. Weak economic numbers are also good for stocks, because interest rates will be lower.

So long as this heads we win, tails we win market psychology continues, stockholders will continue to bid up stock prices. However, some caution remains because the S&P500 is now 30 percent overvalued.


Economic Fundamentals: neutral

Stock Valuation:S&P 500 overvalued by 30 percent

Monetary Policy:restrictive


Robert Genetski, Ph.D., one of the nation’s leading economists and financial advisors, has spent more than 35 years promoting the use of classical economic and investment principles for sound financial decisions. He heads ClassicalPrinciples.