United States
The NY manufacturing May index fell to -1.0 from +5.2 in April. That was well below the estimate of +7.5 and is back below zero for the first time since before the election in October. Post election it peaked at 18.7 in February. New orders fell 11.4 pts to -4.4, the worst since September. Backlogs also went negative, falling by 16.1 pts to -3.7 pts. Inventories also went below zero to -.7 from +3.6. The employment component was down by 2 pts after rising by 5.1 pts in April. The workweek was lower by 1.3 pts to 7.5. Inflation pressures moderated along with the recent pullback in industrial commodity prices. Prices paid fell 12 pts to 20.9, the lowest since November while prices received was lower by 8 pts after rising by 3.6 pts in April. Notwithstanding the May weakness, the 6 month business activity outlook did hold steady at 39.3 vs 39.9 last month. The 6 month outlook for this figure though is 43. Disappointingly in the outlook was the sharp drop in the Capital Spending plans component which plunged by 14.3 pts to 13.4, the weakest since November.
Squaring the weak May print with the 6 month optimistic business activity outlook I believe is easy to do. After the election there was a large amount of naiveté that things in Washington, DC happen quickly, particularly on taxes and healthcare. The reality of current economic conditions that remain mediocre has now brought the post election euphoria down to earth along with what I just said on the snail’s pace of policy reform. The optimistic outlook remains because tax, healthcare and regulatory reform should (better) happen but may be a 2018 event instead of 2017. On the punk capital spending outlook, maybe companies are waiting to see what the tax treatment will be on depreciation before making any big decisions here. That said, capacity utilization is still well below historical averages even in the 9th year of this expansion and that itself has kept a lid on capital expenditures.
As this number is rarely market moving, it doesn’t matter right now for stocks but it will get noticed if confirmed by the other regional manufacturing surveys because there is a high level of expectations that Q1 GDP weakness was still some seasonal anomaly and Q2 will be great again. Well, Q2 has not started out with any great shakes with the economic data.
I’ve spoken about exactly what will move equities in 2017 on my investments page (click here to read the latest):
economic growth remains in a mediocre state notwithstanding all the ebullient confidence figures seen over the past few months from businesses and consumers. In fact, GDP printed just a .7% Q1 growth rate after just a 1.6% performance in 2016. The Fed of course is also raising rates too under these circumstances. I’ll repeat again what this year is all about for stocks and it’s not earnings and not the economy. It’s the hoped for tailwind of tax reform facing off against the headwind that is now monetary policy. If history is a guide, it is the latter that becomes the dominant factor.
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor. Each day The Boock Report provides summaries and commentary on the macro data and news that matter, with analysis of what it all means and how it fits together.