Posts Tagged ‘Akin Oyedele’

We just got the clearest sign yet that something is wrong with the US economy

doorman new york apartmentSpencer Platt/Getty

We just got the clearest sign yet that something is wrong with the US economy.

Markit Economics’ monthly flash services purchasing manager’s index, a preliminary reading on the sector, fell into contraction for the first time in over two years.

The tentative February index was reported Wednesday at 49.8.

That’s below 50, the border between expansion and contraction.

The consensus over the state of the economy had been that gains in the labor market and in consumer spending were propelling growth amid a downturn in financial markets.

This narrative has hit a hiccup, however, with this report.

The services sector, which covers jobs including bartending and counseling, is essentially having its worst month since the recession. The only exception is when the government shutdown disrupted business activity in October 2013.

And because the services sector makes an outsize contribution to US economic activity — about two-thirds — a slowdown here is not good news for the rest of the picture.

Many economists expect that economic activity — measured by gross domestic product — will rebound in the first quarter from the fourth.

But Wednesday’s data shows “a significant risk of the US economy falling into contraction in the first quarter,” according to Chris Williamson, chief economist at Markit.

According to Markit’s release, business activity was slammed by scarce new-work opportunities, as clients lacked confidence in the economic outlook, and snowy weather on the East Coast.

Markit noted that service providers had the weakest business outlook in nearly six years.

Screen Shot 2016 02 24 at 10.06.51 AMMarkit

“Slumping business confidence and an increased downturn in order book backlogs suggest there’s worse to come,” Williamson wrote.

“Any bounce-back from the weather may therefore prove to be only a temporary improvement in a steady downward trend of business conditions.”

Economists had estimated a preliminary reading of 53.5, a slight improvement from the prior reading of 53.2, according to Bloomberg.

The final reading for January showed that the sector was slowing down, as both Markit’s index and the ISM non-manufacturing composite fell.

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STOCKS SURGE AFTER THE FED RAISES RATES: Here’s what you need to know

rocketREUTERS/NASA/Carla Cioffi/Handout

Stocks ripped higher after the Federal Reserve raised its benchmark interest rate for the first time in nine years and gave an upbeat assessment of how the US economy is doing.

First, the scoreboard:

  • Dow: 17,749.09, +224.18, (1.28%)
  • S&P 500: 2,073.07, +29.66, (1.45%)
  • Nasdaq: 5,071.13, +75.77, (1.52%)

And now, the top stories on Wednesday:

  1. The Fed finally raised rates. In a unanimous vote, the FOMC — the Fed’s policy-setting committee — agreed to raise the target range of the federal funds rate by 25 basis points to 0.25% to 0.50%, “given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes.” The Fed acknowledged that the labor market made “considerable improvement” this year, and expressed confidence that inflation would rise to its 2% target. It was also concerned that the risks of delaying higher rates were more than the risks of moving too soon.
  2. The Fed also stressed that the path of rate hikes would be gradual and responsive to incoming economic data. Its forecasts showed that the appropriate rate at the end of 2016 would be 1.375%, implying at least four rate hikes next year. And the updated “dot plot” showed that FOMC members see rates eventually rising to about 3.5% in the longer term.
  3. Fed Chair Janet Yellen held a press conference after the statement crossed. She said rates were kept near 0% for that long so that the Fed had room to maneuver if it needed to tighten monetary policy further. She said it’s a “myth” that economic expansions die of old age, although she cautioned that the chances an external shock could send the economy into a recession in any given year are near 10%. When asked about how the Fed might manage its $4 trillion balance sheet, Yellen said that it is “studying” what a longer-term plan may be and will try to shrink its balance sheet over time.
  4. Stocks fell following an initial rally when the Fed’s statement crossed, but ripped higher in the final half hour of trading. More notably, the yield on the two-year treasury note spiked to as high as 1.02%, and to the highest levels since April 2010. The dollar index rose a bit to about 98.61, by about 0.2%. Gold and silver ripped higher. And crude oil fell 4% to as low as $35.30 — earlier, the Energy Information Administration reported an unexpected build in US oil inventories last week by 4.8 million barrels.
  5. There were other economic data before the Fed. We got Markit’s flash-manufacturing purchasing manager’s index at 51.3. Although it was above 50, in expansionary territory, business conditions improved at the slowest pace since October 2012, and the headline index itself was at the lowest level in just over three years. The effects of a strong dollar, weak global demand, and low energy prices are still weighing on the sector, which is showing “signs of stalling,” according to Markit’s chief economist Chris Williamson.
  6. And even more ugly manufacturing data: Industrial production fell more than expected in November, by 0.6%, while capacity utilization was 77% in November. Warm weather led to a 4.3% drop in the utilities index as demand for heating fell. “On balance, manufacturing activity is likely to remain weak,” wrote BNP Paribas to clients.
  7. But housing starts surged more than expected in November by 10.5% at an annual rate of 1.17 million, while building permits rose 11% at an annual rate of 1.29 million. Single-family starts rose 7.6% at a rate of 768,000, the highest in nearly eight years. The report was “the first solid, meaningful report on new construction we’ve seen since the early spring,” according to Realtor.com’s Jonathan Smoke, and is “finally communicating a clear and positive trend.”

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