Worse-than-expected economic data released on Wednesday may signal softer growth — and greater demand for bonds — in the next few quarters.
“The economy was slowing down even before the tariff effects kick in,” said Charles Self, chief investment officer at iSectors. “Clearly, the first quarter had inventory building in advance of possible tariffs. This masked the actual weakness in the economy during the quarter. The second and third quarter numbers will be weaker than expected. This has led us to minimal allocation to equities and maximum allocation to bonds in client portfolios.”
Retail sales posted a 0.2% drop in April, compared with a 0.3% rise expected by economists polled by IFR Markets. Sales had risen 1.7% in March. Excluding autos, sales rose 0.1% (0.7% gain predicted) after a 1.3% increase the prior month. Car sales and building materials led the decline, which signals consumers will be restrained. The drop may lead to further calls for the Federal Reserve to cut interest rates.
Building material sales fell 1.9% in the month, which suggests the housing market remains depressed.
Also released Wednesday, National Association of Home Builders/Wells Fargo Housing Market Index showed builder confidence gained three points to 66 in May, its highest level since October 2018. Economists had forecast the index at 64.
The “modest” increase “is consistent with a gradual recovery” in the market based on lower mortgage rates, said Fannie Mae chief economist Doug Duncan.
The report also contained some negative signals. “While the buyer traffic improved [to 49 from 47], it was still not positive,” he said. “This aligns well with consumer sentiment expressed in the (Fannie Mae) Home Purchase Sentiment Index which has recently been fairly flat.”
The NAHB said the rise shows builders are “catching up after a wet winter,” but affordability remains “a big impediment.”
The Mortgage Bankers Association reported mortgage applications dropped 0.6% in the week ended May 10.
Manufacturing numbers were mixed, as industrial production slid 0.5% in April, its third decrease in four months, and its year-over-year rise dropped to 0.7%, a 26-month low. Weakness was widespread. Capacity utilization slid to 75.7% from 76.2% in March.
The Empire State Manufacturing Survey general business conditions index posted its best reading in six months: 17.8 in May, up from 10.1 in April. Economists projected an 8.5 reading.
The Federal Reserve Bank of New York reported 36% of respondents said conditions improved in the month, while 18% said conditions had worsened.
The six months ahead business conditions index soared to 30.6 from 12.4.
“The rebound in the Empire State manufacturing index in May likely overstates the pace of activity, but it suggests that activity could start to stabilize soon,” Berenberg Capital Markets said in a report.
Finally, business inventories were flat, as projected, while sales surged 1.6% in March, the Commerce Department reported. The sales gain was the largest since December 2016, and followed a 0.2% gain in February.
Inventories grew an unrevised 0.3% in February.
