MacroScope

Most accurate U.S. growth forecasters say to brace for stronger data this week

Arrows shot by Olympic hopeful and member of the U.S. archery team Gibilaro are seen in the target in BranfordThe two forecasting teams that came closest to predicting the U.S. economy would nearly stall in the first quarter expect other key economic data due this week to be strong.

This gives some support to the view — which some say is more hope than a forecast — that a snap-back is already taking place as the Federal Reserve and most other analysts expect.

UBS and First Trust Advisors both forecast the world’s largest economy grew by a meager 0.5 percent on an annualized basis during the first three months of the year.

All but a handful of the other 99 economists polled by Reuters over the past week expected growth of 1 percent or more, instead of the meager 0.1 percent reported.

FT Advisors has even revised up forecasts for Thursday’s ISM purchasing managers’ index for manufacturing and Friday’s non-farm payrolls releases. The Reuters consensus is for the ISM index to rise to 54.3 from 53.7, and for 210,000 new jobs in April after a gain of 192,000 in March.

Another false start for the U.S. economy?

Since the global financial crisis ripped the floor out from underneath developed world economies, the world’s biggest one has had several false starts nailing the floorboards back in.

Stock markets have moved in almost one direction since their trough in March 2009 – up – but economic growth and job creation have bounced around.

There are some disturbing signs another false start is afoot, but it has become almost taboo to even raise the issue that the U.S. economy, for all of its progress in repairing bank and household balance sheets, may still be at risk.

Weak manufacturing orders tend to precede U.S. recessions

U.S. manufacturing activity shrank for a second straight month in July as recent economic weakness spilled into the third quarter, according to the Institute for Supply Management’s closely watched index. But that wasn’t the worst of it: new orders, a gauge of future business activity, also shrank for a second month, albeit at a slightly slower pace.

Tom Porcelli at RBC explains why the status quo may not be good enough to keep the economy expanding:

The historical record back to 1955 suggests a rather ominous outcome when ISM new orders remain at 48 or less for two straight months. In fully 75% of those instances we were hurtling toward recession. The recent headfakes occurred in 1995 during the mid-cycle slowdown and in 2003 shortly after the recession ended and when the housing boom was in its infancy. Our call remains that we’ll (barely) skirt a recession but with evidence mounting that the economic headwinds are placing significant downward pressure on economic output, we find it striking that forecasters – as bearish as we’ve been told they are – still expect growth to average 2.2% in the second half of the year.

U.S. manufacturing shrinks for second month

The closely watched Institute of Supply Management’s nationwide manufacturing index showed contraction in manufacturing for the second month in a row in July and Bradley Holcomb, chairman of the ISM’s business survey committee, sounded equally subdued in a morning teleconference.

An overall softening and flattening is going on. It’s a reflection of the overall state of the global economy.

New orders for manufactured goods also shrank for the second straight month, and backlogged orders fell for the fourth straight month. Prices weakened for the third month. Said Holcomb:

Fed doves ‘will not be patient’

Ellen Freilich contributed to this post

The Fed did the twist. Will it shout as well? There has been some debate among economists about whether the U.S. central bank might launch a third round of outright bond buys or QE3 given that it just prolonged Operation Twist.

But a truly grim report on the U.S. manufacturing sector from the Institute for Supply Management, if coupled with further evidence of a deteriorating labor market, could certainly induce policymakers to press their foot to the monetary accelerator.

Not only did the index slip below 50 in June, pointing to a contraction for the first time in three years, but the reading of 49.7 was lower than the lowest forecast in a Reuters poll of economists. Moreover, the subcomponents showed the biggest drop in new orders since the aftermath of the Sept. 11 attacks in 2001.

Not your father’s ISM survey

Manufacturing activity picked up in January, an encouraging sign for U.S. growth prospects. Right? Perhaps not as much as it used to be. The shrinking role of factory production in the U.S. economy – now just over a tenth of the nation’s output – means the Institute for Supply Management’s closely watched survey is a less sturdy predictor of broader trends.

Neil Dutta, U.S. economist at Bank of America-Merrill Lynch, explains:

The ISM Manufacturing Index improved to 54.1 in January from 53.1 in December, the highest since June 2011 and broadly in line with market expectations. A level of 54.1 on ISM is consistent with roughly 3.5 percent real GDP growth. This tells you more about the state of the manufacturing sector than the broader economy, in our view. And, we are skeptical the pick-up in the ISM manufacturing index is a harbinger of a coming acceleration in economic growth.

A 3.5 percent rate looks lofty indeed: Current expectations according to Reuters polls are for a 2 percent GDP reading in the first quarter, with a number of analysts citing downside risks to their forecasts.

Looking past schism in the ISM

U.S. manufacturing activity slowed to a crawl in October, according to the latest figures from the Institute for Supply Management. Still, a measure of new orders picked up steam, suggesting some prospect for an improvement in demand.

Which signal to trust? Rather than put too much weight on one month’s number, better to pick up on the trend. Here, the story is largely unchanged: growth does not appear on the verge of stalling, but nor is it fast enough to help the economy dig out of the unemployment hole caused by the Great Recession.

Paul Dales, senior U.S. economist at Capital Economics, writes:

Economic conditions seem just about strong enough to avoid a recession, but not strong enough to generate any meaningful growth. We expect much of the same next year, with GDP growth slowing from just above 2% this year to around 1.5%.