US Economy Just Had One of Its Worst Weeks Ever
June is picking up right where May left off — with a string of bad economic news that is among the worst the market has ever seen.
On Monday, reports showed that factory orders fellunexpectedly in April, while New York business activity entered contraction mode.
That followed Friday's hugely disappointing May jobs report, confirming that the US economy is rapidly weakening.
In fact, last week's batch of 21 economic reports—at least compared to expectations—was the worst ever, with 18 missing forecasts and only one beating them, according to Bespoke Investment Group, which began tracking the difference in 1998.
"That’s a truly unbelievable stat, and we have to believe that this is what the Fed was talking about when they said that they’re ready to act if the economy shows signs of weakening," Bespoke's Paul Hickey said.
As if the major miss in expectations for May job creation wasn't enough — a gain of just 69,000 against predictions for about 155,000 and the unemployment rate rising to 8.2 percent — the economy also fell short in terms of housing, consumer confidence and manufacturing, among a slew of other indicators.
The result, according to Bespoke, is that economic reports have missed the mark 15 times more than they have beaten over the past 50 days, which is comparable to what happened during downturns in the past two years.
"Historically, minus 15 has been an inflection point aside from the huge drop we saw in 2008, so hopefully we’ll see a rebound soon," Hickey said. "If global leaders continue to fail to come up with any kind of resolutions to ongoing problems, however, we’ve got our hands up in the air."
While conditions definitely are slowing, one factor in the dismal performance may be with economists themselves.
One reason for the proliferation of data misses is that expectations are too robust for an economy that faces pressures from the European debt crisis as well as the fiscal cliffin the U.S., said Ethan S. Harris, North American economist for Bank of America Merrill Lynch.
The "cliff" refers to the slew of tax increases and spending cuts that will kick in at the end of the year unless warring congressional factions work out a compromise.
Economists are using outdated forecasting tools that assume business cycle bounces, mean reversion — the tendency of growth to return to normal — and predictable reactions to economic shocks, Harris said.
"In this slow, erratic 'rehab' recovery, some of these forecast methods have worked very poorly," Harris said.
While many economists expected the U.S. to avoid the trend of the past two years for growth to start quickly and then fade, Harris said they "misinterpreted a rebound from shocks last year and warm winter weather as a sign of a new stronger trend...Either way, clearly the long-awaited boom is nowhere in sight."
Investors instead should expect another round of slowing growth as the year continues, due in large part not just to the debt crisis in Europe but also to the fiscal cliff, which Harris said has not been priced in yet.
"As the cliff draws nearer, many investors, households and firms will start taking a wait-and-see approach to major commitments," he said in a note. "This means very weak capital goods orders, employment, home buying and auto sales. It also means another risk-off trade in the markets."
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