The week in ugly: US economy off to a slow start

Shoppers in the parking lot of a Walmart store in Massachusetts.
Brian Snyder | Reuters
Shoppers in the parking lot of a Walmart store in Massachusetts.

A year in which the U.S. economy was supposed to turn the corner and lead the world sure has started out in bumpy fashion.

Retail sales, manufacturing and inflation readings sputtered into the end of 2014, according to reports released this week. Meanwhile, weekly jobless claims jumped back above 300,000 and a new study called a rebirth of U.S. manufacturing a "myth."

Economists generally remain hopeful that the year will turn out well, despite the initial slowness. They point primarily to declining energy prices that will boost consumer spending and breathe life into an economy that grew at about a 2.4 percent annualized clip in 2014, a number expected to climb above 3 percent for 2015.

However, the early indications are that consumers pocketed the savings they got from plunging prices at the pump. Retail sales for December saw a stunning 0.9 percent decline, missing even the modest estimates for the holiday shopping season.

That disappointment specifically caused Goldman Sachs to slice its full-year projections for gross domestic product from 3.1 percent to 2.8 percent, a 9.7 percent reduction that comes even though the firm's experts maintain high hopes for the U.S. consumer. Goldman economist Kris Dawsey, in a note to clients, conceded that spending "appears at least somewhat less favorable than we were expecting" but noted that "fundamentals are quite strong" due to steady job creation, lower savings rates and a break in gas prices, meaning "the bull case for consumer spending is still strong."

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Indeed, sentiment as reported by the widely followed University of Michigan consumer confidence gauge hit an 11-year high in January, which, according to Capital Economics, affirmed "our view that the fall in retail sales in December was nothing to worry about."

Interestingly, it was the same firm that earlier in the week said it was already slashing its end-of-year projection for the benchmark U.S. 10-year note, from 3.75 percent all the way down to 2.5 percent. Capital also cut its 2016 projection from 4.0 percent to 3.0 percent for the 10-year, which the market uses as not only as a guide to interest rates for credit cards and loans but also economic growth.

In the bigger picture, rising consumer sentiment is all well and good—who wouldn't be happy over gas prices below $2 a gallon?—but the full economic picture remains to be seen.

Saving money at the pump is one thing, but if it doesn't translate into a more active consumer then the net effect is lessened.

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A few other things to consider: Years of global central bank easing that have seen more than $5 trillion in liquidity injected into capital markets resulted in surging asset prices, particularly stocks, that haven't cured disinflationary pressures, most recently manifested in the biggest drop the consumer price index has seen in six years, as plunging energy costs more than offset a 3.4 percent annualized gain in food prices.

Also: That 252,000 job creation number from last Friday's nonfarm payrolls report came with a decline in actual earnings and a 36-year low in the labor force participation rate. And in a bit more granular piece of data, the robust Philadelphia Federal Reserve manufacturing reading in October of 40.8 has come tumbling back to earth (as this writer warned it would the day the report was released) to a far lower-than-expected 6.3 reading.

Investors took notice to the vacillating economic trends and sent the S&P 500 stock gauge down 1.8 percent in a week that ended with a rally Friday.

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However, they also began ratcheting down expectations for interest rates, with the latest projections deviating from forecasts that the Federal Reserve's Open Market Committee would start raising rates in midyear. Now, the market expects tightening to happen in the back half of the year, or even into 2016.

"Our view remains that while June is a possible starting date for the first Fed rate hike, disinflationary concerns and risk management are more likely to lead these three, and the rest of the FOMC, to delay hiking until the second half of this year," Ethan Harris, global economist at Bank of America Merrill Lynch, and others wrote in a report for clients. "The market seems to agree, as the recent risk-off move has pushed the timing of the first rate hike to December. Time will tell: the essence of data dependence."