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Economic Watch: New Reports Raise Concerns About a Recession

February 23, 2016

By Evan Lockridge

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A glimmer of hope that U.S. manufacturing was starting to rebound at the start of the year may have been quickly been dashed, leading to increasing concerns about the state of the overall economy, while separate reports show consumers don’t feel as good as they did last year, but they are still in the mood for home buying.

According to preliminary results from a new survey of the nation’s purchasing managers from the financial information services provider Markit, February is seeing the weakest overall improvement in manufacturing business conditions for just over three years.

Its Flash Manufacturing Purchasing Managers’ Index registered 51 this month, down from 52.4 in January, its lowest level since October 2012, as softer rates of output, new business and employment growth all weighed on the headline index. A reading over 50 indicates expansion while one below the level is a sign of contraction.

Manufacturing output growth slowed for the third time in the past four months during February, accordign to the report. At the same time, new business volumes increased only marginally and at one of the weakest rates seen over the past three years.

Manufacturers overwhelmingly linked the slowdown to softer underlying demand patterns in February, while only a small minority cited temporary weather-related disruptions, according to the findings. There were reports that weaker business sentiment, alongside uncertainty about the general economic outlook, had encouraged clients to delay spending decisions during the latest survey period. Also, the strong dollar and less favorable global economic conditions continued to act as a drag on export sales in February.

“Every indicator from the flash PMI survey, from output, order books and exports to employment, inventories and prices, is flashing a warning light about the health of the manufacturing economy, said Chris Williamson, chief economist at Markit.

The report follows two from January, one from Markit and the other from the Institute for Supply Management, both showing manufacturing conditions improved last month, following declines that began in latter part of 2015, though the ISM results indicated manufacturing still contracted for the fourth straight month. The ISM report for February isn’t scheduled for release until early March.

Also, a report released last week by the Federal Reserve on the nation’s industrial sector, added to hopes manufacturing was rebounding. It showed industrial produciton in January increased 0.9% from the month before while manufacturing alone gained 0.5%.

However, this latest report from Markit notes manufacturing output and order books are now growing at one of their slowest rates since late-2012, with exports falling amid weakened global demand and the strong dollar.

“Hiring has weakened as a result. With backlogs of work slumping to the greatest extent since the height of the recession in 2009 and inventories rising for the third successive month, it’s likely that firms will come under increasing pressure to cut payroll numbers and production in coming months unless demand revives,” said Williamson.

The report adds to already existing worries about the U.S. slipping into an economic recession. That’s because four states are already seeing a recession, while three others are at risk of falling into one, according to Bloomberg Business.

The reason is partly due to the slump in manufacturing, which drives a little more than 10% of the U.S. economy, but also to declines in energy output resulting from low energy prices, and the increasing value of the U.S. dollar, which hurts U.S. producers who make goods shipped overseas. On the upside, the story noted a similar situation happened about 30 years ago, with the U.S. managing to avoid a recession.

Consumer Confidence Falls

Adding to concerns is there is now an indication that consumers, who drive an overwhelming majority of the economy, are starting to sour, according to the private research group The Conference Board.

Its Consumer Confidence Index, which had increased moderately in January, declined this month, hitting a seven-month low. The index now stands at 92.2, down from 97.8 in January. The Present Situation Index declined from 116.6 to 112.1, while the Expectations Index decreased from 85.3 to 78.9 in February.

“Consumers’ assessment of current conditions weakened, primarily due to a less favorable assessment of business conditions. Consumers’ short-term outlook grew more pessimistic, with consumers expressing greater apprehension about business conditions, their personal financial situation, and to a lesser degree, labor market prospects,” said Lynn Franco, director of economic indicators at The Conference Board. “Continued turmoil in the financial markets may be rattling consumers, but their assessment of current conditions suggests the economy will continue to expand at a moderate pace in the near-term.”

Existing Home Sales Best in 6 Months

Meantime, a separate economic report is a bit more encouraging, showing existing-home sales crept forward in January to the highest annual rate in six months.

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 0.4% to a seasonally adjusted annual rate of 5.47 million in January from a downwardly revised 5.45 million in December. Sales are now 11% higher than a year ago, the largest year-over-year gain since July 2013.

Lawrence Yun, NAR chief economist, said existing sales kicked off 2016 on solid footing, rising slightly to the strongest pace since July 2015

"The housing market has shown promising resilience in recent months, but home prices are still rising too fast because of ongoing supply constraints," he said. "Despite the global economic slowdown, the housing sector continues to recover and will likely help the U.S. economy avoid a recession."

Single-family home sales increased 1% percent to a seasonally adjusted annual rate of 4.86 million in January from 4.81 million in December, and are now 11.2% higher than the 4.37 million pace a year ago.

 

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