One of the truly pathetic characteristics of the current environment is how the bulls try to find comfort in any news that isn’t terrible while ignoring all the really terrible news.
On March 21, Atlanta Fed president Dennis Lockhart spoke to the Rotary Club of Savannah about his visions of rate hikes as soon as April. He cited “sufficient momentum evidenced by the economic data to justify a further step at one of the coming meetings, possibly as early as the meeting scheduled for end of April.”
On March 22, the Richmond Fed reported that its index for manufacturing activity in its region jumped the most since 2010. I’m guessing that Uncle Dennis had that number the day before, when he spoke. Here’s the chart from the Richmond report:
Now, it is really stretching it to say this number means anything. This index has been flat to down for so long that less down looks like up. And it is only one month. The three month moving average is a lot less impressive. When the trend is down for so long and businesses finally decide to order again, it looks fantastic—for one month.
Also, you need to know how a so-called diffusion index like this one actually works. Companies are asked yes or no questions such as whether or not orders are up. If they were down by 1,000 last month and up by three this month, you report an increase. A tiny firm with an increase in three orders offsets a larger firm with a decrease in 500 orders.
The other data that came out immediately after Lockhart’s speech told the real story. Existing home sales data were released on March 21, the national PMI manufacturing index came out on March 22, the new home sales report on March 23 and durable goods orders on March 24. These reports ranged from poor to terrible. Existing home sales were down a ‘surprising’ 7.1% and durable goods orders fell 2.8%.
The Atlanta Fed where Uncle Dennis works publishes the GDPNow forecast, easily the most accurate predictor of upcoming U.S. GDP reporting. As of March 24, the GDPNow forecast for Q1 was updated to include all the new data. Here it is:
The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2016 is now 1.4 percent as of March 24, down from its previous forecast of 1.9 percent on March 16, largely due to a sharp decline in estimated Q1 real equipment investment growth from 0.9 percent to -1.4 percent.
Is this the kind of economy that should be looking for Fed rate hikes in April? How can the Fed have any credibility at all?