A shift in the tone for discussions about the US debt ceiling negotiations provided motivation for investors last week. Additionally, a rally among regional banks in the US provided some calm to investors worried about the state of the banking system. All major North American indices, except for the TSX, finished in positive territory, particularly the large-cap indices due to significant gains in Alphabet, Meta Platforms, Nvidia, and Advanced Micro Devices. European equities also experienced solid gains.
On Monday, the New York Federal Reserve’s Empire State general business for manufacturing conditions index surprised the market, plummeting 42.6 points in May to negative 31.8 after a solid 35-point advance in April. The index for new orders dropped 53.1 points to negative 28, reversing the 46.7-point gain in April. The shipments index fell 40.3 points to negative 16.4, almost erasing a 37.3-point gain in the prior month, and the Unfilled Orders index fell 13.2 points to negative 13.2. Employment and hours worked softened for the fourth consecutive month, and inventories and delivery times contracted in the month. As businesses do not expect much improvement, the measure of expectations six months ahead ticked up slightly to 9.8 in May.1
On Tuesday, in a sign that consumers are holding up, the US Census Bureau reported that the advance estimate of US retail sales and food services for April is up 0.4%. Excluding autos and gas stations, sales were up 0.6%. Restaurants and bar sales also rose 0.6%. Usually, when consumers feel secure in their jobs, restaurant and bar sales increase and in times of economic distress they tend to sag. 2
Also on Tuesday, the Federal Reserve reported that industrial production for April increased by 0.5%, after being flat the previous months. Manufacturing output rose 1% in April after falling 0.8% in March. Autos and parts jumped 9.3% after a 1.9% decline in April. Excluding autos, manufacturing was up 0.4%. Additionally, business equipment rose 1.2%, mining, which includes oil and natural gas, rose 0.6%, and utilities output fell 3.1%. Capacity utilization increased slightly to 79.7% in April from the revised 79.4% for March. 3
Housing starts for April jumped 2.2% over the revised March estimate on solid demand from potential buyers with few options in the resale market. As a result, the pace of home construction for single-family rose by 1.6% while multi-family increased by 6.2%. However, building permits for future buildings fell 1.5%, with building permits for multi-family diving at 9.7% while single-family permits rose 3.1 in April.4
On Thursday, The Federal Reserve of Philadelphia reported for the ninth consecutive time another negative survey of general activity (rose over 20 points to a negative 10.4), new orders (increased 13.8 points to a negative 8.9), and shipments (rose marginally to a negative 4.7). The six-month business outlook plunged to a negative 10.3 from a negative 1.5 in the previous month.5 The US Labor Department reported that initial unemployment claims for May 13 decreased by 22,000 since last week for a total of 242,000. Continuing claims for benefits in all programs for the week ending April 29 fell by 29,380 to 1,685,985.6
Also on Thursday, the non-profit Conference Board released its latest Leading Economic Indicators index, a gauge of ten indicators designed to determine if the economy is improving or deteriorating. Signaling a coming recession, the index declined for the 13th consecutive month, falling 0.6% in April. Eight of the ten indicators comprising the index were lower for the month.7
Economic data continues to signal a recession in the coming quarters. While consumers are holding up, there are still signs of weakness. Equity markets have traded in a tight range over the last several weeks but are supported by the mega-stock tech sector. With the Nasdaq trading at 22 times forward earnings, a potential pullback would not be unexpected.
Warren Gerow is an independent investment wealth consultant at Sightline Wealth Management.
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