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Wall Street is having trouble getting “too excited” about the US economy
The US economy is no longer shocking Wall Street to the positive.
The economic consensus has changed from forecasters chasing the data higher to reduce the levels of optimism so recent data shows cooling activity across a variety of metrics.
This dampened hopes that economic growth could accelerate unexpectedly. for the second year in a row.
“I’m having a hard time getting too excited about the economy,” Renaissance Macro head of economic research Neil Dutta wrote in a note to clients on Monday.
“Conditions are good, but I would hardly describe the situation as consistent with a significant acceleration.”
The Goldman Sachs economic research team, led by Jan Hatzius, was among the most optimistic about the state of the economy last year. But the company lowered its estimate for second-quarter GDP to reflect an annualized growth rate of 2.7%, from 3.2% on May 24, amid “weak spending momentum at the start of the quarter.”
Likewise, the Atlanta Fed’s GDPNow indicator — which uses data from the entire quarter to extrapolate the pace of GDP — fell to 1.8%, after being above 4% in early May.
Dutta’s Monday note followed a new reading of activity in the manufacturing sector from the Institute for Supply Management (ISM), which showed activity fell further into contraction last month.
The ISM Production PMI recorded a reading of 48.7 in May, below the reading of 49.2 and lower than the 49.5 expected by economists, according to Bloomberg data.
After entering expansion territory with a reading above 50 in March for the first time since 2022the index has fallen in the last two months.
“The drop in the ISM manufacturing index in May adds to the sense that the economy is losing momentum,” wrote Thomas Ryan, an economist at Capital Economics North America, in a note to clients.
The story continues
The drop in PMIs is the latest economic data that points to a weaker result than expected.
In early May, the April employment report showed US job growth was weaker than expected as the unemployment rate unexpectedly rose. A softer-than-projected reading on retail sales in April followed this report. At the end of May, a decrease was recorded in the second estimate of economic growth for the first quarter. largely driven by lower consumption.
The stock market calmly accepted any signs of weakening in the economy, with all three major indices hitting record highs in May.
The correlation between the Citi Economic Surprise index and the S&P 500 has been approaching a negative correlation, meaning that stock investors have increasingly embraced bad economic news as good news for stocks.
Many consider that current economic data opens the door to interest rate cuts by the Federal Reserve, although it does not signal a total recession in economic activity. Lower rates and slower growth could it will still be a constructive environment for actions.
Following April’s weak employment report, for example, the S&P 500 rose about 1.3%.
U.S. and Canadian equity strategist Ohsung Kwon of Bank of America wrote in a note Monday that it will be critical for economic growth to deteriorate further as “bad news can turn into bad news.” also for actions.
The next test for this narrative will come on Friday, with the release of the May jobs report.
The report is expected to show that 185,000 nonfarm jobs were added to the U.S. economy last month, with unemployment holding steady at 3.9%, according to Bloomberg data.
Kwon believes that an impression like this would keep monitoring the job market in the “Goldilocks” range – not too hot to fuel fears of sticky inflation and not too cold to raise concerns of a slowdown.
With inflation still tracking lower, Many Wall Street strategists also see room for stocks to rally if a slowing economy turns out to be a hoax.
“Stronger growth should also be positive for stocks,” Kwon said.
The Wall Street sign is seen with US flags outside the New York Stock Exchange in New York on June 16, 2022. (YUKI IWAMURA/AFP via Getty Images) (YUKI IWAMURA via Getty Images)
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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