While we have been talking about the economic weakness that has been in the underlying data yet completely neglected by the mainstream media – it is hard to ignore such a massive miss this morning in the Philly Fed Survey. This is also the first indicator, of several coming, combined with the receipt slack in the import numbers, that GDP will be revised down to below 2% growth most likely in the coming quarter or two. This, of course, completely screws the budget analysis which has been relying on 4% GDP growth going forward to “infinity and beyond” as well as the impact that we have been warning about as the “fly has hit the windshield” in Japan.
The Philadelphia Fed collapsed from a revised 43.4 (a 27 year high) to 18.5, the lowest since November 2010. And here is why even the Philly Fed admits indicators suggest slower growth – “The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from 43.4 in March to 18.5 this month. The demand for manufactured goods, as measured by the current new orders index, showed a similar slowing: The index fell 22 points, following seven consecutive months of increase. The shipments index declined 6 points and remained at a relatively high level….A majority of firms continue to cite price pressures, and a significant share of firms reported higher prices for their own manufactured goods again this month.”
Of course, the one factor that we have been talking about as of late has been the rise in input prices [read: commodities] and whether or not this can be passed along to corporations. “Firms continue to report price increases for inputs as well as their own manufactured goods. The prices paid index declined 7 points this month but remains about 45 points higher than readings just seven months ago. 59% of the firms reported higher prices for inputs this month, compared to 64% last month. On balance, firms also reported an increase in prices for their own manufactured goods: The prices received index increased 5 points and has steadily increased over the last eight months. 30% of firms reported higher prices for their own goods this month; just 3% reported price reductions” So far it appears that manufacturers have been able to pass along price increases so impacts to profit margins at the moment should be small, however, the question remains for how long.
With market valuations already stretched and year-over-year comparisons for corporate earnings become more difficult there is much more room for a downside correction in stock prices than there is for further advance. Caution is advised.