April 6, 2015 —The past week included another slew of evidence that the domestic economy continued to slow significantly in March. Wednesday’s ISM Manufacturing Index continued a recent trend of disappointing manufacturing data. At 51.5, it was the lowest reading for the index since May 2013 and it missed consensus expectations for the fourth straight month – the longest string of disappointments since August 2012. Among the headwinds cited by the survey’s respondents were references to the West Coast port shutdown, a harsh winter, and the strong U.S. dollar. Friday’s jobs report was another reality check for the U.S. economy, with nonfarm payrolls increasing just 126,000, undershooting consensus expectations by nearly half. The prior two months of job gains were also revised down by 69,000 jobs and the average workweek shortened by 0.1 hours. One of the few encouraging elements of the jobs report was an uptick in average hourly earnings. Nonetheless, the jobs report capped off the generally disappointing economic data of the past month.
Despite generally disappointing domestic economic data in recent months, credit market metrics have yet to signal the type of stress typically seen heading into prolonged economic downturns. However, last week provided one of the first pieces of evidence that credit conditions may be deteriorating. The NACM’s Credit Manager’s Index indicated the amount of credit extended dropped by the most on record over the past two months and the rejections of credit applications also spiked to the highest level in the history of the data (dates back to 2002). At this point, credit spreads and other credit market surveys are not indicating a significant tightening of credit conditions. However, if the deterioration evident in the NACM’s survey begins showing up in other indicators of credit-market health it would have very negative implications for the intermediate-term economic outlook. The mounting evidence of slowing growth and deteriorating credit conditions that emerged in the past week have important implications for Fed policy and heighten the probability that the start of the rate normalization cycle will not begin until September or later. With the majority of major economic data releases out of the way, the attention of investors is likely to turn to the first-quarter earnings season. Although expectations are already very low, extremely broad weakness in earnings outside of the energy sector would call into question the sustainability of current market valuations.