U.S. Stocks Drop On Bad, But Unbelievable, Economic Data
February 4, 2014, Tuesday, 17:05 GMT | 12:05 EST | 21:35 IST | 00:05 SGT
Today the bad news on the U.S. economy is having way more influence on the markets than the good news—even though the good news is way more credible.
In the bad news camp: Today, the Institute for Supply Management’s Purchasing Managers Index for Manufacturing dropped to 51.3 in January from 56.5 in December. That drop, the biggest one-month decline since October 2008, left the index barely above the reading of 50 that separates expansion from contraction. Economists surveyed by Briefing.com had projected a drop to 56 for January.
The number frankly seems whacky. There have been signs in other data—in orders for durable goods, for example—of some weakness in the economy, but nothing like this plunge.
The most recent regional survey from the Federal Reserve banks actually showed a slight improvement in manufacturing. To go from that reading to a plunge that echoes the collapse in the aftermath of the global financial crisis seems, well, beyond odd. Some of the below-the-headline numbers are even stranger—new orders fell to 51.2 in the January survey from 64.4 in December. That is the biggest one-month drop since — no, not since the global financial crisis – December 1980.
To believe this report, you have to believe that the economy has somehow crashed without it showing up in other data. (The Institute for Supply Management has raised the possibility that some of the weakness could be because of extreme cold weather in January. If that is the case, then today’s negative reaction to the news is overdone and I would expect a big bounce back in the survey in February.)
On the good news front, the Federal Reserve’s quarterly survey of bank credit conditions reported today that banks are easing their lending standards for many types of business and consumer loans in the face of increased loan demand. Over the last three months, the Fed reported, banks have loosened lending standards for commercial real estate, all sizes of commercial and industrial loans, and many types of consumer loans. The one exception is mortgage lending where banks report a drop in demand.
This is the kind of relaxation in lending standards and increase in loan demand that the Fed has been working to encourage.
The economic recovery has been so anemic, the Fed believes, because banks have been unwilling to lend and companies have been unwilling (or unable) to borrow.
Bank lending officers also told the Fed that they expect a drop in delinquencies on business loans, a fall in mortgage delinquencies, and an improvement in credit-card loans in 2014.
The Dow Jones Industrial Average closed down 2.08% or 326 points today. The Standard & Poor’s 500 dropped 2.27%.