Weekly Market Commentary – May 25

An interesting week, this past one. Economic news was, on balance, not good. Yet investors’ reactions were muted, and the market did, shall we say, okay.

In general, macro-economic data is historic. That is, it reports on the past (for example, the net number of new jobs created last month) and investors and analysts think about the past as an indicator for the future. We refer to these as backward-looking data. Once in a while we get forward-looking data. One such statistic is orders for durable goods. These are orders placed with manufacturers for cars, dishwashers, industrial equipment, etc. They rose 0.2% in April, which would seem optimistic. However, because orders for transportation equipment (particularly aircraft) tend to be extremely volatile month-to-month, market participants subtract this sector from the index, as not being reflective of the trend. Ex-transportation, durable goods orders actually declined 0.6% last month, a continuation of a negative reading from the month before.

I was not too upset with this number. Sure, as a forward-looking statistic it should have more influence on expectations than extrapolating backward-looking statistics. But, in my experience, durable goods orders are very volatile, and I need at least one more month to proclaim a negative trend. A larger concern for me was the FDIC’s (Federal Deposit Insurance Corporation) quarterly survey of bank lending. Loan balances fell by 0.8% over the first quarter. Commercial and industrial loans to large borrowers expanded, but every other category contracted, including loans to small businesses, which tend to be a catalyst for the economy’s rebound from recession.

Worse news emanated from Europe. The “Purchasing Managers’ Index” for the countries using the euro fell in May, the fourth straight negative month. It stands at 45.9, the lowest it’s been in three years. What does 45.9 mean and why is it so bad? All you need to know is that 50 is the mark between expansion and contraction. (PMI is a “diffusion index,” so 50 is the break-even point. Please call me when you’re bored, and I’ll explain how the numbers are gathered, tabulated and calculated to form the index.) Most worrisome, I think, is that the index hit 49.6 in Germany, the first time it crossed 50 there in six months.