The last couple of months have been characterised by some weak but 'relatively positive' surprises in macro economic data compared to dismal expectations; but that rising momentum has begun to fade very recently. Sagging domestic growth and weak external demand have created noticeable slowdowns in the industrial production and manufacturing sector. This, as Bloomberg Brief notes, has been the area of the economy that has been the primary driver of growth throughout the recovery and represents the greatest risk to the current economic outlook for sub-trend growth at or below 2 percent. As Joseph Brusuelas points out, these disappointing charts indicate, fiscal gridlock aside, the deterioration in the industrial sector is a 'dagger pointed straight at the heart of a weak cyclical expansion'.
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The current challenge to the economy is that the risk of a truncated business cycle due to a modest inventory correction is rising. This is in part due to restrained domestic wage growth and a sharp slowdown in demand from the external sector.
While investors have been nothing short of giddy about the open market transactions by the European Central Bank and the third round of asset purchases from the Fed, it is difficult to see how those actions will do little more than prevent another downturn, let alone push overall output in the U.S. toward its potential.
Source: BloombergBriefs.com