Source: Jin10 Data
With multiple data showing economic activity cooling down, Wall Street is lowering its optimism for the US economy.
The US economy no longer surprises Wall Street. As recent data shows that economic activity is cooling down, forecasters' consensus has shifted from pursuing higher growth to lowering optimism.
This shattered hopes for a second consecutive year of unexpected acceleration in economic growth. Neil Dutta, Head of Renaissance Macro Economic Research, wrote in a report to clients on Monday, 'I find it hard to get overly excited about the economy. Things are good, but I would be hard-pressed to describe this as meaningful acceleration.'
Over the past year, the Goldman Sachs economic research team, led by Jan Hatzius, has been one of the most bullish on the state of the economy. But the company has lowered its expectations for US second-quarter GDP, cutting its annual growth rate from 3.2% on May 24 to 2.7% due to 'weaker momentum in spending' this quarter.
The Atlanta Fed's GDPNow model also predicts US second-quarter GDP growth of 1.8%, down from the previous forecast of 2.7%.
Before Dutta released his report on Monday, the Institute for Supply Management (ISM) released the latest data on manufacturing activity, which showed further contraction in activity last month. The May ISM Manufacturing Purchasing Managers' Index (PMI) for the US was 48.7, lower than both 49.2 and the economists' expected 49.5. The index had surpassed 50 in March for the first time since 2022, indicating expansion, but has been declining for the past two months.
Thomas Ryan, North American analyst for Macroeconomic Research at Nomura, wrote in a report to clients, 'The May ISM manufacturing index decline adds to a sense of the economy losing momentum.'
The PMI data is the latest weaker-than-expected economic data. Earlier, the April nonfarm payrolls report showed weaker-than-expected job growth, as the unemployment rate unexpectedly rose. After this report, April retail sales data was below expectations. The final Q1 GDP also unexpectedly declined at the end of May, largely due to a decline in consumer spending.
However, the US stock market remains unfazed by any signs of economic weakness, with all three major indexes hitting historic highs in May.
Many believe that the current economic data has opened the door for the Federal Reserve to cut interest rates, but the data does not show a complete slowdown in economic activity. Lower rates and slower growth may still be a favorable environment for the stock market. For example, after the weak nonfarm payrolls report was released in April, the S&P 500 rose by about 1.3%.
Ohsung Kwon, US and Canadian equity strategist at Bank of America, wrote in a report on Monday that whether economic growth further deteriorates will be key because for the stock market, 'bad news may no longer be good news.'
The next test of this theory will be in the nonfarm payrolls report released on Friday, which is expected to show an increase of 185,000 jobs added last month, with the unemployment rate remaining steady at 3.9%.
Kwon believes that data like this will keep the labor market in the 'Goldilocks' range, not too hot to cause worries about sticky inflation, but not too cold to exacerbate concerns about an economic slowdown.
Because inflation is still low, many Wall Street strategists also believe that if the slowdown in the economy is proven to be false, there is still room for the stock market to rise. Kwon said, 'Stronger growth should also be positive for the stock market.'
"Stronger growth should also be favorable for the stock market."
Editor / jayden