Bad bunch of economic data is not good news for stocks with the Fed already on hold

Economists definitely see a slowing economy, and on Thursday JP Morgan economists cut their forecasts for first quarter growth to 1.5 percent, on top of a lowered 1.4 percent for the fourth quarter. Many economists still see growth holding just above 2 percent.

But one problem is that the government’s 35-day shutdown, not only could have been a temporary negative drag on the economy, but also slowed the release of economic reports, creating an even murkier than normal look at economic activity.

“The data we’ve been looking at recently is just like all over the map. There’s no really clear pattern to things,” said Ward McCarthy, chief financial economist at Jefferies. “Some things look really bad, some things look good, some things look in the middle. The data that was the most trustworthy was the durable goods number which continues to show the drop off in cap ex spending and according to the survey data, it’s due to uncertainty over the trade war.”

While durable goods for December rose 1.2 percent, economists were watching the core capital goods orders which fell 0.7 percent, on top of a decline of 1 percent in November. That number reflects capital equipment, or business spending, an area that was expected to have been boosted by tax reform.

Stocks have been boosted by optimism over trade talks with China but it’s clear the Fed has been watching the impact of trade on the economy as one of the risks behind its decision to hold off on rate hikes. When the Fed first began discussing a potential ‘pause’ in rate hikes in December, stocks were selling off and the markets were gripped by fear of a potential recession.

“The Fed put itself on the shelf…They basically have just said we’re going to be patient with everything. If you get bad data, they’re going to be patient with that,” said McCarthy. “The Fed just wants to be in the backdrop, and I think that’s a good place for them to be, not just because of the way the data looks but because of all the uncertainties which could be disruptive, like trade and politics. As a consequence, they want to make themselves removed from the scape goat role.”

Some of the fogginess around the data is expected to lift as the economy moves away from the shutdown, which was started in late December but mostly spanned the first weeks of January, in the first quarter.

If the trade discussions between the U.S. and China lead to an eventual deal, economists expect the economy to reflect the end of uncertainty and it could pick up. Even so, JP Morgan economists are expecting growth to pick up to 2.25 percent in the second quarter.