US Macro Data Point to Economic Slowdown

We got a range of macroeconomic data out of the US on Friday. The overall takeaway was decidedly negative. Here’s the quick breakdown.

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Services and Manufacturing PMI

The US Services PMI fell to a 2-year low of 49.7 in February, down from 52.9 in January and far below the 53.0 forecast. With anything below 50 indicating contraction, this was not a positive reading for the health of the economy.

“The deterioration in February was primarily a reflection of increased uncertainty about the business environment, especially in relation to federal government policies related to domestic spending cuts and tariffs,” S&P Global said.

However, the Manufacturing PMI came in slightly above forecast at 51.6. Some media outlets mention forecasts of 51.8 and 52.0 though. Either way, this wasn’t a terrible reading by any means. It was also the highest level since July last year.

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US existing home sales

US existing home sales decreased 4.9% last month to a seasonally adjusted annual rate of 4.08 million units. Economists had expected a rate of 4.12 million.

The median existing home price increased 4.8% from a year earlier to $396,900 in January.

The data undoubtedly points to a slowdown in the housing market, at least short-term. Some choose to see that as a negative while others view it as the beginning of a return to a more natural, balanced market.

One interesting note is that at January's sales pace, it would take 3.5 months to exhaust the current inventory of existing homes. That’s up from 3.0 months a year ago. Analysts generally see a 4-to-7-month supply as a healthy balance between supply and demand. This latest figure thus moved us closer to a healthy market.

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US consumer confidence

US consumer confidence plummeted in February. The latest University of Michigan survey showed the index at 64.7, down 9.8% from January and 15.9% from a year ago. It was also well below consensus for 67.8.

The one-year inflation expectation jumped to 4.3%, the highest since November 2023. The five-year expectation rose to 3.5%, the highest reading since 1995.

When consumers lack confidence in the state of the economy and worry about inflation, they’re much more likely to pull back on spending. Sentiment can thus become a self-fulfilling prophecy, with purchasing behavior inducing the economic slowdown consumers are worried about in the first place.

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The market reaction

Investors clearly perceived the data as negative. At least as judged by the immediate market reaction.

• US stocks sold off throughout the day on Friday. The S&P 500 lost 1.7% while the Nasdaq Composite dropped 2.2%. The Russel 2000 retreated 2.9%.
• The 2-year and 10-year treasury bond yields both dropped 1.7%, to 4.20% and 4.43% respectively.
• Additionally, the likelihood of additional rate cuts from the Fed went up, according to interest rate traders. The likelihood of a cut coming already in May jumped from 18.5% a week ago to 30.5% after Friday’s data. The market now sees the first cut coming in June, a month earlier than a week ago. The most likely scenario for the end of 2025 is now two rate cuts vs just one cut a week ago.

An economic slowdown would hurt businesses and the stock market in the short term, but also pave the way for lower rates and more stimulus to come. We need more data than what we got on Friday to draw any clear conclusions, but it seems like this is the direction we’re currently heading in.