Did Stocks Get Too Bullish on Economic Growth?

The latest decline in longer-term Treasury yields in the face of very strong US economic data suggests the markets have begun to question the sustainability of the economy's recent strength.  Stocks risk pulling back as a result, since they reacted noticeably to last week's strong prints.  A pullback should be modest and temporary, however,  as the stock market's rally should remain supported by above-consensus corporate earnings releases in the next few weeks. 

The extraordinarily strong March US economic data probably overstate the underlying strength of the recovery.  Temporary boosts from weather rebounds and the injection of stimulus funds likely accounted for some of the large gains.  Nevertheless, growth should remain above trend in coming months.

The boost from better weather was clearly seen in March Housing Starts/Permits data.  All the increase in Permits was in the South and Midwest, which had suffered badly from weather in February.  The Midwest and South saw most of the increase in Starts.  Northeast did also.  All three posted declines in February.  Starts in the West fell in March, after they had risen in the prior month.  The February-March average is 1.60 Mn Units.  It is somewhat less than the 1.656 Mn December-January average, so there may be some flattening in trend -- which is close to the level estimated to be the long-run level of demand for housing.

The Mid-April University of Michigan Consumer Sentiment Index also raised questions about the sustainability of the recent surge in economic activity.  The Expectations Component, at 79.7, is well below the 97.2 Current Conditions Component, suggesting people view the recent strength to be somewhat temporary.  

The Unemployment Claims and manufacturing survey data, like the Current Conditions Component, suggest growth is still well above trend in April.  But, the latest w/w drop in Initial Claims, -193k to 576k (a new low for the move down) could have been impacted by the Easter holiday.  So, the low level needs to be confirmed in this week's report.  If they are, it would be solid evidence that growth remains above trend this month.

The Philadelphia Fed and  NY Empire State Mfg Surveys both point to a very high Mfg ISM in April.  Even so, the chip shortage is restraining some manufacturing activity.  For example, while motor vehicle assemblies rose to 9.3 Mn units in March from 8.9 Mn in February, they remained below the 10.7 Mn in January.  But, all this means is that motor vehicle production will strengthen as chips become more available.