The May employment report along with a series of other indicators have formed an unmistakable picture of an economy that has hit a growth wall... just as we did at about the same point last year.
The monthly manufacturing surveys have uniformly turned weak again with most of them barely registering growth at all. The Kansas City Fed, for instance, has gone from a reading of 27 in march to 1 in May. Production and new orders fell off drastically, particularly in the case of new orders, falling to a reading of -15. Basically, this means that 15 percent more firms saw declining orders compared to rising orders. The ISM composite index demonstrated a similar collapse, though it is still in positive territory over 50:
Of course, there is the oil shock, which has clearly dampened consumer demand. With short lead times, it doesn't take much time for a slowdown in consumer demand to be translated into a drop in orders and then production.
The good news is that neither of these factors need be permanent. The bad news is that neither are of the magnitude to be causing a virtual standstill in economic growth, at least not for a genuinely healthy economy. This leads us to another drag which is a decline in state and local government spending and employment. As the expenditures by governments and their employees are part of what I would term the "base load" of demand, their diminution is particularly devastating.
If I were a betting man, I would wager that the economy and, by extension, the stock market, will survive this spell just as they did last year. However, that is provided that Congress doesn't do the ultimate in stupidity and actually default or even come meaningfully close to doing so. One of the reasons that the U.S. has a AAA credit rating is not just because we have never defaulted, but also because our political leadership has never even contemplated it. Even a close call could be enough to send financial markets into quite the tizzy.