Today's release of March durable goods orders data did not paint a pretty picture.
Total orders fell 5.7%, orders excluding transportation fell 1.4%, and nondefense capital goods orders excluding aircraft and parts (a.k.a. "core capex") grew a meager 0.2% (all worse than expected).
To top it off, all of the February numbers were revised down substantially.
So, the question going forward, says Miller Tabak Chief Economic Strategist Andrew Wilkinson, "is how much of the miss is attributable to external factors compared to domestic issues."
In an email following the release, Wilkinson argues it's likely the rest of the world that is dragging the U.S. economic data down at the moment:
Arguably the international headwinds are tougher than those related to the onset of sequester. According to most surveys, business leaders seem prepared to maintain an optimistic attitude about the future. But one thing is for sure: The domestic situation must at least be reinforced by firmer demand once the sequester becomes an accepted way of managing the deficit.
Finally, it is important to note that while orders fell, both capital goods demand held up as did shipments. While it might be a stretch to rely purely on buoyancy of shipments as evidence of a silver lining from the March report, the road ahead may rise to deliver a rebound particularly if domestic demand withstands the sequester, as we believe it will.
Markit's flash PMI reading out yesterday seems to indicate the opposite – domestic demand growth is slowing, while international demand growth is picking up.
The new orders sub-component of yesterday's PMI release fell sharply to 51.8 from February's 55.4 reading, while the new export orders sub-component actually increased to 52.2 from 51.8.
In other words, according to Markit's flash PMI report, international demand growth is now outpacing total demand growth.
BofA rates guru David Woo opined recently that the market is underestimating the effects of sequestration on domestic demand. In a note to clients, he wrote:
In our view, the market continues to underestimate the headwinds associated with the implementation of the sequester. Our US economist team estimate that this will amount to about $50bn worth of fiscal tightening over the next six months , equivalent to an annualized rate of $100bn.
If we were to assume that this will primarily take the form of reduced wages/salaries of government employees and contractors and that most of the hit will occur in Q2, this could result in a very dramatic shock to household income. This is why our US economics team continue to maintain their below consensus GDP growth forecast for the next two quarters.
Regardless of where the weakness is, it seems like investors have begun to position for a global slowdown in 2013.
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