Monday Update: Business and Consumer Confidence Still Rising

Posted by Brad McMillan, CFA, CAIA, MAI

This entry was posted on Dec 12, 2016 3:26:33 PM

and tagged In the News

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monday updateOnce again, last week’s economic reports were surprisingly strong, with most consumer and business data beating expectations, often significantly.

A look at last week’s news

Last week gave us a fairly broad look at the economy. For business, the ISM Non-Manufacturing Index came in with a surprisingly strong increase to 57.2 for November, its highest level in more than a year, up from 54.8 the prior month and well above expectations of an increase to 55.5. Strong details included a move in the employment index to 58.2, suggesting that job growth should remain strong. Combined with the ISM Manufacturing Index report last week, economic growth looks likely to remain around 2.5 percent or better.   

The international trade report showed that the U.S. trade deficit widened again, from $36.4 billion to $42.6 billion, on a reversal of a surprising surge in soybean sales abroad. Net trade should turn from a tailwind to a headwind for growth in the fourth quarter, but this was expected and should be minor.

Finally, the University of Michigan consumer confidence survey ratified the Conference Board’s results, with a major increase from 93.8 to 98.0, well above the expected 94.1 and the highest level in almost two years. On both an absolute and change basis, the result suggests that consumers will continue to grow their spending strongly, further accelerating economic growth.

The week ahead

Wednesday’s retail sales report should tell us whether consumers are spending in line with their confidence levels. Expectations are for slower growth in headline sales, down from an unusually strong 0.8-percent increase in October to a still positive 0.3 percent. There is some downside risk here, as auto sales growth has declined. Core retail sales growth, excluding autos, is expected to be better, dropping only to 0.5 percent, which is still indicative of strong economic growth.

Also on Wednesday, we’ll get a look at the industrial sector. Industrial production is expected to have dropped by 0.2 percent in November, from an increase of 0.1 percent the prior month, on continued weakness in utility production, driven by warm weather. Manufacturing, excluding utilities, is expected to drop even further, from a gain of 0.2 percent to a decline of 0.4 percent, suggesting a pause in the industrial recovery.

On Thursday, consumer price data is expected to show an increase of 0.2 percent on the month and 1.7 percent on the year (down from 0.4 percent monthly and up from 1.6 percent annually), on base effects as the price of oil continues to rise. Core prices, which exclude energy and food, are expected to rise faster, by 0.2 percent monthly and 2.2 percent over the prior year (up from 0.1 percent and 2.1 percent, respectively). This is a well-established trend and should not affect either growth or markets.

Also on Thursday, the National Association of Home Builders will release its industry survey, which is expected to remain at a strong 63. On Friday, housing starts are expected to drop from 1.323 million, the highest level since mid-2007, to a still strong 1.23 million.

The other economic event this week is the Federal Reserve’s interest rate announcement on Wednesday , with markets expecting an increase of 25 basis points. Expectations are so strong, in fact, that a failure to raise rates would be a surprise. The real thing to watch will be how the committee’s expectations for future growth and rate moves have changed since the election.

Have a great week!

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