Monday Update: Business Confidence Pulls Back, But Remains High

Posted by Brad McMillan, CFA, CAIA, MAI

This entry was posted on Apr 9, 2018 11:28:04 AM

and tagged In the News

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Monday updateLast week was a busy one for economic news, starting with the major business surveys. Inflation will be the focus this week, with producer and consumer prices due in the first half.

Last week’s news

On Monday, the Institute for Supply Management (ISM) Manufacturing index dropped slightly, from an extremely strong 60.8 in February to 59.3 for March. This was slightly below expectations of 59.7 but still a very strong number. The February result was the highest in almost 14 years, and the pullback still leaves it at a very strong level. This is a diffusion index, where numbers above 50 indicate expansion, so this report shows strong expansion.

On Wednesday, the ISM Nonmanufacturing index also dropped, but again from a very strong level to one almost as strong. The February result of 59.5 ticked down to 58.8, slightly below expectations of 59. This is not quite as good as the ISM Manufacturing index, but it is still indicative of strong growth. Between the two results, business looks to continue as a positive force for the economy.

The international trade report, on Thursday, is expected to show a worsening of the trade deficit, from $56.6 billion in January to $57.6 billion in February. Exports rebounded while import growth moderated, but one-time factors pulled the final result down. Trade will likely weigh on growth in the first quarter, but the numbers do seem to be improving overall.

Finally, on Friday, the employment report showed surprisingly low job growth. It dropped from an upwardly revised 326,000 in February to 103,000 in March, well below expectations of 185,000. While the March number is quite weak, this is a very volatile series. March was the weakest in six months, yes, but the February number was the highest in more than two years. On a trend basis, job growth has been higher in 2018 than in 2017, so this weak report is likely an outlier. Further supporting this idea is that the unemployment rate remained steady at 4.1 percent, while wage growth rose by 0.3 percent on a monthly basis and 2.7 percent on an annual basis. Overall, while the headline number is indeed weak, job creation remains in an uptrend—and that signals continued growth.

What to look forward to

On Tuesday, the headline producer prices report is expected to show a 0.1-percent increase for March, down from a 0.2-percent increase in February due to lower energy prices. On an annual basis, the change is expected to move from 2.8 percent to 2.9 percent. The core index, which excludes food and energy and so is a better economic indicator, is expected to increase by 0.2 percent for March, as it did in February. The annual figure also is expected to increase from 2.5 percent to 2.6 percent. This would be a six-year high in producer prices, reflecting the dollar’s depreciation and the consequent rise in import prices. These results are well above the Fed’s target range and would boost the chances for a rate hike in June.

On Wednesday, we’ll get a look at consumer prices. The headline index is expected to drop from 0.2-percent growth in February to flat in March—again due to a decrease in gas prices. The annual figure, though, is expected to tick up from 2.2 percent to 2.3 percent, as weak March data from 2017 drops out of the calculation. Core inflation, which excludes food and energy, is expected to remain stable at a 0.2-percent growth rate for March. But the annual figure is expected to rise to 2.1 percent from 1.8 percent. As with producer prices, these figures are above the Fed’s target and would support a rate increase if they come in as expected.

Speaking of the Fed, on Wednesday the central bank will release the notes from the March meeting of its Open Market Committee. The notes will provide more details on the Fed’s decision to raise rates last month, as well as what would drive more hikes this year. As the Fed voters are split on how many increases this year would be appropriate, markets will examine the minutes closely in the context of the inflation data for suggestions that rate increases might come faster than expected.

Finally, on Friday, the University of Michigan will release its consumer confidence survey. Sentiment is expected to tick down from a very high 101.4 in March to a still high 101 in April. There is probably some downside risk here, as recent turmoil in the financial markets may have shaken confidence, but the strong job market and low gas prices should keep confidence elevated. High confidence would be constructive for the economy going forward.

Have a great week!

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