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Last week, results came in mixed for the large number of data releases. Highlights included better-than-expected results for two major consumer surveys and fourth-quarter GDP growth. This week, the focus will be on the business side of the economy, with updates on manufacturer and nonmanufacturer confidence, international trade, and employment all on tap.
Last week’s news
We started off the week with Monday’s release of the December new home sales report. Sales came in lower than expected, falling 0.4 percent during the month against expectations for a 1.5 percent increase. New home sales are a relatively small portion of overall sales, however, and the results can often be more volatile than existing home sales on a monthly basis. So, despite the disappointing result, if we look at longer-term trends, new home sales are continuing to exhibit strong growth. Growth in year-over-year sales was up to 23.7 percent compared with December 2018. As for the supply of new homes on the market, this factor remains constrained. But the uptick in construction we’ve seen recently could help fuel future sales growth as more homes become available for purchase. Given the strength in year-over-year growth and the potential tailwinds from new construction, this disappointing monthly result is nothing to be worried about for the time being.
On Tuesday, December’s durable goods orders report for December was released. Headline durable goods orders beat expectations, growing by 2.4 percent month-over-month against expectations for 0.3 percent growth. This result was due to a rebound in volatile defensive aircraft orders, the sector that was the major cause of November’s downwardly revised 3.1 percent decline in orders. Core durable goods orders, which strip out the impact of volatile transportation orders, declined by 0.1 percent during the month, missing the predicted 0.3 percent growth. December marks the second straight month with declining core orders, following a 0.4 percent drop in November. Core durable goods orders are used as a proxy for business investment, so this trend is cause for concern. It’s not surprising, however, given the lackluster business confidence figures we saw in the fourth quarter.
Speaking of confidence, Tuesday also saw the release of the Conference Board Consumer Confidence Index for January. Confidence increased by more than expected, with the index rising from an upwardly revised 128.2 in December to 131.6 in January. Economists had anticipated a modest move to 128, but confidence now sits at a four-month high. Both the current reading and expectations for future subindices increased in January to their highest levels since August. These strong results are especially impressive given the geopolitical risks that captured headlines in January, including the escalation of tensions between the U.S. and Iran, the spread of the coronavirus from China, and the impeachment proceedings in the U.S. Improving consumer confidence supports additional spending growth, so this result was a very encouraging start for the year.
On Thursday, the first estimate for fourth-quarter GDP growth was released. The economy grew at an annualized rate of 2.1 percent during the quarter, which beat economist estimates for 2 percent growth. This result was in line with the 2.1 percent growth rate we saw in the third quarter. Net trade was the major driver of fourth-quarter growth, as a sharp drop in imports and a modest increase in exports created a tailwind for domestic growth. Personal consumption growth, which was the primary cause of overall growth in the second and third quarters, fell to 1.8 percent. That result was down from 3.2 percent in the third quarter and below estimates for 2 percent growth. The drop in consumption, combined with the sharp decline in imports, indicates that consumer spending cooled off moderately in the fourth quarter. Overall, economic growth for the year came in at 2.3 percent, down from the 2.5 percent growth we experienced in 2018. But, despite the slowdown in 2019, it’s important to remember that slow growth is still growth and certainly better than the alternative.
On Friday, December’s personal income and personal spending reports were released. Both income and spending increased, with incomes rising by 0.2 percent and spending going up by 0.3 percent. Economists had forecasted 0.3 percent growth for both figures. Income growth was negatively affected by a large drop in farm subsidies related to the trade war, which held back overall growth. Despite this volatility, personal income and spending grew at a similar pace throughout 2019, indicating that the spending growth we saw during the year was sustainable. On a year-over-year basis, personal income rose by 4.5 percent in 2019, while spending grew by 4 percent. These solid results to the end the year indicate that the slowdown in consumption to start the fourth quarter was transitory.
Finally, we finished the week with the second and final reading of the University of Michigan consumer confidence survey. Consumer confidence increased during the month, up from 99.1 midmonth to 99.8 at month-end. Economists had forecasted no change for the index. The current result brings the index to an eight-month high, which is very impressive given that it hit a three-year low in August. This swift recovery despite ongoing geopolitical uncertainty is encouraging for the new year. With both of the major consumer surveys beating expectations, the prospects for faster consumer spending growth in the first quarter are strong.
What to look forward to
We started the week with Monday’s release of the ISM Manufacturing index. This measure of manufacturer confidence rose sharply from 47.2 in December up to 50.9 in January, well above the expected increase to 48.4. This is a diffusion index where values below 50 indicate contraction, so this result takes manufacturing back to expansion and is an encouraging result. Manufacturer confidence fell sharply in 2019, so this rebound may be a sign that the phase one trade deal between the U.S. and China is starting to bolster manufacturer confidence.
On Wednesday, December’s international trade report is set to be released. Economists expect the trade gap to widen, partially offsetting the November tightening that shrunk the deficit to a three-year low. The November result was due to a sharp drop in imports, caused by businesses preparing for new tariffs on Chinese goods to go into effect in December. According to advanced trade data, however, we’ll get a rebound in imported goods in December. Trade data will likely remain volatile as negotiations between the U.S. and China continue. There is some hope, however, that things will settle down slightly with the signing of the phase one trade deal between the two countries in January.
On Wednesday, the ISM Nonmanufacturing index is scheduled for release. This index, which measures service sector confidence, should increase modestly from 55 in December to 55.1 in January. This is another diffusion index, where values above or below 50 indicate expansion or contraction, respectively. Accordingly, this result would be welcome, especially if manufacturing confidence also rises in January. The ISM Composite index (which combines manufacturer and service sector confidence) currently sits at a four-month high. Increased business confidence supports additional business investment, so further advances in this index would certainly be a positive development.
On Friday, January’s employment report is set for release. Economists anticipate that 160,000 new jobs will be added during the month, a step up from the 145,000 created in December. The underlying data is also expected to be solid. The unemployment rate should remain at 3.5 percent, while average hourly earnings growth is likely to increase by 0.3 percent. While the pace of new job creation slowed to start 2019, results in the fourth quarter largely beat expectations. Consumers cited the strong job market as a primary factor for increased confidence in January. Continued strength in employment would be another welcome signal that economic growth has picked up after moderating in 2019.
That’s it for this week—thanks for reading!
