Monday Update: Consumers Confident, Business Investment Slowing

Posted by Brad McMillan, CFA, CAIA, MAI

This entry was posted on Mar 5, 2018 1:06:44 PM

and tagged In the News

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Monday updateThere were five major economic reports last week, which gave us a detailed look at both the consumer and manufacturing. This week, we’ll see three major reports, which will give us a view of the service sector, trade, and the job market.

Last week’s news

On Monday, the new home sales report dropped from 643,000 (revised up from 625,000) in December to 593,000 in January, well below expectations of 647,000. Although this was partially offset by the upward revision to previous months, it was still a weak report—and the third decline in the past four months. Labor and material shortages have contributed to weak construction levels, but the long-term trends remain positive. So, this may be more reflective of the supply side than the demand side, but it will bear watching.

On Tuesday, the durable goods orders report did even worse than already low expectations. The headline index dropped from growth of 2.8 percent in December to a decline of 3.7 percent in January, below an expected 2-percent decline. The headline number is extremely volatile, as it is driven by large variations in aircraft orders, so this drop is less worrying than it seems. The core orders number, which excludes transportation, also did worse than expected, however. Strong growth of 0.7 percent in December dropped to a decline of 0.3 percent in January, against an expected gain of 0.3 percent. The weak results show that business investment is likely to slow from the high levels of last quarter, which will be a headwind for growth.

The Conference Board’s consumer confidence survey, also released on Tuesday, did much better. It ticked up from 125.4 in January to 130.8 for February. This result was well above the expected 126 and the highest level since 2000. Both the present-conditions and expectations indices rose. With the effects of the recent tax cut showing up in paychecks, along with the strong labor market, the negative effects of rising gas prices and the stock correction were clearly more than offset. This is an extremely high level of confidence and should continue to support the economy.

On Thursday, the personal income and spending report gave us a look at the facts underlying the consumer confidence report. Income growth remained steady at 0.4 percent in January, against expectations of a decline to 0.2 percent. This number is soft, however, as it includes an estimate of additional income in post-tax bill bonuses, and the real gain may be less. Personal spending growth declined, however, down from 0.4-percent growth in December to 0.2-percent growth in January, as expected. Here, however, the underlying data is somewhat worse, with much of the gain coming from higher gas prices, rather than more constructive spending growth.

Finally, on Thursday, the Institute for Supply Management (ISM) Manufacturing index surprised to the upside. It rose from 59.1 in January to 60.8 in February, against an expected small decline. This is the highest level since May 2004, with 15 of 18 sectors showing expansion. Manufacturing continues to be supported by a weak dollar and strong global growth, and it should continue to be additive to the economy as a whole.

The other potentially significant economic news was the testimony of the new chairman of the Federal Reserve, Jerome Powell, to Congress on Tuesday and Thursday. His testimony suggested that the Fed remains optimistic about the economy and that a rate hike in March is very probable, along with further increases later in the year.

What to look forward to

On Monday, the ISM Nonmanufacturing index was released, which did better than expected. It dropped slightly from 59.9 in January to 59.5 for February, against expectations for a drop to 59. Although this index has been volatile in recent months, the trend has remained positive. Because this is a diffusion index, values above 50 indicate expansion, so even with the decline, the index still indicates strong growth. With the ISM Manufacturing index’s good results last week, this result shows business confidence remains strong across the board.

On Wednesday, the international trade report is expected to show that the trade deficit improved slightly, from $53.1 billion in December to $52.6 billion in January, on a rise in exports due to the weak dollar and strong global growth. There is some downside risk here, but if the numbers come in as expected, trade could be less of a drag than expected on economic growth in the first quarter of 2018.

Finally, on Friday, the employment report is expected to show continued job growth, with 200,000 jobs added in February, the same as in January. Wage growth is also expected to stay constant at a healthy 0.3 percent. Meanwhile, labor demand, as expressed by the average workweek, is expected to rise from 34.3 hours to 34.4 hours. There may be some upside risk here, as jobless claims have continued to drop and employment surveys have remained strong. Overall, if the report is as expected, it will be another positive signal for continued growth.

There’s one more piece of economic news to watch for: whether the White House follows through on the steel and aluminum tariffs President Trump announced last week. Markets around the world pulled back on the news, and any follow-through could result in more volatility.

Have a great week!

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