Last week was a busy one in terms of economic updates, as we continue to see the release of data that was delayed by the government shutdown. This week should also be full and provide further insight on whether the recent spate of weak data is likely to continue.
Last week’s news
On Tuesday, December’s housing starts disappointed. They dropped from a downwardly revised 1.214 million to 1.078 million, well below the expected flat result of 1.256 million. This result is consistent with the recent sharp decline in homebuilder confidence in December. But homebuilder confidence has rebounded to start the year. So, any weakness in housing starts may be temporary, and a small increase in building permits suggests that may be the case.
Also on Tuesday, the Conference Board’s survey of consumer confidence showed a significant bounce after a decline at year-end. It went from 120.2 to 131.4, which was well above expectations. The end of the government shutdown, along with the improvement in the stock market, appears to have brought confidence back close to previous highs, which should be positive going forward.
On Thursday, the first estimate of fourth-quarter GDP growth was released, with solid 2.6-percent economic growth on an annualized basis. This figure is down from the 3.4-percent annualized rate we saw in the third quarter but well above expectations for 2.2-percent growth. The slowdown in the fourth quarter was partially driven by a decline in consumer spending at year-end, as December’s retail sales suffered the biggest monthly drop since 2009. Given the bounce in consumer confidence, this drop—as with the housing numbers—could be temporary.
On Friday, we saw the release of January’s personal income report and December’s personal spending report. Both were disappointing, with income dropping by 0.1 percent, down from a 1.1-percent increase the previous month and well below expectations for a 0.3-percent increase. Spending also pulled back, down by 0.5 percent after an upwardly revised 0.6-percent increase the previous month. These are obviously weak numbers, but as with homebuilder and consumer confidence, they may reflect the shutdown more than anything else.
Finally, also on Friday, the Institute for Supply Management (ISM) Manufacturing index disappointed. It declined from 56.6 in January to 54.2 in February. This is a diffusion index, where results over 50 indicate expansion. So, this slight decline is not an immediate concern but is still one more sign of weakness going forward. Against that, continued trade talks with China have helped bolster manufacturer confidence in the face of slowing global trade. So, there is certainly the potential for improvement.
What to look forward to
On Tuesday, the ISM Nonmanufacturing index is expected to rise slightly, from 56.7 to 57.2, after a significant drop in recent months. This is a diffusion index, where values greater than 50 indicate expansion and less than 50 indicate contraction. So, this would be a very healthy figure.
On Wednesday, the international trade report is expected to show the trade deficit has worsened, going from $49.3 billion to $54.2 billion, after an improvement last month. Advance reports show that the goods deficit rebounded in December, as exports have continued to decline. If the data comes in as expected, this will be a headwind to fourth-quarter growth.
On Friday, the employment report is expected to decline from 304,000 in January to 185,000 in February. The unemployment rate likely will tick back down to 3.9 percent from 4 percent, while wage growth is expected to rebound from 0.1 percent to 0.3 percent. These results would provide more assurance that economic fundamentals are sound, despite recent weakness.
This week’s data will also shed some light on the housing market. On Friday, the housing starts report is expected to show a rebound from 1.08 million to 1.18 million, annualized. While this recovery would be helpful, recent weakness has been widespread enough that it would suggest only stabilization.
Thanks for reading and have a great week!