Monday Update: Growing But Slowing

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jan 23, 2017 3:18:12 PM

and tagged In the News

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monday updateLast week’s news was mixed, both in the data reported and in the trends, suggesting the economy slowed into the end of last year. Nonetheless, while the pace has decelerated somewhat, improvement does continue and remains likely to do so into 2017.

A look at last week’s data

First up, inflation. Consumer price data was released on Wednesday, with the headline index showing an increase of 0.3 percent for December, in line with expectations, and an increase of 2.1 percent year-on-year, also as expected—up from 0.2 percent and 1.7 percent, respectively. The annual rate broke above 2 percent for the first time since mid-2014, due largely to a 1.5-percent rise in the price of energy.

Growth in the core price index, which excludes food and energy, came in as expected at 0.2 percent for the month, the same as November, but rose to 2.2 percent for the year, up from 2.1 percent. The convergence of the two annual figures suggests that the distorting effects of lower oil prices in previous years have started to age out of the calculations, and the two should be more comparable going forward. With inflation staying just above the Federal Reserve’s target rate of 2 percent, further rate increases remain likely.

Industrial production improves dramatically. Industrial production improved even more than expected in December, from a decline of 0.4 percent the previous month to a gain of 0.8 percent, although this gain was negatively affected by a downward revision for November, from –0.4 percent to –0.7 percent. The results for both months were driven largely by weather-related changes in utility production, however, which means that November was not as bad as it looked (and December not quite as good).

On a narrower and more representative basis, manufacturing output also improved, although by less than expected. It swung from a decline of 0.1 percent to a gain of 0.2 percent, despite improvements in energy production and the normalization of the dollar’s value. Although growth is positive, the low level suggests that industrial demand has not yet picked up as much as surveys suggest it might and, in fact, slowed down from the third to the fourth quarter.

Housing remains stable. The National Association of Home Builders survey disappointed. A small decline, from 70 (an 11-year high) to a still very strong 69, had been expected. The actual December number came in at 67, and November was revised downward from 70 to 69.

Despite the drop in industry sentiment, however, housing starts rose much more than expected, from 1.09 million to 1.226 million, while building permits also rose slightly. The decline in the survey notwithstanding, confidence and actual housing starts remain reasonably strong overall.

The week ahead

This week, we should get a similarly mixed batch of data.

Existing and new home sales will be released on Tuesday and Thursday, respectively. Existing sales are expected to drop back from 5.61 million to 5.55 million, after a November figure at the highest level since early 2007. The decline is expected to be a pause rather than something more serious, however, given continued job growth and low rates. That drop should be mirrored in new home sales, with an expected decline from 592,000 to 586,000. Much of the projected shortfall is considered to be due to lack of inventory, rather than lack of demand.

On Friday, the first estimate of fourth-quarter GDP is due, with expectations for a drop from growth of 3.5 percent in the third quarter to 2.1 percent in the fourth. Although the drop appears large, a big part of it would be due to an unsustainable spike in soybean exports in the third quarter; most of the economy continues to grow at rates only modestly slower than the third quarter.

Finally, also on Friday, durable goods orders are expected to improve from a decline of 4.5 percent to a gain of 2 percent on a surge in commercial aircraft orders. Core orders, excluding transportation—a better indicator of economic health, as aircraft orders are so volatile—are expected to remain at a strong level, declining slightly from a 0.6-percent gain to a 0.5-percent gain, which would point to continued improvement in business investment.

Have a great week!

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