Monday Update: Growth Rebound Continues

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on May 21, 2018 12:50:11 PM

and tagged In the News

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Monday updateLast week's economic news was all about whether there are signs of a rebound after a weak first quarter. This week will be a slow one, but the releases we will see are important.

Last week’s news

On Tuesday, the retail sales report was released. At the headline level, growth came in slightly worse than expected. It ticked down from an extremely strong 0.6 percent for March to a still healthy 0.3 percent for April. This number was slightly worse than the 0.4 percent expected, as auto sales were reported to have declined last month. Core retail sales, which exclude autos and gas, also pulled back, to 0.3 percent. Here, the March numbers were revised upward from 0.3-percent growth to 0.4-percent growth. As such, although the April number was below expectations, the actual level met expectations. Overall, the retail sales numbers were positive. Indeed, it looks like the start of a sustainable rebound, with consumption growth likely to exceed the weak first-quarter levels going forward.

Housing is the next area where a rebound was expected. The National Association of Home Builders survey, released on Tuesday, rebounded from 69 in April to 70 in May. This brings us back to levels of previous months, suggesting builders remain confident about future prospects. On the other hand, on Wednesday, the actual new housing starts report dropped: from 1.319 million in March to 1.287 million in April. This result was below expectations of 1.31 million. Building permits also dropped.

Finally, also on Wednesday, the industrial production report showed that the headline index for March was revised up from 0.5-percent growth to 0.7-percent growth, with April holding steady at 0.7-percent growth. This result was above expectations of 0.6 percent, driven by gains in manufacturing output. Mining activity, led by oil drilling, increased, as did utility output. But the increase was primarily due to a bounce back in manufacturing, which rose from a downwardly revised flat result in March to 0.5-percent growth in April. This number was quite strong despite coming in below expectations of even stronger growth. These results are indeed a rebound from a weak first quarter, suggesting faster growth ahead.

Overall, despite some weakness in housing starts, last week’s data suggests that growth is coming back after a relatively weak first quarter.

What to look forward to

On Wednesday, the Federal Reserve (Fed) will release the minutes of the last meeting of its Open Market Committee, which sets interest rates. The statement issued after that meeting was notable for pronouncing that the inflation target was “symmetric” around 2 percent, which suggests the Fed might be willing to let inflation run above that level for some time. Markets are hoping the minutes provide further context for that statement, as well as some clarity about what that could mean for future rate increases. With inflation heating up, interest rates will become increasingly important. Markets will also be looking for some color on how the Fed views the current trade policy disputes, with respect to future growth and inflation.

On Friday, the durable goods orders report is expected to show that headline orders for business equipment dropped from growth of 2.6 percent to a decline of 1.4 percent, on a substantial decline in aircraft orders. This headline index is notoriously volatile due to the airline component. But the core orders index, which excludes transportation and is a much better economic indicator, is expected to do the reverse. It is expected to improve from a decline of 0.1 percent to a gain of 0.5 percent, which would be a very healthy level. Strong regional surveys and manufacturing activity may even show some upside for this figure. If the core number comes in as anticipated, it would suggest that business investment will continue to support growth.

Have a great week!

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