Several important economic updates were released last week, with a focus on February’s business confidence and job reports. The job report showed that more jobs were added than expected during the month, which drove the unemployment rate to a new pandemic-era low. This will be another busy week of updates relating to international trade, consumer inflation, and consumer sentiment.
Last Week’s News
On Tuesday, the ISM Manufacturing survey for February was released. This closely followed measure of manufacturing confidence increased by more than expected during the month. It rose from 57.6 in January to 58.6 in February against calls for a more modest increase to 58. This is a diffusion index, where values above 50 indicate growth. So, this better-than-expected result left the index in healthy expansionary territory following a modest decline in January. The improvement in February was largely driven by an increase in new orders; however, supply shortages caused delivery times to slow to an 11-year low. Overall, this report showed that demand for manufactured goods remains strong and indicates further growth in the months ahead for the manufacturing industry. That said, tangled supply chains and labor shortages are expected to serve as headwinds for the sector in the short term.
Thursday saw the release of the ISM Services survey for February. Service sector confidence unexpectedly dropped during the month, as the index fell from 59.9 in January to 56.5 in February against calls for an increase to 61.1. This surprising result brought the index to its lowest level since February of 2021 and signaled increased service sector concern. As was the case with the manufacturing survey, this is a diffusion index where values above 50 indicate growth, so this result still signaled continued expansion for the service sector despite the drop. The service sector suffered from labor shortages and high levels of employee turnover in February, which was a major headwind for faster growth. Looking forward, economists expect to see service sector confidence rebound in March as the impact from the most recent wave of Covid-19 infections continues to fade. But this will be a closely monitored release in the months ahead, given the fact that the service sector accounts for the majority of economic activity in the country.
We finished the week with Friday’s release of the February employment report. It showed that 678,000 jobs were added during the month, well above the 423,000 that were forecasted. The December and January job reports were also revised up by an additional 92,000 jobs. This better-than-expected result marks the best month for job gains since October 2021, which indicates that the impact of the recent wave of infections on hiring has largely declined. The job gains were widespread, as there was no single sector that accounted for the majority of the hiring increase. The underlying data was also encouraging, as the unemployment rate fell from 4 percent in January to 3.8 percent in February against calls for a drop to 3.9 percent. Labor force participation also increased by more than expected, which is an encouraging sign that folks are continuing to reenter the workforce to start the year. All in all, this was a hopeful report that shows that the economic momentum from the end of 2021 carried over into 2022, despite the headwinds created by inflation and the Omicron variant.
What to Look Forward To
On Tuesday, the international trade balance report for January will be released. The trade deficit is expected to widen from $80.7 billion in December to $87.1 billion in January. If estimates hold, this would represent the largest single-month trade deficit on record, breaking the previous $80.8 billion deficit record that was set in September 2021. We saw historically large monthly trade deficits throughout 2021, as high levels of domestic demand, supply chain challenges, and the uneven global economic recovery all combined to boost import growth over export growth during the year. The previously released advanced estimate of the trade of goods showed that the trade deficit for goods increased from $100.5 billion in December to a record $107.6 billion in January. Looking forward, large monthly deficits are expected until we see a more robust global economic recovery.
Thursday will see the release of the February Consumer Price Index report. Consumer prices are expected to show continued growth, with headline prices set to increase 0.8 percent during the month and 7.9 percent on a year-over-year basis. If estimates prove to be accurate, this would cause the pace of consumer inflation to pick up, following a 0.6 percent monthly increase in consumer prices for January. Core consumer prices, which strip out the impact of volatile food and energy prices, are expected to increase 0.5 percent during the month and 6.4 percent on a year-over-year basis. Consumer prices have seen notable inflationary pressure throughout the past year, driven by high levels of consumer demand, tangled global supply chains, and rising material and labor costs. The recent invasion of Ukraine is also expected to contribute to short-term inflationary pressure, as energy and food prices have already started to see notable increases since the start of the conflict.
We’ll finish the week with Friday’s release of the preliminary estimate of the University of Michigan consumer sentiment survey for March. Consumer confidence is expected to decline modestly from 62.8 in February to 62.5 in March. If estimates hold, this would bring the index to its lowest level since 2011. Consumer sentiment largely improved throughout the first half of 2021; however, rising consumer concern about inflation and new medical risks caused the index to drop notably throughout the second half of 2021 and the start of 2022. Looking forward, we’ll likely need to see progress in combatting high inflation levels before the index can return closer to pre-pandemic levels. Historically, improving confidence has helped support faster consumer spending growth—so if we start to see confidence improve in the months ahead, it could support future spending growth.
That’s it for this week—thanks for reading!