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Last week showed more signs of a potential slowdown in the economy. Housing lagged, despite remaining at strong overall levels, and GDP growth and business investment slowed. But although the headline figures were disappointing, the details were better, suggesting that the current weakness is only temporary.
A look at last week’s data
As reported on Tuesday, existing home sales dropped from an upwardly revised 5.65 million in November to 5.49 million in December, below expectations for 5.52 million. Though the drop appears large, the November figure was the highest since early 2007, so sales remained relatively strong given continued job growth and low rates.
As expected, the decline was mirrored in new home sales, released on Thursday. But there also, the number was worse than expected, falling to 536,000 rather than the expected 586,000. Although this surprise drop is the largest decline since March 2015, the long-term trend remains positive; sales of new homes were up more than 12 percent for 2016 as a whole.
On Friday, the first estimate of GDP growth for the fourth quarter came in at 1.9 percent—down significantly from growth of 3.5 percent in the third quarter and below expectations of 2.1 percent. The drop appears large, but an unsustainable spike in soybean exports in the third quarter played a big role, leading to a 1.7-percent loss in growth from net exports. That aside, most of the economy continues to grow at a rate only modestly slower than the third quarter. Overall, given the bump up in the third quarter and down in the fourth, averaging the two puts growth at around 2.7 percent for the second half of the year, which appears reasonable.
Finally, durable goods orders fell below expectations, dropping 0.4 percent in December, on a substantial decline in aircraft orders. Orders fell by 4.5 percent in November. Core orders, excluding transportation, are a better indicator of economic health, however, as aircraft orders are so volatile; these came in much better, with a gain of 0.5 percent, as expected, down from an upwardly revised 1-percent gain. Both the December increase and substantial upward revision to November point to continued improvement in business investment.
The week ahead
This week will be a busy one for economic data.
Personal income and spending data for December came in this morning, with personal income growth at 0.3 percent, up from an upwardly revised 0.1-percent gain in November but below expectations of 0.4-percent growth. Personal spending was up to 0.5 percent from 0.2 percent, in line with expectations. Slower income growth may be another sign of a pending slowdown, while faster spending growth appears primarily due to higher utility spending from cold weather, rather than stronger consumer activity.
The Conference Board’s consumer confidence survey will give us a look at whether that stronger consumer activity may be pending. Expectations are for a small drop from a 16-year high of 113.7 in December to 112.8, which would still be quite strong.
Business confidence will be tested with the release of the ISM Manufacturing survey on Wednesday, which is expected to increase from 54.5 to 55.0, moving further into expansionary territory to a two-year high. The ISM Non-Manufacturing survey, released on Friday, is also expected to increase, from 56.6 to 57.0, which puts it even further into expansion mode. If both consumer and business confidence remain high, the prospects for faster growth would be substantially improved.
Finally, on Friday, we also get the jobs report. Job growth is expected to tick up from 156,000 in December to 168,000, with the unemployment rate and workweek remaining stable. Wage growth is expected to increase by 0.3 percent, below 0.4-percent growth the previous month but still strong. If the data comes in as expected, the labor market will continue its strong growth pattern.
Have a great week!
