Monday Update: More Surprising Gains in Confidence

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Mar 6, 2017 2:49:26 PM

and tagged In the News

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monday updateLast week’s data extends the string of surprisingly strong sentiment and headline news, and even the weaker reports were better than they looked on the surface. With both consumer and business confidence rising, and the Federal Reserve feeling more upbeat as well, the recovery appears to be continuing.

A look at last week’s news

Manufacturing posts strong headline number. Durable goods orders rose by 1.8 percent in January, somewhat above expectations of 1.6 percent. The increase, however, was due primarily to aircraft orders. The core index, excluding transportation, was down by 0.2 percent, well below expectations of a gain of 0.5 percent; capital goods orders were down even more, by 0.4 percent. Still, this weakness is probably a pullback from previous gains rather than something worse, as three-month performance remains very strong.

Consumer confidence stays positive. The Conference Board Consumer Confidence Index increased significantly, up to 114.8 from 111.8, beating expectations for a small drop to 111.0. This is a very strong level (the highest reading since 2001) and should support continued spending growth. Of note, future expectations improved along with current conditions, suggesting that consumers’ confidence about the future continues to rise.

Income growth picks up. The personal income and spending report showed that income growth beat expectations in January, increasing by 0.4 percent, above the previous month’s 0.3-percent growth. Spending growth, on the other hand, dropped even further than expected, down from 0.5-percent growth in December to 0.2 percent. The decline was not as bad as it seemed, however; below-normal utility spending, driven by warm weather, accounted for almost all of the drop. Adjusting for that, this is still a reasonably healthy result.

Business confidence accelerates. The ISM Manufacturing Index surprised to the upside, rising to 57.7 against an expected level of 56.0, the same as the previous month. Seventeen of eighteen industries expanded, the highest level since mid-2014. The ISM Non-Manufacturing Index surprised to the upside as well, rising to 57.6 from 56.5 against an expected small decline to 56.4, taking the index even further into expansion territory. Continued business confidence increases the likelihood of faster business investment, suggesting that durable goods orders are more likely to bounce next month.

Fed hints at March hike. The other significant piece of economic news last week was a speech by Federal Reserve Chair Janet Yellen, in which she seemed to suggest that a March rate hike was probable. Markets reacted by pricing in such a hike, and speculation is now swirling about what other news might come out of the Fed’s next meeting, given its apparently greater confidence in the recovery.

The week ahead

This week, we’ll see only two major reports: the international trade balance and the jobs report.

Tuesday’s report is expected to show that the trade deficit worsened, down to a deficit of $47.0 billion from $44.3 billion on a small decline in exports and a strong increase in imports.

On Friday, the February employment report is expected to show an increase of 180,000 jobs, down from 227,000 the previous month but still a reasonably strong level. The unemployment rate is expected to decline from 4.8 percent to 4.7 percent, and average wage growth is expected to increase from 0.1 percent to 0.3 percent, another signal of labor market strength. If the report comes in as strong as expected or better—and there are signs it may surprise to the upside—the economy may clear the last hurdle for an expected Fed rate increase.

Have a great week!

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