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Although investor attention has been focused on concerns about the coronavirus and the equity market sell-off, last week’s economic updates showed surprising strength. The highlights of this week’s data releases will be reports on business confidence, international trade, and jobs.
Last week’s news
We started the week with Tuesday’s release of the Conference Board Consumer Confidence Index for February. Consumer confidence increased from a downwardly revised 130.4 in January up to 130.7 in February, against expectations for an increase to 132.2. While this moderate increase looks solid at first glance, it does represent a slight decline from January’s initial estimate of 131.6. Nonetheless, February’s result indicates impressively resilient consumer confidence, given the negative headlines regarding the coronavirus that dominated the news at month-end. We’ll have to wait to see if last week’s sell-off has a measurable impact on consumer confidence in March. For the time being, however, the index looks solid.
On Wednesday, January’s new home sales report showed sales rising 7.9 percent, against expectations for a 3.5 percent increase. This much-better-than-expected result brought the rate of new home sales up to its highest monthly level since 2007. Sales had rallied considerably in the second half of 2019 due to falling mortgage rates. Now, with Treasury rates setting all-time lows in February, the tailwind appears likely to continue. January’s report is yet another example of the current strength of the housing sector, which performed impressively throughout the recent economic expansion.
On Thursday, we received the second estimate of fourth-quarter GDP growth. The pace of annualized growth in the quarter came in at 2.1 percent. This result, which was in line with economist estimates, matched the 2.1 percent growth rate seen in the third quarter. Personal consumption growth was revised down slightly from 1.8 percent to 1.7 percent, also in line with economist estimates. Net trade was the major driver of fourth-quarter GDP growth, due to a notable drop in imports that offset a slight decline in exports. The economy grew by only 2.3 percent during the year, down from the 2.9 percent growth recorded in 2018. While this result is slightly disappointing, slow growth is still growth and certainly better than the alternative.
Thursday also saw the release of January’s preliminary durable goods orders report. Orders declined by only 0.2 percent, against expectations for a 1.4 percent drop. Headline orders were held back by a fall in defensive aircraft orders, which are typically volatile on a month-to-month basis. Core durable goods orders, which strip out the impact of transportation orders, increased by 0.9 percent, against expectations for 0.2 percent growth. Core orders are often used as a proxy for business investment, so this result is a very positive development. Three straight months showing growth in core durable goods orders have now passed, indicating that the slowdown in business investment we saw throughout much of 2019 is not continuing into the new year. Given the improvements to business confidence seen in January and the better-than-predicted producer spending figures, business investment may finally be poised to contribute to economic growth.
On Friday, January’s personal income and personal spending reports were released. Personal income grew by 0.6 percent, while spending increased by 0.2 percent. Economists had forecast 0.4 percent growth for personal income and 0.3 percent growth for personal spending. So, overall, these reports provided a solid start to the year, although the miss in spending is a bit disappointing given the month’s high levels of consumer confidence. The better-than-expected growth in personal income, which reflects the stimulus of a strong job market, was more encouraging. Typically, we would expect to see a pickup in spending given the strength in income. But the recent negative sentiment driven by the spread of the coronavirus is a headwind for consumers. We’ll have to wait and see how spending continues to evolve.
Finally, we finished the week with the second and final reading of the University of Michigan consumer sentiment survey for February. It increased from 100.9 midmonth to 101 at month-end, beating expectations for a slight pullback to 100.7. This result is encouraging, as the interview period for this survey included responses through February 25, when news of the coronavirus was driving the equity market sell-off. Consumer sentiment has remained resilient despite the spread of the virus. Nonetheless, this indicator should be closely monitored, given the escalation of the situation and the important relationship between consumer confidence and spending. For the time being, however, the surveys released last week offer some reassurance that consumer confidence remains healthy.
What to look forward to
We started the week with Monday’s release of the ISM Manufacturing index for February. This measure of manufacturer confidence fell by more than expected during the month, from 50.9 in January to 50.1 in February, against expectations for a more modest decline to 50.5. This is a diffusion index, where values above 50 indicate expansion, so the index is still pointing toward growth, albeit at a slow rate. This decline was largely attributable to worries regarding the spread of the coronavirus, with manufacturers citing uncertainty along global supply chains as their primary concern. Despite the disappointing result, the February result still represents the second-best reading for the index in seven months. It also marks the second straight month where the index has been in expansionary territory, so things could certainly be worse. We’ll continue to monitor this important gauge of manufacturer confidence, to see if the headwinds created by the coronavirus continue in March.
On Wednesday, the ISM Nonmanufacturing index will be released. This survey measures confidence in the service sector, which accounts for the lion’s share of economic activity. Economists expect service sector confidence to decrease moderately, from 55.5 in January to 55 in February. As was the case with the manufacturer index, service sector confidence improved by more than expected in January, so this anticipated decline is understandable. If estimates hold, the combined measure of manufacturer and service sector confidence would sit at levels that have historically indicated economic growth between 1 percent and 1.5 percent.
On Friday, we’ll get January’s international trade report. The trade deficit is expected to shrink modestly, from $48.9 billion in December to $48.5 billion in January. Previously released monthly reports on trade showed a modest drop in exported goods that was more than offset by a larger drop in imports. This report is unlikely to be affected by the concerns over the coronavirus, given that most of the measures taken by countries and businesses to halt the spread of the virus were enacted in February. Trade was a net contributor to economic growth in the fourth quarter, but going forward results will likely be volatile given the global uncertainty regarding the spread of the coronavirus.
We’ll finish the week with Friday’s release of the February employment report. Economists expect it to show that 175,000 new jobs were created during the month, following January’s better-than-expected result of 225,000 new jobs. The underlying data should also show positive momentum, with the unemployment rate expected to decline from 3.6 percent to 3.5 percent. Average hourly earnings growth is set to improve, with January’s 0.2 percent gain followed by a 0.3 percent rise in February. If these estimates prove to be accurate, February would represent another solid month of updates for the job market. This sector, which softened at the start of 2019, has shown signs of strength over the past few months.
That’s it for this week—thanks for reading!
