The Independent Market Observer

Monday Update: Personal Spending Beats Expectations

Posted by Sam Millette

This entry was posted on Feb 28, 2022 10:28:23 AM

and tagged In the News

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Monday UpdateLast week’s important economic updates centered around consumer confidence, personal income and spending, and durable goods orders reports. Personal spending growth increased more than expected in January, echoing a similar, better-than-expected rebound in retail sales growth during the month. This will be another busy week of updates, with a focus on business confidence and the February employment report.

Last Week’s News

On Tuesday, the Conference Board Consumer Confidence Index for February was released. This widely followed measure of consumer confidence declined slightly less than expected during the month. The index fell from 113.8 in January to 110.5 in February against calls for a drop to 110. This marks two consecutive months with declining consumer confidence to start the year, but the index stayed well above the pandemic-era low of 85.7 we saw during initial lockdowns. The decline in confidence to start the year is largely due to continued consumer concern about the high levels of inflation throughout the economy. The decline in overall confidence in February was driven by lowered consumer expectations for future economic growth, which, in turn, was caused by rising 12-month consumer inflation expectations. Historically, improving confidence has helped support faster consumer spending growth, so this will continue to be a closely monitored report in the months ahead.

Friday saw the release of the January personal income and personal spending reports. The spending report showed higher-than-expected levels of consumer demand to start the year, with spending up 2.1 percent during the month against calls for a more modest 1.6 percent increase. This result echoes the better-than-expected increase in retail sales that we saw to start the year. Personal spending fell by a downwardly revised 0.8 percent in December, so this quick rebound is an encouraging sign that December’s weakness was a temporary lull caused by rising medical risks rather than a downward trend for spending. Personal income also came in slightly better than expected, with average incomes remaining unchanged against calls for a 0.3 percent decline. This flat month for income growth was interesting, as it signaled that high levels of wage growth were enough to offset the decline in income caused by the expiration of monthly child tax credits at the end of 2021. The tight labor market is expected to support continued personal income growth in the months ahead.

We finished the week with the release of the preliminary estimate of the January durable goods orders report on Friday. Headline durable goods orders increased  1.6 percent to start the year against calls for a 1 percent increase. Core durable goods orders, which strip out the impact of volatile transportation orders, also impressed during the month with core orders up 0.7 percent against calls for a 0.4 percent increase. This now marks 11 consecutive months with rising core durable goods orders, which is an encouraging signal for the pace of the overall economic recovery, given the fact that core durable goods orders are often viewed as a proxy for business investment. Looking forward, continued high levels of consumer demand for goods and services are expected to support business spending growth in the coming months.

What to Look Forward To

On Tuesday, the ISM Manufacturing survey for February is set to be released. This widely monitored measure of manufacturing confidence is expected to increase from 57.6 in January to 58 in February. This is a diffusion index, where values above 50 indicate growth. So, this anticipated result would signal faster expansion for manufacturers during the month. If estimates hold, this would also be the first increase in manufacturing confidence in four months, as concerns about inflation and the Omicron variant negatively affected sentiment at the end of 2021 and the start of 2022. Despite the decline in manufacturing confidence over the past four months, the index has remained in healthy expansionary territory since initial lockdowns were lifted in 2020, which has helped support strong levels of business investment throughout the pandemic. As we saw with the January durable goods orders report, business spending remained solid to start the year despite the modest drop in confidence in January. Ultimately, if estimates hold, this would be an encouraging sign that the manufacturing recovery is set to accelerate into the new year.

Thursday will see the release of the ISM Services index for February. Service sector confidence is also expected to improve during the month, with economists calling for an increase from 59.9 in January to 61 in February. This is another diffusion index where values above 50 indicate growth. So, this result would signal continued healthy levels of service sector expansion, if estimates are accurate. As was the case with manufacturing confidence, service sector confidence was negatively affected by the Omicron variant and inflation toward the end of 2021 and the start of 2022, so any rebound for the index in February would be a positive sign. The service sector accounts for the majority of economic activity in the country. As such, an improvement to service sector confidence in February would be an encouraging development that should support continued business investment in the months ahead.

We’ll finish the week with Friday’s release of the February employment report. Economists expect to see 400,000 additional jobs added during the month, down from the 467,000 jobs that were added in January. Despite the anticipated slowdown in hiring, this would still represent a strong month of job gains on a historical basis. The underlying data is also expected to show improvements, as the unemployment rate is set to fall from 4 percent in January to 3.9 percent in February. If estimates hold, this would tie the lowest unemployment rate since the start of the pandemic. The labor market recovery throughout 2021 was impressive, given the headwinds created by inflation and the pandemic. The anticipated continued hiring growth to start 2022 would be a promising sign that the momentum from last year has carried over into this year despite the headwinds that remain.

That’s it for this week—thanks for reading!

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