Monday Update: Q1 2019 Growth Surprisingly Strong

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Apr 29, 2019 1:08:51 PM

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Monday updateLast week was a slow one from a data standpoint, but we did get a look at housing sales, durable goods orders, and what economic growth looked like at the start of the year. This week is a very busy one, with a number of key reports.

Last week’s news

On Monday, the existing home sales report did even worse than expected. Sales slowed from a downwardly revised annualized rate of 5.48 million in February to 5.21 million in March, below expectations for a decline to 5.3 million. Lower mortgage rates appear not to have supported housing demand as much as expected. This shortfall was partially offset on Tuesday by the new homes sales report. It rose from a downwardly revised 662,000 annualized run rate in February to 692,000 in March, well above the expected 649,000. Although the data was mixed, these numbers are consistent with the prior week's data and show that recent optimism around the housing sector may be overdone.

On Thursday, the durable goods orders report was released. The headline index showed a significant rebound, from an upwardly revised 1.1-percent decline in February to a 2.7-percent gain in March. This rebound was based largely on a recovery in aircraft orders, despite Boeing’s problems with the 737 Max, but was also supported by a bounce in motor vehicle orders. The core index, which excludes transportation and is a better economic indicator, also showed a rebound, although a smaller one. It went from a downwardly revised decline of 0.2 percent to a gain of 0.4 percent, beating expectations for 0.2-percent growth. Although slowing business investment growth has been a drag on first-quarter growth, if this data holds, that drag may moderate in the rest of the year.

Finally, on Friday, the initial estimate of first-quarter economic growth, in GDP, came in much better than expected. Growth rose from 2.2 percent in the fourth quarter of last year to 3.2 percent for the first quarter of 2019. Although this is a great number, the underlying data is less positive. Consumer spending and business investment slowed, and the gain was made up by a less negative trade balance, faster growth in government spending, and inventory stockpiling—none of which are likely to last. Even given the weak underlying data, however, first quarters have historically been weak and followed by stronger growth. As such, prospects for continued growth remain solid.

What to look forward to

The week will kick off with the personal income and spending reports. We should see accelerating growth in income, up from a gain of 0.2 percent for February to 0.4 percent for March, on faster wage growth. Faster income growth would be a positive sign. The personal spending report will be a bit different than usual, as both February and March figures will be published at the same time in a final catchup from the government shutdown. February spending growth is expected to come in at 0.1 percent, while March is expected to be much stronger at 0.7 percent on the recent strong retail sales report. These results would signal faster consumption growth after a slowdown in the first quarter. If the numbers come in as expected, the rebound would be consistent with renewed confidence and would be a positive sign.

On Tuesday, the Institute for Supply Management (ISM) Manufacturing index is expected to pull back slightly, from 55.3 for March to 55 for April. This is a nominal decline and would suggest that a slowdown in global demand has not yet significantly damaged the U.S. manufacturing sector. Plus, there may be some upside here as global conditions seem to be improving. This is a diffusion index, where values above 50 indicate expansion and below 50 indicate contraction. So, this would be a reasonably healthy figure, suggesting continued growth.

Also on Tuesday, the Conference Board’s survey of consumer confidence is expected to show that confidence rose from 124.1 in March to 126.1 in April. This rise would signal the rebound from the drop after the government shutdown continues, which would be positive. But there may be some downside risk on the recent rise in fuel prices, which historically has hurt confidence levels.

On Wednesday, the Federal Open Market Committee will conclude its regular policy meeting with a statement and press conference. No meaningful action is expected from this meeting, but markets will be watching for hints about whether the Fed’s concerns about the economy may lead to rate cuts.

On Friday, the ISM Nonmanufacturing index is expected to increase slightly, from 56.1 in March to 57.2, on strong domestic demand for services. This is a diffusion index, where values above 50 indicate expansion and below 50 indicate contraction. So, this would be a very healthy figure, suggesting continued growth.

Finally, on Friday, the employment report is expected to show that job growth pulled back slightly from 196,000 for March to 181,000 in April. There may be some downside risk here, which could pull the shorter-term averages down further and indicate job growth is finally slowing. The unemployment rate is expected to hold steady at 3.8 percent. Wage growth is expected to pick up from 0.1 percent to 0.3 percent, which would take annual growth from 3.2 percent to 3.3 percent. If the numbers come in as expected, it will provide more assurance that despite recent weakness, the economic fundamentals remain sound.

Have a great week!

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