The Independent Market Observer

Monday Update: Signs of Economic Improvement in February

Posted by Sam Millette

This entry was posted on Mar 9, 2020 11:36:45 AM

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In his Monday Update, Commonwealth’s Sam Millette discusses signs of economic improvement in February, including a surprising jobs report.Last week’s economic updates showed surprising economic strength in February, highlighted by improving business confidence and an unexpectedly strong February jobs report. In March, confidence figures are likely to decline, due to the global spread of the coronavirus. Nonetheless, before that crisis emerged, the recent updates pointed toward an improving economy poised for faster growth. This week will be relatively quiet on the economic update front. Economists will, however, be closely monitoring the preliminary consumer confidence report set to be released on Friday, which will be our first look at consumer confidence in March.

Last week’s news

We started the week with Monday’s release of the ISM Manufacturing index for February. This measure of manufacturer confidence fell 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 for February was released. This measure of service sector confidence beat expectations, rising from 55.5 in January to 57.3 in February, against predictions for a decline to 54.8. As was the case with the manufacturer survey, this is a diffusion index, where values above 50 indicate expansion. The result brought the index to a 15-month high and helped calm concerns that business confidence would fall sharply due to the spread of the coronavirus. The service sector accounts for the vast majority of economic output, so the jump in confidence was more than enough to offset the decline on the part of manufacturers. In fact, the composite index, which combines manufacturer and nonmanufacturer surveys, now sits at a 12-month high, which is another positive sign for business investment. In March, we can reasonably expect to see confidence fall due to the continued spread of the coronavirus. Still, this update displays the solid economic fundamentals that we saw to start the year.

On Friday, January’s international trade report was released. The trade deficit declined from a revised $48.6 billion in December to $45.3 billion in January, against expectations for a more modest move to $46.1 billion. This narrowing was caused by a 1.6 percent drop in imports that more than offset a 0.4 percent decline in exports. In 2019, the trade deficit fell for the first time in six years, which added to GDP growth in the fourth quarter. That narrowing was also caused by imports falling faster than exports, rather than by faster export growth. Looking forward, trade data is expected to be volatile given the uncertainty created by the global spread of the coronavirus.

Finally, we finished the week with Friday’s release of the February employment report, which blew away expectations. The new jobs added during the month totaled 273,000, against forecasts for the creation of 175,000. As a result, the unemployment rate is down to 3.5 percent, which ties a postrecession low. The six-month moving average for new job growth now sits at a four-year high of 231,000, showing that the strong rebound in hiring we saw in the second half of 2019 has continued. These numbers were driven in large part by a surge in construction-related hiring, which was boosted by the strong housing market and February’s warm weather. Overall, this very positive report reinforces the message that 2020’s fundamental economic growth started out strong. Since then, as we all know, concerns surrounding the spread of the coronavirus have caused market turmoil.

What to look forward to

On Wednesday, the Consumer Price Index for February is set to be released. Economists expect consumer prices to remain flat for the month, which would bring year-over-year inflation down to 2.2 percent from January’s rate of 2.5 percent. This anticipated slowdown in headline inflation would be largely due to the drop in gas prices in February. The core inflation figure, which strips out the impact of volatile food and energy prices, is set to increase by 0.2 percent for the month and 2.3 percent on a year-over-year basis, matching January’s results.

Thursday will see the release of the Producer Price Index for February. Economists are forecasting a 0.1 percent decrease in headline producer prices for the month, which would lead to a 1.8 percent increase year-over-year. As was the case with consumer inflation, the large decline in gas prices in February is expected to be a headwind for producer inflation. Core producer inflation should increase by 0.2 percent during the month and 1.7 percent year-over-year, in line with January’s levels. Inflation has remained largely constrained despite 2019’s three interest rate cuts. Still, we’ll have to wait to see if the surprise 50 bps cut in March leads to faster inflation.

On Friday, the preliminary reading of the University of Michigan consumer confidence survey for March is set to be released. This measure of consumer confidence is expected to decline from 101 in February to 95 in March, due to fears over the coronavirus weighing heavily on consumers. The February reading for this index included responses through February 25, so the coronavirus had some impact on last month’s report. Given the escalating situation and the continued stock market volatility, March’s report will provide a more thorough view on the effect of the health crisis on consumer confidence. If the forecasts prove to be accurate, the index would still be well above the low of 89.8 seen in August 2019. So, while a drop would be disappointing, it would not necessarily indicate that consumer spending is expected to fall as swiftly as some economists fear. Rising confidence levels typically support faster spending growth, so it’s important to monitor this area of the economy. Consumer spending accounts for roughly two-thirds of all economic activity.

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

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