Monday Update: Slow but Real Economic Improvement

Last week’s economic news was positive overall.

Consumers continued to save rather than spend, but signs of increasing confidence suggest that may change. U.S. business, on the other hand, signaled widely improving confidence, especially in the industrial and manufacturing sector. Finally, employment growth continues strong and is starting to attract discouraged workers back into the labor force even faster—a very encouraging development.

A look at last week’s news

The U.S. consumer. Last week told us quite a bit about how U.S. consumers, the most important part of the economy, are doing. Unfortunately, the news wasn’t particularly good. The personal income and spending report showed that: 

• Personal income growth was 0.2 percent in February, above expectations of 0.1 percent but down from the previous month’s increase of 0.5 percent.
• Personal spending growth did even worse, declining to 0.1 percent.
• Worse still, the prior month’s strong spending growth of 0.5 percent was revised downward to 0.1 percent as well.

Consumers clearly decided to save rather than spend earlier this year, which has been a headwind for growth so far.

This downbeat news was partially offset by improving consumer confidence. The Conference Board Consumer Confidence Index beat expectations, increasing from 94.0 to 96.2 in March, and the previous month was also revised upward. The increase was based entirely on better future expectations, suggesting that while consumers remain worried, they expect conditions to continue to improve.

The final number for the University of Michigan Consumer Sentiment Index increased as well, reversing the initial reading, which showed a decline.

Overall, despite some weak results, consumer sentiment does appear to be improving. Current levels of confidence have historically shown faster spending growth than we now see, suggesting there’s reason to hope for that headwind to abate. Note also that we are still seeing growth, not a decline, and we can expect that growth to continue.

Business sentiment. If consumers were downbeat, business was upbeat. The ISM Manufacturing report beat expectations by moving well into positive territory, increasing from 49.5 to 51.8. This is a diffusion index, so results above 50 indicate the sector is expanding.

This good result was further supported by substantial improvements in regional surveys from the Federal Reserve, which show businesses doing better than expected. The recent weakening of the dollar has helped, as has the continuing normalization of the oil-drilling industry. Manufacturing, though a small component of the total economy, has important systemic effects, and this should be a tailwind going forward.

Jobs report. Another indicator of business confidence was continued strong hiring, as evidenced in the March employment report:

• Job growth dropped from the previous month’s extremely strong 242,000 (revised upward to 245,000) to a still-healthy 215,000, beating expectations.
• The underlying data was also positive, with wage growth strong for the month at 0.3 percent, up from a decline the previous month, but remaining at 2.3 percent for the year.
• Both unemployment and underemployment rose, from 4.9 percent to 5.0 percent and from 9.7 percent to 9.8 percent, respectively, but this was considered positive as it reflects discouraged workers moving back into the labor force.
• Accordingly, the labor force participation rate edged up to 63 percent.

A less encouraging component was the hours worked number, which remained steady at 34.4. While not terrible, it remains below recent levels and is something to watch. Overall, however, the jobs report showed that labor demand remains healthy and should continue to support growth.

The week ahead

On Tuesday, the ISM Non-Manufacturing report is expected to show a small increase, from 53.4 to 54.0, indicating continued expansion and recovery from the slowdown. This matters, as the service sector accounts for seven-eighths of the economy.

Also on Tuesday, the international trade balance is expected to show a decline from a deficit of $45.7 billion to one of $46.3 billion. A sign that exports are recovering would help the manufacturing sector. Although exports appear to be increasing, imports may be growing even more quickly, largely reflecting faster economic growth here in the U.S.

Finally, the March meeting notes for the Federal Open Market Committee will be released on Wednesday. With increasing dissonance between Janet Yellen and other Fed members, the minutes should provide some insight into how the committee as a whole is thinking. As uncertainty about the direction of Fed policy rises, this will be valuable information.

Have a great week!