The Independent Market Observer

Monday Update: U.S. Consumers Strong, Industry Struggling

Posted by Brad McMillan, CFA®, CFP®

Find me on:

This entry was posted on Feb 1, 2016 2:45:31 PM

and tagged In the News

Leave a comment

monday updateOverall, last week’s data reflects an ongoing split in the U.S. economy, with consumers and the service sector doing well while manufacturing and industry continue to struggle. 

A closer look at last week’s numbers

On Tuesday, the Conference Board’s Consumer Confidence Survey produced a positive surprise. Confidence was expected to remain flat, at 96.5, but instead increased to 98.1, a three-month high. Even more positive was the source of the increase: the expectations index, which is the most forward-looking component. The proportion of the population expecting an increase in wages also rose, to a level that has historically meant wage increases of around 2.7 percent. Overall, it was a very positive report.

New home sales figures were also unexpectedly positive, increasing by 10.8 percent, from 490,000 to 544,000, well above the 500,000 expected. Housing prices continued to rise as well, between 5 percent and 6 percent year-on-year, depending on the survey. Further good housing news included a rise in mortgage applications and an increase in plans to purchase a home (from the Consumer Confidence Survey) to the highest level since December 2013. Overall, housing validates the strong consumer confidence numbers.

The durable goods orders report, on the other hand, was just bad. Headline orders, which include aircraft, dropped by 5.1 percent, significantly worse than the expectation of a 0.5-percent drop. This was due largely to a 30-percent decline in aircraft orders, but it still indicates weakness. The core orders report, excluding transportation, was down 1.2 percent, worse than expectations of a 0.1-percent decline, and the previous month was revised downward to a loss of 0.5 percent from flat. For capital goods specifically, the news was also bad, with a loss of 0.2 percent (versus an expected gain of 0.8 percent) and a downward revision of the previous month, from a drop of 0.6 percent to a drop of 1.1 percent.

These numbers suggest that, despite earlier signs of potential stabilization, the weakness in the industrial and manufacturing sectors of the economy continues, driven by the decline in energy production and the strong dollar.

This weakness was also reflected in the initial estimate of gross domestic product for the fourth quarter of last year. At 0.7 percent, it came in slightly below expectations of 0.8 percent and down from 2 percent in the prior quarter. As expected, the decline was due to factors including a slower buildup of inventories and weak investment, as mining and oil drilling continue to decline. Although certainly disappointing, it’s important to note that the GDP figure looks backward, and many forward-looking indicators remain healthy.

The Federal Reserve’s meeting statement also confirmed this view. Despite some changes—notably, economic risks are no longer described as “balanced”—the Fed’s tone remained generally positive on the economy.

In short, although risks remain, last week's data was consistent with what we already know and suggests that economic growth should continue.

The week ahead

This week, we’ll gain more insight into consumer and business confidence. Released this morning, both personal spending and income data for December were muted.

  • Personal income was up by 0.3 percent, in line with the previous month and slightly above expectations of 0.2 percent. Interestingly, the savings rate increased to 5.5 percent from 5.3 percent—inconsistent with the higher consumer confidence numbers but in line with a return to prior levels of savings, suggesting that consumer behavior may be changing on a sustainable basis.
  • Personal spending increased by only 0.1 percent, down from an increase of 0.4 percent in the previous month, which had been revised upward. Again, this weak increase is inconsistent with rising consumer confidence but can be explained by the higher savings rate. It may also be partially attributable to record wet weather through most of the country. In any case, while not terrible in context, it’s not a particularly positive number.

The Institute for Supply Management (ISM) will also release its monthly business surveys this week.

  • The ISM Manufacturing index is expected to show a small improvement, from 48.2 to 48.5. Although this would leave the index in contractionary territory (below 50), it would still be a sign of stabilization. The risks appear to be to the downside, as last week’s poor durable goods orders suggest.
  • The ISM Non-Manufacturing index, which reflects the service sector, is also expected to remain around its current level of 55.2. But there are downside risks here, too, as weakness from the manufacturing sector continues to drag on the rest of the economy. Although this index remains expansionary, the general slowdown has dragged on it and will likely have done so last month as well.

Finally, the employment report will be released on Friday.

  • Job growth is expected to be around 200,000, well below last month’s 292,000 but still at a healthy level.
  • Unemployment should remain around 5 percent, the same as the previous month, as should the hours worked per week, at 34.5.
  • Average hourly earnings are expected to increase by 0.3 percent, an improvement from the previous month’s flat results.

Overall, expectations are for another solid jobs report, with the potential for some positive surprises.

Have a great week!

  Subscribe to the Independent Market Observer

Subscribe via Email

Crash-Test Investing

Hot Topics

New Call-to-action



see all



The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility across a wide range of S&P 500 options.

The forward price-to-earnings (P/E) ratio divides the current share price of the index by its estimated future earnings.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.


Please review our Terms of Use

Commonwealth Financial Network®