The Independent Market Observer

Monday Update: Watch What Consumers Do, Not What They Say

Posted by Brad McMillan, CFA®, CFP®

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This entry was posted on Feb 29, 2016 1:37:26 PM

and tagged In the News

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monday updateLast week’s economic news was generally good, despite some signs of weakness. Data showed consumers making and spending money, more signs of stabilization in industry, and continued growth in housing.

A recap of last week’s news

The weakest link was consumer confidence. On Tuesday, the Conference Board’s Consumer Confidence Index dropped much more than expected, from 98.1 to 92.2, the lowest level in seven months. It was expected to decline to 97.2. Although the absolute level remains reasonably strong, the size of the drop, particularly in light of declines in recent months, suggests consumer sentiment may be in a weakening trend. Continued declines in gas prices are apparently being offset by turbulence in the stock market and worries elsewhere in the world

Existing home sales, however, offered better news, rising to 5.47 million from 5.45 million, as opposed to an expected decline to 5.35 million. This is a six-month high and the second-highest level since February 2007. On a 12-month-average basis, sales were at their highest level since October 2007, confirming a strengthening long-term trend. Prices also continued to rise, reaching their highest level since August 2007, up 5.4 percent for the year per the S&P/Case-Shiller National Home Price Index.

New home sales were much weaker, declining from 544,000 to 494,000, worse than expectations of 520,000. The decline comes after a substantial jump in December, which was due to a rule change rather than a real change in demand. Both the longer-term trend and the absolute level of sales remain strong, and the decline shouldn’t be a cause for concern, particularly given the strong existing home sales.

Durable goods orders were also strong, swinging from a 5-percent decline the previous month (itself revised up to a 4.6-percent decline) to a gain of 4.9 percent, the largest in 10 months, thanks to a sharp rebound in aircraft orders, which are very volatile. The more representative core orders, which exclude transportation, also improved substantially, with a gain of 1.8 percent, more than reversing the previous month’s decline of 0.7 percent, which was revised upward from a decline of 1 percent. All of these numbers were substantially better than expectations—and, in several cases, above the highest estimates. These results suggest that the manufacturing sector is stabilizing and that growth may come in better than expected for both the first quarter and 2016 as a whole.

Finally, on Friday, personal income and spending data was released. Personal income growth increased even more than expected, from a strong 0.3 percent to a very strong 0.5 percent. Spending growth surged from a flat result the previous month, which was revised to 0.1-percent growth, to a very strong 0.5 percent. Both of these figures suggest that the consumer continues to be extremely healthy, significantly reducing the risk of a recession in the near term. They also present a gap between what consumers are saying (per the weak consumer confidence surveys) and what they are doing in stores.

Other news from last week includes slowly increasing inflation, which is a positive at this point, and a surprise upward revision to the estimate of overall economic growth at the end of last year, from 0.7 percent to 1 percent, against an expected drop to 0.4 percent. Along with the strong income and spending data, both should serve to calm the Federal Reserve’s worries about the path of the economy going forward.

A look at the week ahead

Three very important reports are slated for release this week.

The Institute for Supply Management will release its manufacturing survey on Tuesday and the nonmanufacturing survey on Thursday. Manufacturing is expected to improve slightly, from 48.2 to 48.5, but to remain below 50, the level that indicates contraction. The nonmanufacturing number is expected to tick down slightly, from 53.5 to 53, but to remain in expansion territory. Both levels and trends are similar to those of past months, suggesting slight improvement and continued growth.

The most important release this week will be the employment report on Friday. Job growth is expected to increase to 195,000 from last month’s 151,000, with the unemployment rate and average weekly hours worked remaining stable. The wage growth rate is expected to drop from a very strong 0.5 percent to a more normal 0.2 percent. All of these numbers would be healthy and indicate that the economy continues to grow.

Have a great week!

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