The data flow started on Tuesday with the release of the housing starts report. It dropped back significantly more than expected, to 1.162 million for February from an upwardly revised 1.273 million annualized in January. This result was below the expected 1.21 million. But the disappointment was not a complete surprise, given that single-family building permits dropped back in the prior month. It does suggest that the housing industry remains weak.
Also on Tuesday, the Conference Board survey of consumer confidence disappointed as well. It dropped from 131.4 in February to 121.4 in March, well below the expected 132. This shows the recent rebound has already faded. Still, the index remains at a relatively high level, historically. The decline was widespread, and weak confidence has historically been a signal of more weakness ahead.
On Wednesday, the international trade report gave some good news. The trade deficit came in much smaller than expected, going from $59.8 billion in December (a 10-year high) to $51.1 billion in January, well below the expected $57 billion. While this is a positive sign, the deficit still remains very high overall. The improvement came from a rise in Chinese soybean purchases and a drop in imports, rather than a rise in exports. Overall, trade is likely to be a drag on growth in the first quarter.
Finally, on Friday, the personal income and spending report came in below expectations but did show gains. Income was up from a drop of 0.1 percent in January to a gain of 0.2 percent for February. January’s drop was technical rather than fundamental—a timing issue relating to dividend payments—so a return to growth is a positive sign. Personal spending rebounded even more, from a downwardly revised 0.6-percent drop in December to a 0.1-percent gain in January, with the difference in timing between the reports due to the ongoing catchup from the government shutdown. Again, the rebound is consistent with renewed confidence and is a positive sign. Although the results came in slightly below expectations, the most important fact here is the rebound itself.
On Monday, the retail sales report came in well below expectations. The headline index dropped from a gain of 0.2 percent in January to a 0.2-percent decline for February, which was boosted by higher gas prices. Core retail sales, which exclude autos, slowed by even more, from an upwardly revised 1.4-percent gain to a 0.4-percent decline. Retail demand has clearly weakened again after a one-month rebound from the significant pullback in December and will likely signal slower first-quarter growth.
Also on Monday, the Institute for Supply Management (ISM) Manufacturing index rose slightly, from 54.2 in February to 55.3 for March, above expectations. This result suggests that a slowdown in global demand has not yet significantly damaged the U.S. manufacturing sector. 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.
On Tuesday, the durable goods orders report is expected to disappoint at the headline level. It should drop from a gain of 0.3 percent in January to a decline of 1.2 percent for February, on a significant drop in aircraft orders. That said, this is an extremely volatile series that depends largely on aircraft. The core index, which excludes transportation and is a better economic indicator, is expected to rise from a decline of 0.2 percent in January to a gain of 0.3 percent for February. There may be some downside risk here on a weakness in business investment plans.
On Wednesday, the ISM Nonmanufacturing index is expected to pull back from 59.7 in February to 58 in March. This result would still leave it at a very healthy level on strong domestic demand for services. This is a diffusion index, where values above 50 indicate expansion and below 50 indicate contraction. As such, this would be a very healthy figure despite the recent pullback, suggesting continued growth.
Finally, on Friday, the employment report is expected to show that job growth recovered to 175,000 for March, up from a surprise decline to 20,000 in February. There may be some downside risk here, which could indicate job growth is finally slowing. The unemployment rate is expected to hold steady at 3.8 percent. Wage growth is expected to pull back from 0.4 percent to 0.2 percent, although that would still leave annual growth steady at 3.4 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!