The Independent Market Observer

Monday Update: Weak Trade and Jobs Data, But Business Confidence Improves

Posted by Brad McMillan, CFA®, CFP®

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This entry was posted on Mar 11, 2019 1:49:12 PM

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Monday updateLast week was a busy one in terms of economic updates, including the very important jobs report. This week, we’ll get a look at retail sales and manufacturing.

Last week’s news

On Tuesday, the Institute for Supply Management Nonmanufacturing index beat expectations. It rose from 56.7 in January to 59.7 for February—reversing most of the significant drop seen in recent months and coming in well above the expected 57.4. As with consumer confidence, the bounce may indicate that the drop was due to the government shutdown and has now passed. This is a diffusion index, where values above 50 indicate expansion and below 50 indicate contraction. So, this is a very healthy figure that suggests a renewed expansion after the recent pullback.

Also on Tuesday, the new home sales report showed continued weakness in the housing market. Sales rose from the revised November figure of 599,000 to 621,000 for December. But the November figure was revised down from 657,000, leaving the quarterly figure lower. Offsetting this result, on Friday, the housing starts report showed starts up from 1.078 million to 1.23 million. This result was better than expected, suggesting the housing market may be rebounding as well. Overall, a weak housing market would remain a source of concern for the economy as a whole.

Trade also remains a worry. On Wednesday, the international trade report showed the trade deficit worsened by even more than expected. It went from $49.3 billion in November to $59.8 billion for December. The rising deficit will be an even bigger headwind to fourth-quarter growth than was expected. This result should take 2018 GDP growth down further and will likely weigh on first-quarter 2019 growth.

On Friday, the employment report also shocked to the downside, declining from an upwardly revised 311,000 in January to 20,000 in February. This very weak number from the establishment survey was offset, however, by a stronger number from the household survey. It showed the unemployment rate dropping to 3.8 percent from 4 percent on stronger reported job growth, while wage growth rebounded from 0.1 percent to 0.4 percent for the month. Although the headline number was terrible, the supporting data was considerably stronger, which suggests this may be a one-off rather than something worse. Nonetheless, this is a terrible report and raises concerns going forward.

What to look forward to

On Monday, the retail sales report was released. The headline index rebounded from December’s surprising 1.6-percent drop (downwardly revised from a 1.2-percent initial figure) to a 0.2-percent gain for January. The core index, which excludes autos, recovered a bit more. It went from a downwardly revised 2.1-percent drop in December to a 0.9-percent gain in January. Much of the December decline appeared to be due to decreased income and confidence during the government shutdown, so the reversal is reasonable. But even with the rebound, the data suggests we may well see slower growth in the first quarter.

On Tuesday, the Consumer Price Index is expected to show a rise in the headline index, which includes energy and food, of 0.2 percent for February. This would be up from a flat result in January, leaving the annual rate at 1.6 percent. The core index, which excludes food and energy, is expected to hold steady at a 0.2-percent gain for February, the same as January. Here, the annual figure should stay steady at 2.2 percent. If the numbers come in as expected, inflation will remain solidly under control, which likely will keep the Fed patient on interest rates.

On Wednesday, the Producer Price Index is also expected to show moderate inflation. The headline index should rise from a 0.1-percent decline in January to a 0.2-percent increase in February. The annual rate, however, is expected to decline from 2 percent to 1.9 percent on base effects. Core prices are also expected to rise on a monthly basis, but by less, from an increase of 0.3 percent in January to a 0.2-percent gain in February. The annual figure is expected to stay steady at 2.6 percent.

Also on Wednesday, the durable goods orders report is expected to show a drop in the headline index. It should go from a 1.2-percent gain in December to a 0.8-percent decline in January, on a drop in aircraft orders. The core index, which excludes transportation and is a better economic indicator, is expected to rise from a 0.1-percent gain in December to a 0.3-percent gain in January. There may be some downside risk here, however, as surveys show slower business investment growth.

On Friday, the industrial production report is expected to bounce off a very weak January. Growth declined by 0.6 percent in January, largely on reduced manufacturing output. It is expected to rise by 0.6 percent in February, however, on resumed growth and higher utility production due to the cold weather. Manufacturing is also expected to rebound, from a 0.9-percent decline in December to a 0.5-percent rise in January. There may be some downside risk to both of these numbers on slowing global demand.

Also on Friday, the initial release of the University of Michigan consumer confidence index is expected to rebound a bit, from 93.8 in February to 95.8 in March. The government shutdown was responsible for much of the recent decline, reportedly, so its end should help the index bounce back a bit. Lower gas prices and the stock market recovery are also expected to help.

Thanks for reading and have a great week!

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