A look back at the March 25 week saw the first quarter 2019 close out with evidence that the long expansion continues and is likely to match or exceed the 120 months of the March 1991-March 2001 period. Concerns about a possible recession got a jolt with the yield curve inversion on March 23, but generally the numbers indicate that both manufacturing and services have weathered the slowdown at the end of 2018 and the impacts of the partial federal government shutdown that lasted 35 days and encompassed most of January. Housing activity is starting to reawaken, consumer confidence is still elevated due to continued strength in the labor market and rising wages.
The final estimate of GDP for the fourth quarter was for growth up 2.2% (previously up 2.6% in the initial report). Consumer and business spending were the main reason for the downward revision. Nonetheless, moderate growth managed to chug along in the final quarter of 2018. It may not provide much momentum to power the first quarter 2019 which has experienced a series of adverse events (the shutdown and major weather episodes). The first quarter is often subject to “residual seasonality” that depresses the GDP number. However, activity tends to rebound in the second quarter after softness in the first, and there is no immediate reason to think that the US economy is anything but fundamentally sound.
The data on personal income and spending remains out of sync at present. The numbers for income were through February, but spending was only through January. Income is showing steady gains for wages and salaries, reflecting increases seen in the employment data and anecdotal evidence of businesses having to raise pay to attract and retain workers. Consumer spending has been sluggish, particularly for durables. It may be that some future demand for items like motor vehicles, and furniture and appliances was used in October and November in 2018 after a series of natural disasters necessitated the replacement of large items. The PCE deflator showed year-over-year prices increases at only 1.4% in January, but to some extent this is a holdover from lower energy prices in prior months. However, the core PCE deflator was up 1.8%, a notch down from the prior month and hinting that inflation is softer.
The March surveys of manufacturing and service sector activity were somewhat mixed in tone. However, the regional data pointed to broadly expansionary conditions, if below the sorts of highs seen in 2018. In particular, manufacturing seems to have found its footing after the end of 2018-early 2019 wobble and activity is consistent with middling expansion. Services seem to have had more trouble recovering after the impacts of the government shutdown. However, on the whole these too are expanding, albeit unevenly.
The house price index for January from the FHFA put price gains up again month-to-month. Nonetheless, the year-over-year pace of increases has lost momentum. This is good news on home affordability for potential buyers who will have more negotiating power from sellers, although in turn some potential sellers may be reluctant to put a property on the market if they do not think they will get the best price.
Another piece of good news on home affordability is that fixed rates for mortgages are at their lowest in 14 months. The run up in rates in October and November 2018 had a definite impact on sales of homes. When rates began to trend lower in January, it helped stimulate some demand. Further declines have done a bit more, but the drop in the March 28 report to 4.06% for a 30-year mortgage and 3.57% for a 15-year loan brings rates down to levels that led to the buying spree in late 2017 through mid-2018.
The NAR’s Pending Home Sales Index for February unwound some of the upswing from January without undoing the fundamentally better pace of contracts for home purchases. Lower mortgage rates should mean more buyers move to lock in contracts while affordability is improved.
Sales of new single-family homes in February surprised to the upside with a solid up 4.9% to 667,000 from 636,000 in January and was the highest since 672,00 in March 2018. Like other housing data, it is probable that lower mortgage rates are helping sales.
The two most closely followed indicators of consumer confidence moved in different directions in March. The Conference Board’s Consumer Confidence Index fell 7.3 points to 124.1 in March from 131.4 in February. However, February reflected a sigh of relief after the end of the partial federal government shutdown. March’s reading is probably closer to the underlying trend as consumers adjust to the prospect of less robust economic growth and the maturity in the labor market. The University of Michigan Consumer Sentiment Index’s final reading of 98.4 in March was up from 93.8 in February when consumers were still concerned about a number of possibilities including a second partial shutdown shortly after the first. At present, the bottom line is that in the historical context, consumers are quite optimistic.
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