A look behind at the February 24 sees the economic data reports obscured by the rapid and steep plunges in equities prices and the geopolitical response to developments in the COVID-19 outbreak that has escalated.
Much of the data was concentrated on conditions in manufacturing. Evidence is building that it has broken away from its five month downturn of August-December 2019. Most of the regional factory sector data was expansionary for February, much of it building on an upswing in January. However, warnings about impacts along the supply chain of goods from China during its massive quarantines were more prevalent. If the situation lingers, it may drag the sector back into a mild recession. The Richmond Fed’s Composite Manufacturing Index – the regional number that best predicts the ISM Manufacturing Index – took a sharp turn lower to -2 in February, but it should be read in context after the surge to 20 in January. Even so, the Richmond-ISM equivalent predicted continued expansion for the national report.
The advance report on new orders for durable goods was above expectations in January with a small 0.2% decline. Weakness in aircraft orders was anticipated to pull the total lower than it did. However, seasonal adjustment helped lift the total dollar value somewhat. In combination with firming in other sectors, January didn’t look too bad.
Regional service sector data reflected on-going expansion but the surveys expressed similar – if less severe – misgivings about what is happening to contain the spread of the virus. The increase in the Richmond Fed’s index of service sector revenues is the best hint that non-manufacturing is growing solidly for now.
Consumer confidence seemed largely unaffected by news in February. Both the Conference Board’s Consumer Confidence Index and the University of Michigan’s Consumer Sentiment Index are near post-recession highs. As long as the labor market is strong and compensation on the rise, confidence seems insulated from the elevated the risks to growth. However, this may be less true in March when there is time to absorb developments like the stock market plunge and a government response that is inconsistent and confusing.
The housing market is showing no signs of cooling off in the winter months. As long as mortgage rates are low, homebuying is going to be more attractive. And with the flight-to-safety into bonds, it is possible rates are going to be even lower and borrow even more sales from the spring months.
Sales of new single-family homes are got a boost from lack of supply in existing units in addition to the presence of low rates. Homebuilders are starting projects as fast as they can in the winter months and homebuyers are signing contracts for units not yet started or which are only under construction, which in turn is limiting the supply of completed homes for sale. The Pending Home Sales Index was up sharply in January, which should mean contracts are closed in February that will pull even more units off the market.
The second estimate of fourth quarter GDP was unchanged at the headline from the advance report at up 2.1%. The composition of growth looked a bit different, but as expected it continued to be carried by personal consumption expenditures. Things are starting to shape up for estimates for first quarter growth with advance data for January on international trade in goods only, and inventories for retail and wholesale businesses.
Personal income was up a solid 0.5% in January from December with increases in minimum wages and the arrival of the COLA for social security payments. While personal spending was unspectacular at up 0.2%, some of that was due to restraint in nondurables where falling gasoline prices reduced the dollar value of spending. Spending was up for durables and services which may be in part from the active housing market.
The PCE deflator for January was up 1.7% year-over-year. This is still below the Fed’s 2% symmetric objective. However, it is of a piece with what Chair Jerome Powell has said, that the deflator was held down by some special factors early last year that are now starting to move through the data. Still, inflation measures are probably going to feel the effects of declines in energy prices. Certainly, inflation expectations as seen in the University of Michigan Survey of Consumers were low in January and were only just above record lows in February.
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