US Economy February 2019
The markets rallied in January on good corporate earnings, solid economic news and reassurance that the Fed would not raise rates any time soon. The S&P, the index most closely followed by economists, turned in its best January performance since 1987, and its biggest monthly gain since October 2015. The DOW also had the largest monthly increase since 2015 and the biggest January gain in 30 years. The NASDAQ jumped 9.7% in January, its largest monthly gain since 2011.
Consumer Confidence Drops to 120.2
The New York-based Conference Board’s Consumer Confidence Index fell to 120.2 in January after dropping to 128.1 in December, according to the Conference Board’s latest survey. The third consecutive monthly decline was most likely due to continued financial uncertainty and the government shutdown. The Present Situation Index, which is based on consumers’ assessment of current business and labor market conditions, declined from a downwardly revised 169.9 to 169.6. The Expectations Index, which is based on consumers’ short-term outlook for income, business and labor market conditions, fell sharply, to 87.3 from a downwardly revised 97.7 in December. While confidence is still above the level that indicates growth, analysts note that three consecutive monthly declines could pose issues for consumer spending ahead. However, the Conference Board stated that much of the decline was most likely driven by the shutdown and said that “shock events” tend to have a very sharp but temporary impact on confidence. Economists note that a level of 90 indicates that the economy is on solid footing and a level of 100 or more indicates growth. Analysts caution that the real driver behind consumer spending is income growth and that labor market trends are a more accurate predictor of consumer behavior.
Consumer Spending Delayed
The report on consumer spending due out in January was delayed by the government shutdown. Consumer spending rose 0.4% in November after rising an upwardly revised 0.8% in October. It was the ninth consecutive month that consumer spending increased. Personal incomes rose 0.2% in November after rising 0.5% in October. The savings rate dropped to 6%, a five-year low. The personal consumption expenditures (PCE) price index excluding food and energy edged up 0.1% from October and the annual core PCE price index was up 1.9%, still slightly below the Fed’s inflation target of 2.0%.
Consumer Prices Fall 0.1%
The Consumer Price Index (CPI) fell 0.1% in December after being unchanged in November; it was the first decline in the CPI in nine months. The CPI rose 1.9% over the past twelve months, down from a 2.2% annual increase in November. Core inflation, which excludes food and energy, rose 0.2% for the third consecutive month and was up 2.2% from December 2017. Falling gasoline prices were behind the overall decline in the CPI once again. Retail gas prices dropped 7.5%, reflecting the sharp drop in crude prices over the course of the fourth quarter.
Unemployment Rises to 4%
The unemployment rate rose to 4% in January after rising to 3.9% in December and the economy added a very robust 304,000 new jobs, well ahead of expectations of 170,000 new jobs. However, job numbers for November and December were revised. Gains for December were revised down to 222,000 from the 312,000 first reported, while gains for November rose to 196,000 from the 176,000 new jobs first reported. The net result was 70,000 fewer jobs for November and December, which took the three-month average down to 241,000 jobs, still well above trend. For the full year of 2018, the average monthly gain was 223,000. Average hourly earnings rose just 3 cents for the month, or 0.1%, well below expectations. Average hourly earnings were up a solid 3.2% year over year. Construction added 52,000 new workers in December, bringing the total number of construction workers added since January 2018 to 338,000. January was the 100th consecutive month of positive job creation, by far the longest stretch on record. The increase in the unemployment rate was most likely due to fallout from the government shutdown, although the government workers directly affected were actually counted as employed since they received pay during the survey week of January 12. The economy needs to create about 120,000 new jobs each month to keep up with growth in the working-age population.
Durable Goods Orders Delayed
The durable goods report for December was delayed due to the government shutdown. Durable goods orders rose 0.8% in November after plunging an upwardly revised 4.3% in October. Economists had forecast a 1.6% increase in orders. The increase was primarily driven by aircraft orders for both commercial and military aircraft. Core durable goods orders for non-defense capital goods excluding aircraft, widely regarded as a key indicator of business spending, fell 0.6% after being flat in October. Nondefense capital goods shipments, which factor into GDP, rose 2.4% in November after falling 0.6% in October. The durable goods report is volatile and often subject to sharp revisions.
Chicago PMI Falls to 56.7
The Chicago Purchasing Managers’ Index (PMI) fell 7.1 points to 56.7 in January after dropping to a downwardly revised 63.8 in December. Four of the five components fell, with sizable drops in Production and New Orders accounting for most of the decline. However, it was the 24th consecutive month the PMI was above 50, the level that indicates growth. The Prices Paid component was unchanged for the month, ending five consecutive months of declines. Respondents reported higher prices in raw materials and metals and continued pressure from supplier price increases. A total of 42.9% of firms surveyed believed that their business had not been impacted by market volatility, while 40.8% believed market volatility was impacting their business. The remaining 16.3% of firms were not certain if market volatility was impacting their business.
Wholesale Prices Fall 0.2%
The Producer Price Index (PPI) fell 0.2% in December after rising 0.1% in November. The PPI rose 2.5% in 2018. Core producer prices, which exclude food, energy and trade services, were flat in December after rising 0.3% in November and were up 2.8% from December 2017. The sharp drop in oil prices over the fourth quarter pulled down energy costs. Input costs for services and core goods are running ahead of selling prices, which points toward pressure on profit margins. Core PCE data for December, the Fed’s preferred measure of inflation, was delayed due to the government shutdown.
Q4 GDP Delayed
The first reading for Q4 GDP was delayed by the government shutdown. GDP growth slowed to 3.4% in the third quarter, according to the third and final reading from the Commerce Department. Growth was previously reported at 3.5% in both the first and second reading. The revision was due to downward revisions to consumer spending, which grew 3.5% rather than the 3.6% first reported and a further downward revision to exports. Inventories were revised upward from $86.6 billion to $89.8 billion, and added 2.33% to GDP growth, the biggest contribution since the fourth quarter of 2011. Consumer spending accounts for more than two-thirds of US economic activity.
Job Openings Drop
The number of job openings dropped by 243,000 to 6.9 million in November after rising to 7.1 million in October, according to the most recent Job Openings and Labor Turnover Survey (JOLTS). Job openings hit a record high of 7.3 million in August. In November construction vacancies fell by 45,000, with much of the decrease in openings concentrated in the West. The job openings rate slipped to 4.4% in November after rising to 4.5% in October. Hiring dropped by 218,000 to 5.7 million, and the hiring rate fell to 3.8% from 4.0% in October. The number of workers quitting their jobs fell by 112,000 to 3.4 million in November, and the quits rate was unchanged at 2.3%. Many companies reported difficulties in finding qualified workers. A survey from the NFIB showed that the share of small business owners with job openings they could not fill jumped five points to a record high of 39% in December. That lifted the job opening rate to 4.5% from 4.4% in October. The JOLTS report is one of the Fed’s preferred economic indicators.
Fed Will Wait on Rate Increases
The Fed left interest rates unchanged at 2.25% to 2.50% when they met at the end of January. The decision to wait on interest rate increases was unanimous as well as widely expected. The Fed board downgraded their assessment of the economy, estimating that GDP growth continued to slow in the fourth quarter of 2018, and will slow further in the first quarter this year. The Fed also stated that economic expansion is still the most likely long-term outcome, but that they can be patient as there is no need to raise rates right now. Wells Fargo believes that another rate hike will eventually ensue this year, but the Fed will then remain on the sidelines through much of 2020. They also forecast that real GDP will grow at an annualized rate between 2.0% and 2.5% this year. In addition, the very low unemployment rate will continue to put some upward pressure on wage inflation. The Fed raised rates four times in 2018 and had originally penciled in two increases for this year. Fed Chairman Jerome Powell’s statement is noteworthy because he has long favored a more aggressive outlook for monetary policy.
Government Shutdown Truce
The US government shutdown that began at midnight on December 22, 2018 was temporarily ended on January 25 with an agreement that reopened the government until February 15, allowing Federal government employees to get paid while Congress attempts to negotiate a permanent agreement. The Congressional Budget Office (CBO) estimates that the 36-day shutdown cost the government about $3 billion and will subtract about 0.4% from GDP in the first quarter. All in all, about 800,000 government workers were affected, more than half of whom were actually on the job even though they were not getting paid. It was also announced that many reports produced by various departments due out in January would be delayed.
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