Consumer Confidence Rises to 130.8
The New York-based Conference Board’s Consumer Confidence Index rose to 130.8 in February after rising to 125.4 in January. The Present Situation Index increased to 162.4 after declining slightly to a downwardly revised 154.7 in February. The Expectations Index continued to increase, rising to 109.7 from 104.0. It was the highest level on consumer confidence since November 2000. Consumers are optimistic about their short-term prospects and remain confident that the economy will continue expanding at a strong pace over the coming months. 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 Rises 0.2%
Consumer spending growth slowed to 0.2% in January from 0.4% in December. It was the smallest increase in consumer spending since August. Core consumer spending fell 0.1% after rising 0.3% in December. Personal incomes rose 0.4% in January after rising by the same amount in December and wages increased 0.5% for the second consecutive month. The savings rate increased to 3.2% from 2.5% in December. The Commerce Department estimated that the tax package reduced personal income taxed by $115.5 billion at an annual rate. Consumer prices, as measured by the PCE deflator, the Fed’s preferred inflation measure, rose 0.4% after rising 0.1% in December. It was the biggest increase since September. In the 12 months through January, the PCE price index rose 1.7%. Excluding the volatile food and energy components, the PCE price index rose 0.3% in January, the largest gain since January 2017. The core PCE price index rose 0.3% in January after rising 0.2% in December and was up 1.5% from January 2017. The Fed’s preferred inflation measure, the personal consumption expenditures (PCE) price index excluding food and energy has undershot its target of 2% since May 2012
Consumer Prices Rise 0.5%
The Consumer Price Index (CPI) jumped 0.5% in January after rising 0.1% in December. It was the biggest increase in five months. The CPI was up 2.1% over the past twelve months, unchanged from December’s year-over-year increase. Core inflation, which excludes food and energy, rose 0.3% in January after rising by the same percentage in December and was up 1.8% year over year. Core inflation has consistently been below the Fed’s target of 2%. Wall Street has been concerned that higher inflation will force the Federal Reserve to raise interest rates more aggressively which could in turn dampen the economic expansion. But most economists believe that fear is overblown, and while inflation may hover around 2% this year, it is unlikely to rise further in the short term. Gains in the CPI were tempered by a fallback in energy costs as gasoline prices fell 2.7%.
Unemployment Remains at 4.1%
The economy added 313,000 new jobs in February and the unemployment rate remained at a 17-year low of 4.1%. It was the biggest gain in jobs in more than a year and a half and was much higher than the 222,000 jobs economists were expecting. Job gains for December and January were also revised up by a total of 54,000 jobs. Altogether the economy has added an average of 242,000 new jobs in the past three months, a big improvement from the 182,000 monthly average in 2017. Construction companies hired 61,000 people, the biggest increase in 11 years. Retailers added 50,000 jobs and manufacturing added 31,000. However, wage growth is not keeping up. Hourly pay rose 4 cents to $26.75 per hour but the yearly increase in pay slipped to just 2.6% from a revised 2.8% in January. The strong report makes it virtually certain that the Fed will raise interest rates when the board meets later in March.
Durable Goods Orders Drop 3.7%
Durable goods orders dropped 3.7% in January after increasing 2.9% in December. It was the biggest drop in durable goods orders since last summer. The big decline was largely due to a sharp drop in contracts for commercial aircraft. New orders for nondefense capital goods excluding aircraft shrank 0.2% in January after dropping 0.6% in December, the first back-to-back decline in core orders since spring 2016. Businesses boosted investment at the fastest pace in six years in 2017, and core orders rose in all but two months. The durable goods report is volatile and often subject to sharp revisions.
Chicago PMI Falls to 61.9
The Chicago Purchasing Managers’ Index (PMI) fell to 61.9 in February after falling to 65.7 in January. The PMI was up 8% compared to February 2017 and remained slightly above the average reading for 2017 of 60.8. All five components fell for the month, with New Orders falling to a six-month low and contributing the most to the PMI’s decline. Production also fell to a level last seen in September. Prices Paid remained elevated, although this indicator dropped from January’s four-month high. Steel, wood, foam and alloy were reported as being particularly expensive. In February, firms were asked how input prices would impact them over the coming 12 months. Exactly half of the firms said they expected input prices to weigh on and challenge regular business operations, while 6% thought input prices would help them. The remaining 44% of respondents thought input prices would have no effect on their business.
Wholesale Prices Rise 0.4%
The producer price index (PPI) rose 0.4% in January after falling 0.1% in December, resuming the upward climb in producer prices that has been going on since August 2016. Results exceeded economists’ expectations. Prices were up 2.7% from January 2017. Energy prices accounted for much of the increase, rising 3.4% from December. Core producer prices, which exclude food, energy and trade services, were up 0.4% in January after edging up 0.1% in December. Core PPI was up 2.5% from January 2017, the biggest jump since 2014. While inflation has definitely picked up, analysts say it is doing so at a manageable pace that is not likely to alter the Fed’s methodical plan of small increases in interest rates.
Q4 GDP Revised Down to 2.5%
GDP grew a downwardly revised 2.5% in the fourth quarter, slightly weaker than the 2.6% first reported. Output was revised down because companies drew down inventories more than previously estimated, and business investment was slightly weaker than initially reported, growing 6.6% rather than 6.8%. However, growth in business spending on equipment was revised up to an 11.8% rate from the 11.4% first reported. Growth in consumer spending for the quarter was unrevised at a strong 3.8%, the most robust pace since the fourth quarter of 2014. The GDP revision, combined with sluggish retail sales and durable goods orders, have caused some analysts to revise their forecasts for first quarter growth down significantly, to ranges between 1.8% and 2.6%. Analysts said that unusually severe winter weather may have impacted growth, and also considered the fact that first quarter growth is typically slower than in any other quarter. Another measure of GDP that some economists think better reflects underlying demand in the economy, known as real final sales, was actually revised up to show a 3.3% gain for Q4 rather than the 3.2% increase first reported.
Job Openings Fall Again
Job openings fell by 167,000 in December to a seasonally adjusted 5.8 million. The drop in openings was led by the professional and business services sector, where job openings dropped by 119,000. Job openings in retail fell by 85,000 and vacancies in construction dropped 52,000. The quits rate rose to 2.2% from 2.1% in November as 3.259 million workers voluntarily left their jobs. The quits rate is considered a measure of confidence in the job market, and has been steadily rising since hitting a low of 1.3% in late 2009. Rising job turnover should eventually lead to accelerated wage growth, which economists say will help push inflation towards the Fed’s target of 2%. Hiring in December was little changed at 5.49 million. The JOLTS report is one of the Fed’s preferred economic indicators.
More Rate Increases Forecast
More forecasters now expect the Fed to raise rates four times this year instead of the three times previously forecast because of the bipartisan spending bill that will increase federal government spending by $300 billion over the next two years. Many economists predict the bill could boost US economic growth by approximately 0.3% both this year and next year, which is roughly the same amount of increase expected from the $1.5 trillion tax cut that was signed into law in December. The Fed’s rate-setting decisions are important to markets because of the likely impact of climbing rates on the values of bonds, stocks, currencies, real estate and other assets. Policies often influence borrowing costs for households and businesses. The Fed has raised rates five times since December 2015; at the end of 2017 rates were between 1.25% and 1.5%.
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