NAM: Monday Economic Report
The U.S. economy grew 2.6 percent at the annual rate in the fourth quarter. For the year, real GDP rose 2.9 percent in 2018, or by 3.1 percent from Q4:2017 to Q4:2018. As such, economic growth last year was the best since 2005, as expected, on a year-over-year basis. In the fourth quarter figures, consumer and business spending were the bright spots, but there were continuing drags in growth from net exports and residential fixed investment.
Moving forward, I forecast 2.4 percent growth for 2019, recognizing that the global economy is softening and there are lingering political uncertainties. With that in mind, policymakers need to build on last year’s momentum by taking action on additional priorities, including approval of the U.S.–Canada–Mexico Agreement, to ensure manufacturers in America can continue to grow and prosper.
The recovery in the stock market and the end of the partial government shutdown have helped boost consumer confidence, according to the Conference Board. That will hopefully boost spending moving forward, but in December, personal consumption expenditures fell 0.5 percent, the first monthly decline since February 2017. With that decrease, the savings rate soared from 6.1 percent in November to 7.6 percent in December, its highest reading since January 2016. January personal spending data were delayed due to the shutdown.
Meanwhile, personal income edged down 0.1 percent in January after rising 1.0 percent in December. On a year-over-year basis, personal income has risen 4.3 percent since January 2018.
The manufacturing data out last week were mixed. On the survey front, activity rebounded among respondents to reports from the Dallas and Richmond Federal Reserve Banks in February after softening in both December and January. Manufacturers in the Kansas City Fed district cited ever-so-slight growth, but at the slowest pace since November 2016. Moving forward, though, all of the regions reported a mostly upbeat assessment of activity over the next six months.
The ISM® Manufacturing Purchasing Managers’ Index® declined from 56.6 in January to 54.2 in February, its lowest point since November 2016, with slower growth for new orders, production and employment. Nonetheless, overall business conditions continue to be favorable, with the sector expanding modestly. Exports improved in February, and prices declined for the second straight month.
New orders for manufactured goods inched up 0.1 percent in December. With that said, there were sizable nondefense aircraft and parts sales, which helped boost the headline number. Excluding transportation equipment, factory orders were down 0.6 percent. Overall, factory orders rose 2.4 percent year-over-year.
In addition, new orders for core capital goods (or nondefense capital goods excluding aircraft)—a proxy for capital spending in the U.S. economy—decreased for the second straight month, continuing to pull back from the all-time high reached in July. However, core capital goods spending has increased by a very modest 2.0 percent over the past 12 months.
New housing starts plummeted to their lowest level since September 2016, down from an annualized 1,214,000 units in November to 1,078,000 units in December. This is consistent with other data showing softness in the housing market, largely due to affordability and workforce issues.
Encouragingly, housing permits—a proxy of future activity—seem to indicate that the December starts data might be an aberration. Indeed, housing permits inched up from 1,322,000 units at the annual rate in November to 1,326,000 units in December, an eight-month high. This rebound will likely be supported by lower mortgage rates seen so far in 2019.
The personal consumption expenditures deflator inched up 0.1 percent in December, or 1.7 percent over the past 12 months. That suggests some moderation from July’s pace of 2.4 percent year-over-year. Core inflation remained at 1.9 percent year-over-year, staying below the Federal Reserve’s stated goal of 2 percent.
This moderation in the rate of price growth should provide some comfort to the Federal Open Market Committee, as it should allow them the luxury of being less “hawkish” in setting monetary policy over the coming months. Indeed, comments last week from Federal Reserve Board Chair Jerome H. Powell and Vice Chair Richard H. Clarida seem to support the view that the FOMC will wait for signs of stronger economic data before hiking interest rates again.