NAM: Monday Economic Report
Note: While the federal government reopened on January 25, some economic data scheduled for release last week, notably the first estimate for fourth-quarter GDP, were delayed.
Continued growth at a slower rate is a key theme emanating from different business surveys. The Chicago Fed National Activity Index, an aggregate of 85 national indicators, accelerated in December with positive contributions from its production and employment components. The three-month moving average increased but remained well below last April’s eight-year high. The ISM® Manufacturing Purchasing Managers’ Index® gained 2.3 points to a robust 56.6 in January, firmly in the expansion zone. New orders bounced back from a disappointing December, up 6.9 points to 58.2. Production also increased to a solid 60.5. Fourteen out of 18 industries reported an expansion in January, more than last month but just shy of annual averages of the past two years.
On a more regional basis, the Dallas Federal Reserve Texas Manufacturing Outlook Survey indicates continued expansion and improving outlook from the weak data at the end of last year, but the survey results also remained below last year’s highs. In addition, the Chicago Business Barometer, covering both manufacturing and non-manufacturing businesses in the Chicago area, cooled to 56.7 in January, a two-year low but also firmly in the expansion zone.
Consumer confidence has weakened lately. The Conference Board Consumer Confidence Index lost six points, down to 120.2 in January. While consumers’ assessment of the current situation was stable over a month ago, the decline in their expectations over the past two months was the fourth largest on record with history going back to 1967. The Conference Board tied the expectation decline to financial market volatility and to the partial government shutdown. To the extent that both factors improved lately, this drop might prove temporary. The Index of Consumer Sentimentfrom the University of Michigan paints a similar picture, but its analysis notes that consumer sentiment is at risk if another government shutdown would occur after February 15.
Recent events might have shaken consumer confidence, but it did not prevent consumers from finding a job. The Bureau of Labor Statistics (BLS) announced that total nonfarm payroll employment increased by 304,000 in January, above market expectations. The unemployment rate edged up one-tenth to 4.0 percent with the participation rate also increasing by one-tenth to 63.2 percent. Average hourly earnings grew 3.2 percent over a year earlier. In a separate report, the BLS announced that employment costs for civilian workers increased 0.7 percent from last September, with benefits growing slightly faster than wages and salaries.
November construction spending rose 0.8 percent from October and 3.4 percent from November 2017. Residential construction reversed a declining trend initiated last May. New home sales increased sharply in November to 657,000 units, also reversing a yearlong decline. Median prices decreased, and months of supply declined from seven to six months. Nonresidential construction declined 1 percent in November, bringing year-over-year growth to 5.5 percent. Total public construction rose 7 percent from November 2017, while total private construction expanded 2.3 percent over the same period.
The FOMC kept the target federal funds rate to 2.25–2.50 percent and its balance sheet reduction targets unchanged, but it revised its statement to indicate a more patient and careful approach to future tightening, including its balance sheet reduction. It also emphasized the symmetric nature of its 2 percent inflation target. Financial markets quickly reassessed down the path of future rate increases. The federal funds rate adjusted for the Federal Reserve’s preferred inflation measure just turned positive in the fourth quarter. The FOMC’s pragmatism in setting its monetary policy and managing market expectations was certainly a key driver of this long expansion phase.
Editor’s Note: Many thanks to Nicolas Clerc, chief economist at Caterpillar, for compiling this week’s Monday Economic Report.