GDP Growth Slowed in Q4, Was Solid for 2018: February 25 – March 1

GDP growth slowed during Q4 but was relatively healthy for all of 2018. Here are the five things we learned from U.S. economic data released during the week ending March 1. 

#1The economic expansion slowed a bit during the final three months of 2018. The first estimate of fourth-quarter 2018 gross domestic product (GDP) places economic growth at a seasonally adjusted annualized rate (SAAR) of +2.6 percent, compared to gains of +4.2 percent and +3.4 percent in Q2 and Q3, respectively. GDP has expanded 3.1 percent since Q4 2017. The Bureau of Economic Analysis also reports that GDP grew 2.9 percent for all of 2018, an improvement over gains of +1.6 percent and +2.2 percent in 2016 and 2017, respectively. Positive contributors to Q4 GDP growth were (in decreasing order) personal consumption expenditures, nonresidential fixed investment (i.e., business investment), exports, the change in private inventories, and government spending. Dragging down Q4 GDP were imports and residential fixed investment (i.e., housing). The BEA will update its Q4 GDP estimate twice over the next two months.GDP Growth 2015-2018 03019

#2Personal spending slumped in December, as had personal income in January. The Bureau of Economic Analysis reports that real personal consumption expenditures (PCE) fell 0.6 percent in December. Real spending on goods slumped 1.4 percent during the month, pulled down by declines for durable and nondurable goods of -1.9 percent and -1.2 percent, respectively. The reduction in spending on services was at a more modest -0.2 percent. Real personal disposable income jumped 1.0 percent in December, with gains for nominal disposable income and nominal personal income growing 1.0 percent the same month. (“Real” measures control for inflation while “nominal” measures do not.) The same report also included January nominal income data, but the story was not as good as nominal personal income slipped 0.1 percent (its first drop since November 2015) while nominal disposable income declined 0.2 percent. Delayed data collection due to the partial federal government shutdown prevented the publication of January data of real disposable income and personal consumption expenditures.

#3Manufacturing activity grew at a slower rate in February. The PMI, the headline index from the Institute for Supply Management’s Manufacturing Report on Business, lost 2.4 points during the month to a reading of 54.2. Despite the PMI dropping to its lowest point since November 2016, the measure has been above a reading of 50.0 for 30 straight months, indicative of an expanding manufacturing sector. Four of five PMI components declined in February: production (-5.7 points), employment (-3.2 points), new orders (-2.7 points), and supplier deliveries (-1.3 points). The index tracking inventories added 6/10ths of a point during the month. Sixteen of 18 tracked manufacturing sector expanded in February, led by printing, textile mills, and computer/electronics.

#4Housing starts plummeted in December. The Census Bureau estimates housing starts dropped 11.2 percent during the month to a seasonally adjusted annualized rate (SAAR) of 1.078 million units. This was 10.9 percent under the year-ago pace of starts. Starts of multi-family units (five or more units) slumped 22.0 percent while single-family home starts slowed 6.7 percent. Starts fell in three of four Census regions during December but held steady in the Northeast. Looking towards the future, the number of issued building permits edged up 0.3 percent to 1.326 million (SAAR), an increase of 0.5 percent from a year earlier. The number of permits issued to build single-family homes dropped 2.2 percent while that for multi-family units of at least five units jumped 5.7 percent. The annualized rate of completed homes slowed 2.7 percent to 1.097 million, an 8.4 percent decline from December 2017.

#5Consumer sentiment rebounded in February. The Conference Board’s Consumer Confidence jumped by 9.7 points during the month to a seasonally adjusted 131.4 (1985=100), its first increase in four months. Much of the gain came from an improved outlook for near-future business conditions as the expectations index surged a full 14 points to 103.4. The current conditions measure added 3.3 points to 173.5. 41.2 percent of surveyed consumers saw current business conditions as “good” compared to just 10.8 percent saying there were “bad.” Similarly, 46.1 percent of survey respondents viewed jobs as being “plentiful” versus 11.8 percent of them as being “hard to get.”

Meanwhile, the University of Michigan’s Index of Consumer Sentiment grew to a seasonally adjusted reading of 93.8 (1966Q1=100), up 2.6 points for the month but still below the year-ago reading of 99.7. The present conditions index edged down by 3/10ths of a point to 84.4 (February 2018: 90.0) while the expectations index improved by 4.5 points to 84.4 (February 2018: 90.0). The press release said that the survey data suggests real personal spending will grow 2.6 percent for all of 2019, which “will mean that the expansion is expected to set a new record length by mid-year.

Other U.S. economic data released over the past week:
Jobless Claims (week ending February 23, 2019, First-Time Claims, seasonally adjusted): 225,000 (+8,000 vs. previous week; +8,000 vs. the same week a year earlier). 4-week moving average: 229,000 (+2.7% vs. the same week a year earlier).
Chicago Fed National Activity Index (January 2019, Index (0.00=U.S. Expanding at its Historical Average): -0.43 (vs. December 2018: +0.05; January 2018: -0.29).
Factory Orders (December 2018, New Orders for Manufactured Goods, seasonally adjusted): $499.9 billion (+0.1% vs. November 2018, +2.4% vs. December 2017).
Pending Home Sales (January 2019, Index (100=2001), seasonally adjusted): 103.2 (December 2018: 98.7; January 2018: 105.6).
FHFA House Price Index (December 2018, Purchase-Only Index, seasonally adjusted): +0.3% vs. November 2018, +5.6% vs. December 2017.
Case-Shiller Home Price Index (December 2018, 20-City Index, seasonally adjusted): +0.2% vs. November 2018, +4.2% vs. December 2017.
Agricultural Prices (January 2019, Prices Received by Farmers (Index: 2011=100)): -4.5% vs. December 2018, -0.7% vs. January 2018.

The opinions expressed here are not necessarily those of Kevin’s current employer. No endorsements are implied.

The Fed Shares One Final Gift Before the Holidays: December 17 – 21

The Federal Reserve hiked its short-term interest rate target for a fourth and final time in 2018. Here are the five things we learned from U.S. economic data released during the week ending December 21.

#1The Fed bumps up short-term rates but forecasts fewer hikes in 2019. The statement released following last week’s meeting of the Federal Open Market Committee once again noted that “the labor market has continued to strengthen and that economic activity has been rising at a solid rate.” Also, it indicated that core inflation was near its two-percent target rate, but also pointed out that business investment had “moderated.” Unlike with previous statements, this one included a comment that the committee “will continue to monitor global economic and financial developments and assess their implications for the economic outlook.” This is a reference to (among other things) the potential impact of tariffs, Brexit and partial government shutdowns. With all of this in mind, the committee voted unanimously to bump up the fed funds target rate by a quarter point to range between 2.25 and 2.50 percent. The hike was widely expected, despite some external cajoling to the contrary.

Released in conjunction with the policy statement was economic projections of Federal Reserve Board members and Federal Reserve Bank presidents and one big takeaway was an expectation for slightly slower economic growth than previously predicted. The median forecast now has gross domestic product (GDP) growing 2.3 percent in 2019, whereas the previous prediction had growth at 2.5 percent. The median projection for the unemployment rate next year remained at 3.5 percent, but the core inflation rate now is expected to be 2.1 percent in 2019 (versus the previous 2.0 percent forecast). Most notable is the median prediction among FOMC members now has two hikes in the fed funds target rate in 2019—previously, FOMC members had anticipated three hikes next year.Fed Funds Target Rate Forecast.png

#2A revised Q3 GDP estimate continued to show robust economic growth. The Bureau of Economic Analysis’ third estimate of Q3 gross domestic product has the U.S. economy expanding at a healthy 3.4 percent seasonally adjusted annualized rate. This was just below the 3.5 percent rate of expansion reported in the first two previously published estimates. The downward revision was a product of lower than previously believed estimates of consumer spending and exports (only partially counterbalanced by an upward revision to private inventory accumulation). Corporate profits (with inventory valuation and capital consumption adjustments rose 3.5 percent to $2.321 trillion (+10.4 percent versus 2017 Q3).

#3Personal spending remained resilient in November. The Bureau of Economic Analysis estimates real (inflation-adjusted) personal consumption expenditures (PCE) increased 0.3 percent on a seasonally adjusted basis during the month. While this was half of October’s 0.6 percent bounce, it leaves real PCE up 2.8 percent over the past year. Real spending on goods rose 0.9 percent during November while services expenditures expanded at a more modest 0.2 percent. The 12-month comparables for both were a solid +3.4 percent and +2.8 percent, respectively. Funding the increased spending were 0.2 percent gains for nominal personal income and both real and nominal disposable income. Real disposable income has grown by 2.8 percent over the past year. The savings rate was +6.0 percent, down 1/10th of a percentage point from October.

#4Sales of previously owned homes grew for a second straight month after showing general weakness for much of 2018. The National Association of Realtors reports existing home sales increased 1.9 percent in November to a seasonally adjusted annualized rate of 5.32 million units. Despite the rise, home sales were 7.0 percent under its year-ago market, representing the largest negative 12-month comparable since November 2011. Sales grew during the month in three of four Census regions, with the West’s 6.3 percent decline being the outlier. All four Census regions experienced negative year-to-year sales trends: West (-15.4 percent), South (-5.6 percent), Midwest (-4.3 percent), and Northeast (-2.6 percent). Inventories contracted 5.9 percent during November to 1.74 million units (+4.2 percent versus November 2017 and the equivalent to a 3.9-month supply). The median sales price has risen 4.2 percent over the past year to $257,700.

#5Consumer sentiment ends the year on a high note. The University of Michigan’s Index of Consumer Sentiment added 8/10ths of a point in December to a seasonally adjusted 98.3. This places the sentiment measure 2.4 points ahead of its year-ago mark and keeps it within the same five-point range where it has been over the past two years. In December, the present conditions index added 3.8 points to 116.1 (December 2017: 113.8) while the expectations index shed 1.1 points to 87.0 (December 2017: 84.3). The press release notes that 2018 was the best year for the headline index’s 12-month average (98.4) since 2000.

Other U.S. economic data released over the past week:
Jobless Claims (week ending December 15, 2018, First-Time Claims, seasonally adjusted): 214,000 (-27,000 vs. previous week; +8,000 vs. the same week a year earlier). 4-week moving average: 222,000 (-6.0% vs. the same week a year earlier).
Leading Indicators (November 2018, Index (2016=100), seasonally adjusted): 111.8 (+0.2% vs. October 2018, +5.2% vs. November 2017).
Durable Goods (November 2018, New Orders for Manufactured Durable Goods, seasonally adjusted): $250.8 billion (+0.8% vs. October 2018). Nontransportation goods new orders: $163.8 billion (-0.3% vs. October 2018).
Housing Starts (November 2018, Housing Units Started, seasonally adjusted annualized rate): 1.256 million (+3.2% vs. October 2018, -3.6% vs. November 2017).
Housing Market Index (December, Index (>50 = “Good” housing market, seasonally adjusted): 56 (vs. November 2018: 60; December 2017: 74).
Treasury International Capital Flows (October 2018, Net Purchases of U.S. Securities, not seasonally adjusted): -$6.5 billion (vs. September 2018: +$7.5 billion; vs. October 2017: +$10.5 billion.
State Employment (November 2018, Nonfarm Payrolls, seasonally adjusted): Vs. October 2018: Payrolls grew in 4 states and were essentially unchanged in 46 states and the District of Columbia. Vs. November 2017: Payrolls grew in 37 states and were essentially unchanged in 13 states and the District of Columbia.

The opinions expressed here are not necessarily those of Kevin’s current employer. No endorsements are implied.

Consumer Spending Bounced Back: November 26 – 30

Personal spending and overall economic activity were resilient in October.  Here are the five things we learned from U.S. economic data released during the week ending November 30.

#1Consumers continued spending in October. The Census Bureau reports that real personal consumption expenditures (PCE) grew 0.4 percent on a seasonally adjusted basis during the month, up from a 0.1 percent gain in September. Spending on goods advanced 0.3 percent, with gains for durable and nondurable goods of 0.4 percent and 0.3 percent, respectively. Spending on services expanded 0.5 percent during October. Without adjustments for inflation, PCE rose 0.6 percent, funded by 0.5 percent growth in both nominal personal income and nominal disposable income. With inflation adjustments, real disposable income increased 0.3 percent. Over the past year, real PCE has grown 2.9 percent, funded by a 2.8 percent rise in real disposable income. October’s savings rate of +6.2 percent was 1/10th of a percentage point below that of the prior month.Income and Spending 113018

#2The second estimate of Q3 GDP growth matched that of the first. The Bureau of Economic Analysis estimates Gross Domestic Product (GDP) increased at a seasonally adjusted annualized rate of 3.5 percent, matching the prior month’s published estimate of economic growth. This report reflects larger than previously believed levels of nonresidential fixed investment and private inventory accumulation counterbalanced by lower levels of consumer spending and exports. The contributors to Q3 GDP growth were, in declining order, consumption, private inventory accumulation, government expenditures, and nonresidential fixed investment. Drags on Q3 economic growth were imports, exports, and residential fixed investment. This report also features the first estimate of Q3 corporate profits, which increased 3.4 percent to a seasonally adjusted annualized rate of $2.318 trillion (+10.3 percent from a year earlier).

#3Economic growth picked up slightly in October. The Chicago Fed National Activity Index (CFNAI), a weighted average of 85 economic indicators indexed such that a reading of 0.00 indicates economic growth at the historical average, grew by ten-basis points during the month to a seasonally adjusted +0.24. Fifty of the 85 indicators made positive contributions to the CFNAI, with 51 indicators gaining from their September readings. Among the four major categories of indicators, only those tied to employment made a larger positive contribution to the headline index (rising from a +0.05 to +0.19 contribution). Slumping slightly during the month were indicators linked to production (from a +0.09 to +0.05 ) and personal consumption/housing (from -0.04 to -0.05). Indicators tied to sales/orders/inventories made the same +0.04 contribution that they had made in September.

#4New home sales sank in October. The Census Bureau places new home sales at a seasonally adjusted annualized rate of 544,000 units, down 8.9 percent for the month, 12.0 percent under the year-ago pace, and its worst month since March 2016. Sales fell in all four Census regions, with drops of 22.1 percent in the Midwest, 18.5 percent in the Northeast, 7.7 percent in the South, and 3.2 percent in the West. Further, only the West did not have a negative double-digit percentage 12-month comparable, albeit with a modest 1.3 percent gain. Inventories of unsold new homes grew 4.3 percent to 336,000 units (+17.5 percent versus October 2017), the equivalent to a 7.4 month supply (the most since February 2011).

#5Contract signing activity for home purchases fell in October. The Pending Home Sales Index (PHSI) from the National Association of Realtors lost 2.7 points during the month to a seasonally adjusted 102.1 (2001=100). The measure fell in three of four Census regions: West (-8.9 percent), Midwest (-1.8 percent), and South (-1.1 percent). Contract signing activity edged up 0.7 percent in the Northeast. The PHSI has fallen 6.7 percent over the past year (this was the 10th consecutive month with a negative 12-month comparable), with declines in all four Census regions: West (-15.3 percent), Midwest (-4.9 percent), South (-4.6 percent), and Northeast (-2.9 percent).

Other U.S. economic data released over the past week:
Jobless Claims (week ending November 24, 2018, First-Time Claims, seasonally adjusted): 234,000 (+10,000 vs. previous week; -4,000 vs. the same week a year earlier). 4-week moving average: 223,250 (-7.5% vs. the same week a year earlier).
Agricultural Prices (October 2018, Prices Received by Farmers): -3.5% vs. September 2018, -3.0% vs. October 2017.
FHFA House Price Index (September 2018, Purchase-Only Index, seasonally adjusted): +0.2% vs. August 2018, +6.0% vs. September 2017.
Case Shiller Home Price Index (September 2018, 20-City Index, seasonally adjusted): +0.3% vs. August 2018, +5.1% vs. September 2017.
FOMC Minutes

The opinions expressed here are not necessarily those of Kevin’s current employer. No endorsements are implied.