Monday Update: Despite Disappointing News, Slow Growth Should Continue

Last week’s economic news was discouraging, with weak headline numbers and generally weak details. Nonetheless, the data points more toward continued slow growth, not a collapse.

A look at last week’s news

Sales of existing homes declined, falling by 7.1 percent from 5.47 million to 5.08 million, considerably worse than expectations of 5.31 million. Supply constraints and price increases are hitting both supply and demand, suggesting that housing sales may continue to grow more slowly, even as this should continue to support the homebuilding industry and housing starts. Other negative factors were the stock market decline and the January blizzard in the Northeast.

At the same, time, however, sales were up over a year ago, by 2.2 percent, and the 12-month average moved to its highest level since October 2007, suggesting that the uptrend, though slowing, remains intact. Prices also continued to increase, a sign of healthy demand.

New home sales, on the other hand, increased to 512,000 last month from an upwardly revised 502,000 the month before, supported by the same supply constraints that are slowing existing home sales. Nonetheless, the longer-term trend is slowing, and sales are actually down over the past year.

Finally, durable goods orders were reported last Thursday. The headline number fell substantially, as expected, from a downwardly revised gain of 4.2 percent to a decline of 2.8 percent, on a big drop in aircraft orders, but this kind of volatility is typical for the data series.

Core orders, which exclude transportation, also dropped, and by more than was expected. The strong January gain of 1.7 percent was revised down to a 1.2-percent gain, and February’s number was a decrease of 1 percent, worse than the expected 0.3-percent decline. Much of this was due to a more than 25-percent drop in defense orders, but even so, the report shows continuing weakness across the board in capital investment.

The week ahead

After last week’s weak data in housing and industry, this week should tell us much more about how the U.S. consumer—the most important part of the economy—is doing. Today, the personal income and spending report is due.

• Personal income growth is expected to drop substantially, from an increase last month of 0.5 percent to an increase of 0.1 percent, based on a decline in the average hours worked figure.
• Personal spending growth is also expected to decline in the same way. Although January’s growth was unsustainable, this would be a bigger pullback than expected.

On Tuesday, the Conference Board's consumer confidence survey is expected to increase from 92.2 to 94.0, driven by the stock market’s recovery. Although the University of Michigan survey dropped last week, on higher gasoline prices, the rise in the market since the survey date should provide an upward boost.

On Friday, the ISM Manufacturing report will show whether this sector is continuing to stabilize. Expectations are for the index to increase into positive territory, from 49.5 to 50.4, based on encouraging regional surveys from the Federal Reserve that show businesses doing better than expected. The recent weakening of the dollar has helped, as has the continuing normalization of the oil drilling industry. Though this increase wouldn't be large enough to have a material effect, the psychological impact could be real.

The most important data of the week will also come out on Friday: the employment report.

• Expectations are for job growth to drop from 242,000 to a still healthy 202,000.
• The unemployment rate is expected to remain at 4.9 percent.
• Labor demand is expected to increase further, with average hours worked climbing from 34.4 to 34.5, and wage growth moving back into positive territory, at a gain of 0.2 percent.

If we hit expectations, this would be another positive report, and the risks appear to be more on the upside than the downside.

Have a great week!