KEY DATA: Durable Orders: -1.6%; Ex-Aircraft: +0.1%; Capital Spending: -0.1%/ Paychex Index (Over-Year): -0.88%

IN A NUTSHELL:  “Businesses are just not investing and that is a worrisome thing for the economy going forward.”

WHAT IT MEANS:  Productivity has been growing minimally and it was hoped that the tax cuts would trigger a surge in capital spending.  Well, maybe not.  Durable goods orders tanked in February, but that was largely due to a massive drop in Boeing airplane demand.  Nondefense aircraft orders were off over 30%.  Even excluding aircraft, demand for big-ticket items was up only modestly.  Some of the most critical sectors, such as computers, communications equipment, vehicles and machinery, all posted negative numbers.  There were gains in metals and electrical equipment, but that was it.  But the most disconcerting number in the report was the proxy for private sector capital spending:  It also eased back.  For the first two months of 2019 compared to 2018, orders are up just 2.6% and that gain is not inflation adjusted.  In other words, so much for the investment boom.

Friday we get the March employment numbers and there are some differing indicators of how strong it could be.  The Supply Managers’ manufacturing employment index popped and the NFIB index has been trending upward.  However, the Paychex/HIS Markit Small Business Employment index keeps showing slowing job gains.  That decline continued in March and it has translated into a wage gains bouncing around, rather than continuously accelerating.

MARKETS AND FED POLICY IMPLICATIONS:  The capacity of the economy to expand depends heavily of firms being more efficient and that requires investing in new equipment, buildings and software.  While capital spending is growing, it is doing so at a pace that is not likely to improve productivity markedly.  With labor markets tight, it is hard to see how growth can accelerate sharply for any extended period.  I had based, at least to some extent, my 2019 solid growth forecast on the supposition that it takes time for firms to ramp up large spending decisions and by early this year, we should be seeing those decisions turn into actual orders.  That has yet to happen and given the worldwide slowdown and consumer cautiousness, I am no longer expecting a second round of business investment increases.  If investors look at the fundamentals, what they will see is that wage gains are accelerating, productivity is lagging and household and business spending is rising moderately, at best.  With world growth also slowing, it is hard to see where profit growth is going to come from, especially since this year’s numbers have last year’s tax hyped gains as comparisons.  Fed Chair Powell has already bowing once to the screams of the markets and this forecast of modest earnings growth makes me wonder what he will do next.  For me, the risks are not balanced, as the Fed claims, but are skewed toward the downside.    

KEY DATA: Sales: -0.2%; Vehicles: +0.7%/ ISM (Manufacturing): +1.1 points; Orders: +1.9 points

IN A NUTSHELL:  “The consumer is not out there buying a whole lot and that does not bode well for growth.”

WHAT IT MEANS:  The first quarter is in the books, at least as far as the calendar is concerned, and it doesn’t look as if the economy did so great.  Most importantly, the data on household spending, as has been noted before, remains tepid.  Retail sales fell in February despite a rebound in vehicle purchases.  The rise in vehicle demand was a surprise given the weak dealer sales reports.  Actually, this entire report has caveats attached.  There was an increase in gasoline sales, but that was likely the result of rising prices.  Offsetting that was a sharp reduction in building supply purchases, but that came after a similar surge in January.  Even given the yes, buts, this was not a good report.  The “control” retail sales number, which excludes vehicles, gasoline and building supplies, also fell.  This more closely tracks the GDP consumption number and so far this quarter it is pointing to a soft first quarter consumer expenditure growth rate.  It is likely to come in well below 2%.

As additional data come in, it looks like the manufacturing sector is righting itself.  The Institute for Supply Management’s Manufacturing Index rose nicely in March, led by solid increases in new orders, production and employment.  However, strangely enough, order books expanded at a much slower pace and they grew only modestly.  The overall index is still pointing to solid growth, but its average for the first quarter is well off the fourth quarter’s level and that tells me growth is slowing. 

There were two other reports released today.  Construction jumped in February, led but a huge rise in government spending on highways, streets, sewers and water projects.  That is weird, as I haven’t seen any major new infrastructure spending bills passed either at the federal or state and local government levels.  Maybe governments are calling clearing snow into huge mounds “construction”.  I don’t know.  Also, inventories surged in January.  That is worrisome, as I doubt it is occurring because firms are laying in new supplies for an expected rise in demand.  Instead, those new stocks may be unintended and that means orders will slow so the excess supply can be worked off. MARKETS AND FED POLICY IMPLICATIONS:The economic downslide may be over but there are no clear indications that an acceleration in growth is at hand.  Friday we get the March employment report and while there is likely to have been a rebound in job gains, that is not saying much given that the February increase was barely measureable.   The second quarter is likely to really tell the story of this year’s economy.  Weather is starting to warm somewhere and confidence is improving.  If we don’t get a solid rebound in growth in the spring, especially after what is likely to have been a very disappointing first quarter, then it is hard to see how we will do anything but slowly decelerate going forward.  There is nothing out there to push growth forward and the comparisons with the tax cut-hyped 2018 economy is going to make things more difficult.  The Fed has reason to watch and wait and that is what it will do, since that is what it said it would do.  And if there is one thing we know about the Fed, it always does what it says it will do, at least until it says it will do something different.  And then it does that … sometimes.

KEY DATA: Confidence: +4.6 points/ Feb. Income: +0.2%; Jan. Income: -0.2%; Jan. Spending: +0.1%/ New Home Sales: +4.9%; Prices: -3.6%

IN A NUTSHELL:  “The consumer started the year in the doldrums but a pick up in confidence may lead to better spending in the months to come.”

WHAT IT MEANS:  Households have not been happy with the world and they showed it through declining confidence and weak spending.  Hopefully, that may be changing.  First of all, confidence rebounded in March.  The University of Michigan’s Consumer Sentiment Index jumped with both the current conditions and expectations components rising solidly.  Maybe the most important data in the report was a rise in expected income changes.  Lower and middle-income households expect their wages and salaries to increase at a faster pace and that could trigger greater spending.

We have the March confidence numbers, but only the January and February income and spending number and they are not that great.  Income rose moderately in February but was down in January. There were no components that were strong and wage and salary gains were mediocre.  Meanwhile, consumption rose only modestly in January after having cratered in December.  (The government shutdown has messed up the timing of the data releases.)  With vehicle sales soft in February, I don’t expect the February consumption numbers will be very good either.  In other words, even if spending rebounds in March, as the rise in confidence seems to indicate, first quarter consumption should be quite modest.  And that points to a weak first quarter GDP number.

But then there is the weakest link, housing.  New home sales rebounded sharply in February and the January sales pace, which was initially estimated to be pretty tepid, was revised up significantly.  That confirms the huge jump in existing home demand in February.  It looks like the housing market may be coming back.  With mortgage rates down in March and prices leveling out, we could see continued improvement in this key sector.  Still, the gains were in limited to two regions, the Northeast and Midwest, so let’s wait and see if weather was a critical factor in the improvement. MARKETS AND FED POLICY IMPLICATIONS:I have argued that the economy was not nearly as bad as it seemed and there could be a rebound in the spring and summer.  The recent data are more mixed than they had been and that is good given how poor the numbers were for a couple of months.  But don’t expect growth to surge.  I am not sure we will even average 2.5% during the middle portion of the year and by year’s end, even that pace could be a thing of the past.  Think closer to 2%.  That is not a recession, but it is not anything that makes people feel good.   It is growth that could be enough to accelerate pressure on wages, which is needed since worker compensation numbers are up but not so good that consumption can be strong.  In other words, unless some positive shock hits the economy, by the fall, we are likely to be back to where we were before the tax cut bill was passed.  What does this mean for the Fed?  It is all about inflation.  If it remains contained, there is no reason for the gang that cannot think straight to make any move.  And for me, that is a problem because the current level of rates is simply too low to provide much ammunition when the next downturn hits.

KEY DATA: GDP: 2.2% (from 2.6%); Annual: 2.9%/ Pending Sales: -1%; Over-Year: -4.9%/ Claims: -5,000

IN A NUTSHELL:  “We’re back to trend growth, which really should not surprise anyone.”

WHAT IT MEANS:  The economy expanded solidly last year, but we could be looking at the end of near-3% growth.  Fourth quarter growth came in less than previously calculated, as just about every component was revised downward.  The only positive revision was a narrowing of the trade deficit. But it is looking like the slowdown that followed the 2015 surge may be nearly matched this year.  After peaking in the spring, we have had two consecutive quarters of decelerating growth and it is likely that we started off 2019 on an even slower note.  The tax cuts helped power growth last year, but the positive effects looks like they lasted for a much shorter time than most economists expected.  I thought we would get a more moderate slowdown and it wouldn’t be until this spring that trend growth would be hit.  We are there now.

One segment of the economy that faltered last year was housing and that weakness has been continued into this year.  The National Association of Realtors Pending Home Sales Index, which measures signed contracts not closings, fell again in February.  The level seems to be stabilizing, but not at nearly the pace we saw before 2018 or even at the 2018 level.  Undoubtedly, the limited supply is affecting sales rates, but we have complained about that for several years now, so don’t expect it to change soon. 

Jobless claims fell last week and are now back near historically low levels.  The craziness of the winter weather and government shutdown may have finally washed out of the numbers. 

MARKETS AND FED POLICY IMPLICATIONS: There really is no difference between 2.9% and 3%, given the margin of error in the estimates, so don’t go using this number for any reason other than to say that growth was solid last year.  Still, you can only expand so fast and with labor market growth limited and productivity weak, it was only a matter of time before we got back to trend growth.  The fourth quarter 2.2% number is pretty much at trend.  Investors and the Fed members need to get their heads around that likelihood.Comment on yesterday’s January trade report:  The monthly trade deficit narrowed sharply in January and there are several explanations for that shrinkage.  Some say it was due to the tariffs, as imports from China fell sharply.  That is one likely reason, though I think it was due to something else related to tariffs: Hopes that a traded agreement would be concluded and the tariffs lifted.  That would have led importers to wait before landing their products in the U.S.  That way, their goods would not be subject to tariffs.  I expect imports from China to rise as we go through the next few months as the timing of a possible deal has become more uncertain.  Of course, if it were mostly due to the weakening growth, that would be something to worry about.

KEY DATA: Starts: -8.7%; Permits: -1.6%/ Prices (National, Over-Year): +4.3%; Over Month: +0.2%/ Confidence: -8.9 points/ Phil. Fed (NonMan.): +11.7 points; Orders: +8 points

IN A NUTSHELL:  “Some segments of the economy may be starting to improve from the early year slump, but you cannot say the same thing for housing.”

WHAT IT MEANS:  We are closing in on the end of the first quarter and the data are coming in somewhat less negative than they had been.  I am not saying the economy rebounded in March, but at least the general malaise eased.  That cannot be said about residential real estate.  Housing starts crumbled in February and so far this year, new building activity is down nearly nine percent.  This pace was well below expectations. Activity was down sharply in three of the four regions, with only the Midwest posting a gain.  But that came after an incredibly weak January, so weather was likely the major factor there.  Will housing come back?  It just may, at least a little.  While permit requests also faded, they are still running well above the level of starts and builders don’t like to pay for the permits for no reason at all.  So, looks for starts to improve over the next few months. 

But don’t look for construction to surge.  Home price increases are continuing to decelerate.  While the S&P CoreLogic Case-Shiller national index edged upward a touch in January, the rise over the year eased again.  The increase was the smallest since April 2015.  Four years tends to indicate a trend.  Similar decelerations have been seen in all the other major home price indices.  That points to a softening in demand, especially since supply is not booming.

As for the consumer, they are happy but hardly jumping for joy.  The Conference Board’s Consumer Confidence Index dropped sharply in March as both the current conditions and expectations components were off.  This was a disappointing report as confidence was expected to rise a little.

Meanwhile, it looks like services activity may be recovering.  The Philadelphia Fed’s Non-Manufacturing Index popped in March, led by strong gains in new orders, sales and backlogs.  Firms were back in hiring strongly, but they are being forced to pay more for their workers.  The only disappointing part of the survey was in the investment numbers, which are mediocre at best.  Small service providers may have gotten tax breaks but they have likely used it to hire and/or just stay in business.

MARKETS AND FED POLICY IMPLICATIONS:  The economy is not falling apart.  It is also not booming.  Thursday we get the revisions to fourth quarter GDP and they are likely to show that growth was softer than the 2.6% gain initially estimated.  Look for something in the 2.25% range.  This quarter is currently coming in below 2% and could be pushing the 1% level.  While a rebound in the spring and summer is hardly out of the question, those growth rates will likely be more in the 2.5% range than 3% or more.   Essentially, the sugar high is just about over and we are back to normal growth.  But the risks are more toward the downside than the upside.  Consumers are feeling fine, not great, and the tight labor markets are helping them grow their paychecks.  Nevertheless, they are not buying big-ticket items, so don’t expect spending to surge.  Firms have shown little interest in investing heavily. The sugar-daddy federal government is running out of lollipops as the deficit should near one trillion dollars this fiscal year and break it next year.  And the world economy is in a global slowdown.  Even the delivery of the Mueller Report didn’t create any investor exuberance, so what will cause growth to accelerate is beyond me, so investors need to start focusing on what an economy that mirrors the 2011-2016 period means, but one that no longer has the Fed pumping huge amounts of liquidity into the system. 

KEY DATA: Import Prices: +0.6%; Nonfuel: 0%; Export Prices: +0.6%; Farm: +0.3%/ New Home Sales: -6.9%; Prices: -3.8%; Claims: +6,000

IN A NUTSHELL:  “Cold weather and the government shutdown didn’t help the housing market at all.”

WHAT IT MEANS:  The data just don’t seem to be getting better, though it is good that inflation is going nowhere.  Import prices jumped in February but that was due largely to a surge in petroleum product costs.  The increase was known but the extent of the rise was a little more than expected.  There were also higher prices for non-vehicle consumer products.  Meanwhile, food and capital goods costs were down.  Basically, the costs of imported goods are not putting a lot of pressure on consumer buying power.  On the export side, the battered farmer got a break as prices rose.  Over the year, they are still off a little.  U.S. exporters in just about all industries managed to push through price increases. 

What happens when a bitter winter and a government partial shutdown get together?  The economy tends to go into a slowdown and that is what happened for the most part in January.  New home sales tanked.  It is hard to visit a construction site when there is snow or it is so cold you don’t want to step outside.  In large parts of the nation, that is what happened.  And then there was the hit to confidence that the shutdown created, which didn’t help either.  So it should not surprise anyone that new home sales were off sharply.  Still, the year has started off on a weak note and prices are falling, another sign of softness. While inventory is building, it is due to the slowing sales as well as the additional homes for sale.    

Jobless claims rose last week and while the level remains low, it is beginning to look as if the historic lows are behind us.  That may indicate a modest softening in the job market. 

MARKETS AND FED POLICY IMPLICATIONS:  Modest inflation means the Fed can watch the economic fundamentals more closely and there are few signs the economy is picking up the steam that it lost at the end of last year.  New home sales were soft and most indicators point to a disappointing first quarter consumer spending number.  And there is no reason to think businesses will suddenly decide to use their windfall tax gains to spend like crazy on machinery, equipment, building or software.  So, I have no idea what would drive a surge in equity prices, other than the belief trade will come around.  Tariffs have been imposed but the trade deficit widened sharply even with China, so unless we suddenly embrace free trade, I don’t really see how that sector will help significantly.  As I keep saying, a recession may not be in sight, but neither is strong growth. I am leaving for the airport to go on my annual father/son Phillies spring training trip.  It’s nice to know I don’t have to potentially fly a 737 Max8 to Clearwater.  The flight should be a lot less stressful. 

KEY DATA: PPI: +0.1%; Ex-Food and Energy: +0.1%/ Orders: +0.4%; Ex-Aircraft: -0.6%; Capital Spending: +0.8%/ Construction: +1.3%; Public: +4.9%

IN A NUTSHELL:  “Despite some decent headline numbers, the data still indicate that growth is moderating while inflation remains tame.”

WHAT IT MEANS:  The Fed is trying to read the economic tea leaves before deciding on what to do next and one thing they are watching carefully is inflation.  Well, they can probably start focusing on something else.  Wholesale prices went largely nowhere in February.  Energy costs did jump, but they were largely offset by a decline in food prices.  Excluding those categories, there were few places where prices rose with any gusto.  There were some large increases in chemical products, electronic components, appliances and cable services, of course, but otherwise, producer costs we well contained.  As for the pipeline, it is largely empty.

Will demand pick up sharply enough to move the needle on inflation?  I don’t think so.  Durable goods orders rose moderately in January but that was due to a surge in aircraft demand.  Excluding planes, demand for big-ticket items fell sharply.  The measure that most closely mirrors business capital spending did jump.  But that came after very large declines in new orders the previous two months.  Even with that increase, capital spending was up only 3.1% from the January 2018 level.  Since these data are not adjusted for prices, you can see that orders are no soaring.

Despite the terrible weather, construction spending jumped in January.  But again, you have to put that into perspective.  There were significant decline in both December and November and the level of construction was still below the October pace.  In addition, just about all the gain came from a surge in public construction as private sector activity rose minimally.  MARKETS AND FED POLICY IMPLICATIONS:It’s nice to get some decent improvement in the economic indicators, but given how soft the previous data were, you cannot read too much into those increases.The rise in retail sales in January, reported earlier this week, tells us only that we ended the year on a major down beat.The December number was revised sharply lower and that may mean fourth quarter growth was slower than initially estimated.  The revision will come out in two weeks and could show growth closer to 2% and it looks like first quarter growth could be well below 2%.  Indeed, many forecasters have it closer to 1%, a pace that as of now cannot be ruled out.  In other words, the economy lost steam at the end of last year and the while the fire in the engine has not gone out, it is not roaring either.  Since inflation is also showing no signs of becoming a problem anytime soon, the Fed members will have little to do at their meetings for quite a while.  Washington in the spring is very pleasant, so I suspect they will be taking lots of walks, especially if the cherry blossoms are in bloom.  As for investors, they have little to cheer about and lots to worry about.  There is Brexit and trade, Boeing and consumer lethargy.  March Madness cannot be coming at a better time as there are now lots of game watching to be done over the next few weeks.  Since my two alma maters, Stony Brook and Brown, didn’t make the tournament (as usual), I am stuck rooting only for local Philadelphia teams.  Of course with Villanova being one of them, there is always hope.

INDICATOR: February Consumer Prices, Real Earnings and Small Business Confidence

KEY DATA: CPI: +0.2%; Over-Year: +1.5%; Ex-Food and Energy: +0.1%; Over-Year: +2.1%/ Real Earnings: +0.3%; Over-Year: +1.9%/ NFIB: +0.5 point

IN A NUTSHELL:  “Modest inflation and tight labor markets are helping drive up worker spending power, which hopefully will keep the expansion going.”

WHAT IT MEANS:  With the world economy slowing and uncertainty about trade continuing to restrain business decision making, something needs to improve if the economy is to pick up some steam.  Well, that just may be household spending power and modest inflation is helping that along.  The Consumer Price Index rose moderately in February, led by increases in energy and to a lesser extent, gains in food, apparel and shelter costs.  On the other hand, medical goods and used vehicle prices dropped sharply, as did energy services costs.  Excluding food and energy, prices rose minimally. Over the year, consumers have had to deal with very limited inflation pressures, though they increased somewhat more moderately when food and energy were taken out of the mix.  Nevertheless, there are few signs that inflation pressures are building.

Household spending power is determined by both wage gains and inflation.  Inflation is tame; Wage gains are not.  Hourly wage costs jumped in February, rising 3.4%, the fastest pace in a decade.  When inflation was factored in, the increase is pushing 2%, something we haven’t seen in four years.  Back then, inflation was largely flat. 

The National Federation of Independent Businesses reported that small business confidence is stabilizing after having been bashed by the economic slowdown and the government shutdown.  The index peaked in August and declined consistently until it edged up in February. 
A number of categories posted increases, including general business conditions and the outlook for expansion, but earnings were still weak and sales are going nowhere.  These data bounce around and the modest rise in February may not be a signal that conditions are starting to improve.  It could just be an improvement due to the government shutdown ending.  Let’s wait a couple of months to see if this was a start of an upward trend or just a temporary rebound. 

MARKETS AND FED POLICY IMPLICATIONS:  In general, the economic data have indicated that growth moderated fairly sharply at the end of the year.  The consumer really didn’t spend a lot of money and that is not good news for future growth.  But households have more money to spend and it is not being eaten away by inflation.  That implies we should be able to sustain moderate growth in the spring.  Unfortunately, there is simply nothing out there that says the economy will accelerate sharply.   It is hard to see what could give investors the green light other than a trade agreement that is much more than puff pastry.  That puts pressure on to not only get something done, but to get a real change in the terms of trade between the U.S. and China.  If we wind up with more puff than pastry, investors may exhale for a while, but reality could settle fairly quickly.  Given all the uncertainty, the Fed is likely to make believe it is the second coming of Rip Van Winkle and go to sleep for quite a while.  The members are in no rush to move (from under the covers).