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.