KEY DATA: ISM (Manufacturing): +2.1 points; Orders: +3.7 points; Employment: +1.8 points/ Construction: +1.7%
IN A NUTSHELL: “The economy is starting to shift into higher gear.”
WHAT IT MEANS: A slowdown from the massive summer rebound was expected and it did happen to some extent. But it looks like the economy, helped along by the second round of stimulus, is picking up some steam. In February, the Institute of Supply Managers’ manufacturing activity index rose to its highest level in three years and the details were just as strong. The new orders measure jumped as fewer firms reported a decline in demand and a rising proportion said orders were higher over the month. This improvement is broad based as only 6.4% of the respondents indicated demand has softened. As a consequence, production accelerated and hiring increased. With order books filling, it looks like we could see manufacturing take a place as a leading sector of growth.
Construction is also did extremely well starting off the year. Spending on public and private, residential and nonresidential building rose strongly in January. In other words, everywhere. About the only really weak link was private commercial construction. With uncertainty about the extent to which work from home will be sustained, that component is likely to be soft for some time.
IMPLICATIONS: It’s starting to look like first quarter growth could exceed the strong, 4.1% growth in the fourth quarter of last year. Much of that can be credited to the reopening of the federal government’s stimulus spigot, which sent money flowing to businesses and households. Consumption is surging even with households saving much of the funds. That okay because it means they are better able to continue shopping like crazy. And round 3 of stimulus is coming soon. No matter what the final number is, it will be big. The markets got a little spooked last week by rising interest rates, but that is because too many people actually thought the ridiculously low level of rates could be sustained. Maybe the Fed will remain on hold for another couple of years, but if growth this year hits the consensus of about 4.5%, there is little logic in thinking the low, longer-term rates could be sustained. With that kind of growth, inflation had to start rising back toward more normal levels from the low rate posted as a result of the pandemic. But we are not talking high inflation; just levels that reflect a solidly growing economy. As I noted many times before, a 10-year rate below 1% made little sense when the Fed was determined to get back to an average of 2% inflation. Yes, housing may moderate, but once again, does anyone think a 3% or 3.5% 30-year fixed rate mortgage is high? We are looking at an economy that is picking up steam and the government turning up the heat with a new stimulus bill. If that doesn’t help investors overcome their fear of returning to normal interest rates, I don’t know what will.