First Quarter GDP and April Consumer Confidence

KEY DATA: GDP: +3.2%; Consumption: 1.2%; Investment: +2.7%; State and Local Government: +3.9%; Consumer Prices: +0.6%/ Confidence: 97.2 (Down 1.2 points)

IN A NUTSHELL:  “The headline GDP number looks great but the details are a lot less positive.”

WHAT IT MEANS:  The economy did a lot better than expected during the first quarter as growth exceeded 3%.  But let me repeat what I frequently state: The devil – and the real information – is in the details.  There, the numbers look a lot less positive.  Take consumption, please! (Drum roll here.)  We knew that vehicle sales were soft, which brought down durable goods spending.  But demand for nondurables and services was mediocre and with gasoline prices rising, there is little reason to expect households to shop ‘till they drop this spring.  As for businesses, they bought lots of software but little hardware and spent even less on structures.  That doesn’t point to any major investment surge.  And, as expected, housing restrained growth.  So, where did things go right?  Where I warned there could be some strange results.  Take trade, please!  (Okay, enough Henny Youngman.)  Exports rose while imports fell, meaning the trade deficit narrowed much more sharply than expected.  That added one full percentage point to growth and explains most of why growth exceeded forecasts. I had suggested that the tariff issues could have led to strange patterns in trade and that is likely what happened in the first quarter.  There is very little reason to think that a strong economy would lead to lowered imports, so don’t expect the trade deficit to keep narrowing.  The second place I thought we could have something strange was in inventories. Warehouses filled sharply, adding two-thirds of a percentage point to growth. It is not clear those additions were intended, so don’t be surprised if inventories are drawn down, slowing growth this quarter.  Finally, state and local governments spent like drunken sailors.  This sector added four-tenths of a percent to growth.  Really, does anyone believe state and local governments will spent so crazily going forward?  Meanwhile, inflation went absolutely nowhere.  In summary, the headline was great but the details were not so good. 

As for consumer confidence, it faded a touch in April.  The University of Michigan’s Consumer Sentiment Index dropped modestly as both the current conditions and expectations components declined.  The index remains at a high level as respondents are nearly ebullient about their financial prospects. MARKETS AND FED POLICY IMPLICATIONS: I have been saying for months that the economic fundamentals were solid and the Fed, make that Chair Powell, panicked in December.  So, I should be happy with this number as it supports my argument.  But the reality is that growth is not strong, at the least when you consider the performance of the two key segments, households and businesses.  Consumption was weak and business investment was mediocre.  Worse, I don’t see any reason why that would change anytime soon.  So, what I and probably most other economists are doing is making down second quarter growth.  The trade deficit should widen and inventories become a drag.  While investors may be happy with this report, and Mr. Powell will have a lot of explaining to do, it really doesn’t change much when it comes to growth: It is decent but not great.  Now if we back this up with another near-3% growth rate, I will have to re-evaluate my thinking, but so would the Fed.  Indeed, if spring growth were strong, the Fed would be foolhardy not to consider hiking again, even if inflation remains tame.  In other words, no good economic news goes unpunished!

March Housing Sales and April Philadelphia Fed NonManufacturing Survey

KEY DATA: New Home Sales: +4.5%/ Existing Home Sales: -4.9%/ Phila. Fed (NonMan.): -0.7 point; New Orders: +0.9 point

IN A NUTSHELL:  “The housing market is wandering aimlessly and that is hardly a sign of a strong economy.”

WHAT IT MEANS:  We get our initial look at first quarter growth on Friday, but regardless of what it comes out as there is little reason to think the economy is booming along.  This week’s so-so numbers leading up to the GDP release were the housing sales data.  Today we got the new home sales numbers and they were really good, at least when you consider where they had been.  Demand jumped in March to a level not seen since November 2017.  It looks like sales bottomed in October of last year and there has been a fairly steady improvement since then. As for the details, a strong rise in the Midwest offset a sharp drop in the East.  There were solid gains in the South and West.  Sales prices firmed as inventories remained low.

Yesterday, the National Association of Realtors indicated that existing home demand faded in March. The softening in sales was in every region. But the fall off in sales came after a sharp rise in February, so it is not clear what is going on with the existing home market.  The average sales pace for the first three months of the year was well below the pace posted in 2018, so it really cannot be said that demand is improving.

Maybe the clearest indication that the economy is in good shape but growth is not re-accelerating could be seen in the Philadelphia Fed’s nonmanufacturing index.  It was largely flat in April, but level was still quite solid.  Optimism remains high.  Indeed, a greater proportion of the respondents indicated they thought that their firm’s business conditions would improve than said it would remain the same.  Few expected they would see their own business suffer a reduction in activity.  MARKETS AND FED POLICY IMPLICATIONS:  First quarter growth looks like it came in near the same 2.2% pace that we saw in the fourth quarter.  The unknowns and likely drivers of improved growth are inventories and trade.  Unintended inventories increases appear to have occurred and those will have to be worked off.  The uncertainty over tariffs – and the hopes that might be lifted – may have led to strange patterns in imports.  Regardless, whether the number is better than worse than forecast, the underlying pattern of growth remains near the 2% or so trend rate.  That is consistent with a housing market that is basically going nowhere.  As for investors, the focus seems to have returned to earnings, not politics or economics and so far, the profits reports have been decent.  Meanwhile, back at the Fed, I suspect the members would be smart to keep their heads down, especially if growth comes in above consensus.  With labor costs high, productivity low and energy prices rising, inflation is not going to decelerate.  Which raises the question: Why did Chair Powell rush to hoist the white flag in December?

March Retail Sales, Leading Indicators and Weekly Jobless Claims

KEY DATA: Sales: +1.6%; Vehicles: +3.1%; Gasoline: +3.5%/ LEI: +0.4%/ Claims: -5,000

IN A NUTSHELL:  “The economy appears to have thrown off some of the winter lethargy and is growing again at a decent pace.”

WHAT IT MEANS:  When in doubt, panic.  At least that seems to be the motto of those who worry about each and every data point released, such as most investors.  Even the Fed, in particular Chair Powell, seemed to have subscribed to that approach.  But as more level-headed economists argued at the end of last year, the market crash made no sense when the fundamentals of the economy were analyzed and now we are seeing that a “wait and see” approach was the right way to go.  Consumer spending rebounded sharply in March led by a jump in vehicle demand.  We need some time to see if the March vehicle sales were just a one-month wonder, but at least purchases didn’t fall off the cliff.  There was also a major increase in gasoline sales, but those were largely price driven.  Still, there was only major component, sporting goods/hobbies/musical instruments, etc. that declined and that was modestly.  Over the year, non-inflation adjusted sales were up 3.6%, a decent gain, though nothing special given the roughly 2% inflation rate.  With consumption rebounding, first quarter growth is likely to come in a little better than expected and it sets up a solid second quarter number.

The Conference Board’s Leading Economic Indicators index jumped in March, led by improving labor markets, expectations and financial markets. The Coincident and Lagging Indices rose modestly.  Still, as the report noted, “the trend in the US LEI continues to moderate, suggesting that growth in the US economy is likely to decelerate toward its long term potential of about 2 percent by year end.”  So, don’t look for robust growth coming anytime soon.

Jobless claims, incredibly, continue to drop.  The level is almost incomprehensible, given the size of the labor force and the dynamism of the economy.  There seems to be almost no turnover.  What makes this so weird is that wage gains have stabilized despite what appears to be a drum-tight labor market.MARKETS AND FED POLICY IMPLICATIONS:The Fed has tried to give itself an out by reiterating that a rebound in growth could make them rethink their stance.  I am not saying growth is so strong that the Fed will actually do that, but it is clearly not so soft as it believed it to be when it suddenly decided it would do nothing this year.  First quarter GDP growth should be in the 2% range but could be higher if inventories increase rapidly.  That would help the first quarter. But if, as believed, those additions to stock were unintended, it would pull down second quarter growth when firms push back orders so they can whittle down their excessive inventories.  That points the need to look at the trend in growth, not just the data on one quarter.  Of course, I raise the point of not giving too much credence to any one number constantly and that warning goes unheeded, but I will keep on trying.  As for investors, they should like today’s reports though a certain report may dominate the discussion.  

March Wholesale Prices and Weekly Jobless Claims

KEY DATA: PPI: +0.6%; Energy: +5.6%; Personal Consumption Ex-Food and Energy: +0.4%/ Claims: -8,000

IN A NUTSHELL:  “Producer costs are rising a little faster, but not enough to cause inflation to accelerate significantly.”

WHAT IT MEANS:  With the administration screaming for a rate cut, inflation pressures have become even critical to the discussion and the Fed.  Producer prices surged in March, but most of that came from a jump in energy costs.   Food prices rebounded, but that was after much larger declines in the previous two months.  Indeed, over the year, finished consumer food costs are up less than one percent.  Transportation and warehousing costs were off sharply despite the rise in energy prices.  That could change.  Services prices were also up moderately, meaning that there was some pressure on wholesale costs.  The measure I like to watch is the index for personal consumption excluding food and energy.  It rose fairly solidly in March and was up 2.4% from March 2018.  While the pathway from wholesale to retail prices is hardly straight and often a dead end, if wholesale prices of core consumer goods keep rising moderately, some of that is likely to bleed in retail prices.  That would point to a slow acceleration in consumer inflation.

New claims for unemployment insurance broke below the magical 200,000 number last week to hit the lowest level since October 1969. That was near the peak in the Viet Nam War when not having a job often meant winding up in the military.  And to really put that number in perspective, the labor force was one-half the size that it is currently.   In other words, the labor market remains incredibly tight.  MARKETS AND FED POLICY IMPLICATIONS:The recent consumer and producer price data don’t point to any major acceleration or deceleration in inflation.  Therefore, the Fed will feel no economic pressure to do anything.  While that may be good news for Chair Powell’s rate policy, it further exposes the Fed to the slings and arrows of outrageous politicians.  Apparently, applying political pressure on the Fed has become an acceptable form of behavior.  That includes not just speaking out about what Fed policy should be but also potentially nominating people who are perceived to be being willing to impose political beliefs on the Fed.  Keep in mind; if those currently politicizing Fed policy get away with it now, it opens the door for all future politicians to politicize the Fed.  And if they are successful, the markets will not be able to determine the true purpose of Fed policy, reducing its credibility and effectiveness.  So I ask you, do you really want politicians running both monetary and fiscal policy?  We have seen how well Washington does with budgets and fiscal policy; do we really want that same approach to determine interest rates and liquidity?  I understand that investors and politicians all want the lowest rates and the fastest growth, regardless of the longer-term implications.  But that is not why we have a Fed.  Its purpose is not to create the maximum growth rate for the current group of politicians to run on but to look out over the future and minimize the ups and downs so longer-run growth can be maximized.  If that means raising rates and reducing balance sheets, so be it.

March Consumer Prices and Inflation Adjusted Earnings

KEY DATA: CPI: +0.4%; Ex-Food and Energy: 0.1%; Gasoline: +6.5%; Food: +0.3%/ Real Earnings (Monthly): -0.3%; Over-Year: +1.3%

IN A NUTSHELL:  “For the most part, inflation remains tame.”

WHAT IT MEANS:  About the only thing that could get the Fed to raise rates would be a jump in inflation and it doesn’t look that is happening.  Over the year, consumer price increases are running pretty much at the Fed’s target of 2%, no matter which measure you use.  Yes, consumer prices popped in March, led by sharp rises in energy, food and rental costs.  However, excluding the more volatile food and energy components, inflation only inched upward.  Looking forward, with growth moderating, it is not likely we will see continued large rises in energy.  However, the food and shelter components could come in a little higher than the average.  And there was some really bad news on the food front: Cake, cupcakes and cookie prices surged.  Back to the diet time.  Offsetting, to some extent, the pop in gasoline prices was a cratering in apparel expenses.  Clothing costs seem to be making a move to be added to the volatile list, so don’t expect this components moderating impact on prices to continue. Thus, while inflation is not likely to surge anytime soon, it could slowly accelerate. 

One of the big surprises in the employment report was the minimal gain in hourly wages. With overall inflation rising sharply, that led to a large drop in real, or inflation-adjusted wages.  Over the year, real wage growth, which reflects household spending power, decelerated.  That said, this was the first time since July 2018 that we haven’t seen real wage gains accelerate, so I am not that worried.  Still, with purchasing power growing at a dismal 1.3% pace, it is hard to generate lots of additional household demand. We need to get back to the nearly 2% rise we had in February if household spending is to expand at a decent rate. 

MARKETS AND FED POLICY IMPLICATIONS:  The Fed effectively went on vacation and is likely to stay there for quite a few more months.  Yes, the members will gather, have some good meals, chat back and forth about what is going on what are the risks, but otherwise, don’t expect them to decide to do anything.  Which raises the question: Is the next move up or down?  The answer, of course, is it dependsIf you are an optimist about a pick up in growth over the second half of the year, then up seems possible, especially if inflation rises a touch.  By pointing to a rate hike in 2020, the members signaled that they really think the funds rate is still below neutral and they would like to get back there.  Of course, they could just revise downward their estimates of neutral, as they have done, and declare victory, but I am not sure that is going to happen.  Regardless, if we get back to 2.5% growth, that might be enough for the Fed to get some guts and move the funds rate up a notch.  On the dreaded other hand, many see the current slowdown as just a prelude to an even greater deceleration. That would mean inflation would not increase and the Fed could be pressured to lower rates.  I still think the Fed is looking for any excuse to get in one more rate hike, so I lean toward that happening.  As for the markets, with inflation not an issue, the view that the Fed is on hold for the rest of the year will likely continue to be the prevailing sentiment.  And as far as investors are concerned, no Fed is a good Fed.     

March Employment Report

KEY DATA: Payrolls: +196,000; Private: +182,000; Manufacturing: -6,000; wages: +0.1%; Unemployment Rate: 3.8% (unchanged)

IN A NUTSHELL:  “Job gains are back on track, but the trend is still down.””

WHAT IT MEANS:  After the initial report that only 20,000 new positions were added, angst about the state of the economy took hold, at least with those who actually think that a single month’s number means something.  Today, those same worrywarts are probably smiling.  Job gains came in above expectations in March and there were some minor, but positive revisions to the January and February numbers.  But the details don’t tell me that this was a great report.  As I have mentioned frequently, concentrate on the three-month moving average.  That number decelerated again and will likely continue to do so as the January number disappears when we get the April report.  Private sector job gains were solid but not great over the past three months, averaging 168,000As for March, there were really only two strong sectors, health care and restaurants, while manufacturing and retail were down.  A bounce in state and local government hiring, which I don’t expect to continue, helped push up the overall gain.

But the real disappointment was in the household portion of the survey.  First, wages rose minimally and the increase over the year decelerated.  That was a real surprise given all the stories of firms raising wages.  That may just be a one-month wonder, but it is something to watch.  We need stronger, not weaker wage gains if the economy is to growth faster.  Second, the labor force participation rate declined and looking over the course of the year, it has wandered around in a relatively tight range.  In March, it was only up 0.1 percentage point over the March 2018 number.  While the downward trend that we had seen since spring 2000 has been arrested, there has been no sudden surge despite the labor shortages.  That does not bode well for the future when job gains are softer.  The unemployment did remain at 3.8%, which is well below what most economists believe is the long-term trend.

MARKETS AND FED POLICY IMPLICATIONS:  Don’t get me wrong, this was a very good report.  But given the wild swings in job gains – 312,000 in January, 33,000 in February, 196,000 in March – it does not tell me the labor market is continuing to be a lean mean jobs machine.  Private sector hiring is decelerating and wage gains might be moderating as well.  The outsized increases in health care, restaurants and state and local government are likely to unwind in April.  Investors will probably enjoy this report, but its impact should wear off pretty quickly:  It’s just not as strong as the headline number implies.  This is the last jobs report before the Fed meets at the end of the month, so the members will be able to say that job gains have stabilized.  That gives them the cover to keep doing what they have been doing, which is nothing. 

March Layoff Announcements and Weekly Jobless Claims

KEY DATA: Layoff Announcements: 60,587; Claims: -10,000

IN A NUTSHELL:  “Are layoffs up or down?  The answer seems to be yes.”

WHAT IT MEANS:  Tomorrow’s jobs numbers are important given that we had a huge rise in January and barely eked on out in February, so it is not clear where the job market stands.  Consequently, we are looking for other hints at what might be happening.  Unfortunately, the data have been all over the place and today’s numbers only add to the confusion.  First there is the Challenger, Gray and Christmas monthly layoff announcement report, which indicated that cut backs are continuing at a high pace.  In previous months, the large number of job cut notices were driven by activity one industry, such as retail, energy or industrial goods.  In March, though, the announcements were spread across a wide variety of industries. First quarter announcements were the highest since the third quarter of 2015. Restructuring, not bankruptcy is the major reason that has been given for this year’s layoff announcements, which to me points to softer economic growth.  The details in this report seem to be pointing to growing weakness in the labor market.  Keep in mind that these are announcements, not actual layoffs.

While layoff notices may be rising, actual layoffs or job losses don’t appear to be on the rise.  Weekly jobless claims fell to the lowest level since December 1969.  To put things in perspective, the labor force in December 1969 was half the size of where it is now.  That means the current level is at a historic low, when adjusted for the size of the market.MARKETS AND FED POLICY IMPLICATIONS:Well, we have surging layoff announcements and record low unemployment claims.  The two don’t seem like they should go together, but here they are.  This inconsistency is seen in many of the numbers and my explanation is that we are at a point of inflection where the overall economic trend is changing.  That would account for at least some of the volatility and contradictory nature of the data.It would also point to a slowdown not a crash.  Will tomorrow’s numbers provide some clarity?  I doubt it.  First, what is a weak number?  I am at 168,000 new jobs.  To me, that is strong, given the lack of readily available, qualified workers.  It is also large enough to keep the unemployment rate slowly trending downward, though I don’t think that happened in March.   Others, though, will be disappointed if my estimate is anywhere near what the Bureau of Labor Statistics reports, especially given that we had monthly gains in excess of 200,000 last year.  The warning, then, is that any one number really means little, as it must be viewed in context.  For payrolls, start with a three-month moving average and then compare it to what is needed to reduce the unemployment rate.  For me, that means anything in the 125,000 to 175,000 range is good.  I doubt the markets would agree with me.  That range, though, would be enough for the Fed to do nothing. 

March NonManufacturing Activity, Private Sector Jobs and Help Wanted OnLine

KEY DATA: ISM (NonMan.): -3.6 points; Orders: -6.2 points; Employment: +0.7 point/ ADP: +129.000; Manufacturing:  -2,000/ HWOL: -1.6%

IN A NUTSHELL:  “There are more signs the economy is slowing.”

WHAT IT MEANS:  If there is one consistency in the data, it is that they are inconsistent.  We have gotten some good numbers this week, some iffy numbers and some disturbing ones.  Today’s data were somewhat weaker than expected.  Let’s start with the Institute for Supply Management’s NonManufacturing Index.  It came in lower than forecast.  That said, the level is still pretty solid, or at least points to continued moderate growth.  The details were a bit odd.  The overall index fell solidly, business activity and orders crashed, but backlogs and hiring improved.  Those results tend not to say the same thing.  What they seem to be implying is that there is a easing in activity but it is not spread across all segments of the economy.  Indeed, the manufacturing supply managers indicted that conditions were improving.  Conclusion:  Conditions are a lot more mixed than they had been.

With Friday being the day of the March employment report, today’s ADP estimate of private sector job gains was looked toward to provide some insight into the extent of the bounce from the February modest 20,000 payroll rise.  Well, it could be somewhat less than hoped for.  There were some concerns that popped up in this report.  First, the small business segment, which had been hiring quite solidly, appears to be shutting things down.  It is unclear whether that is due to softer demand or a lack of qualified applicants, but regardless, that is a critical component of job growth and right now it is lacking.  The second is the sharp slowing in manufacturing payroll gains.  I don’t know what to make of that as the ISM manufacturing survey pointed to a rebound in manufacturing employment.  I guess we will have to wait a couple of days to find out.

On the jobs front, the Conference Board’s Help Wanted OnLine index fell in March.  This index has become somewhat more volatile than usual and it may be due to temporary factors such as the government shutdown and the weather.  Of course, it could be due to uncertainty over the direction of growth, which would not be a good thing.  But just as the ISM nonmanufacturing index still points to solid growth despite its decline, the HWOL index decline only means that job growth should be good not great.MARKETS AND FED POLICY IMPLICATIONS:So, where is the economy going?  Good question.  The yin and yang of the numbers makes it clear that the year of tax-induced solid growth is over.  But growth is still decent.  Indeed, yesterday’s surprising report that vehicle sales popped in March provides some hope that the slowdown is bottoming.  My first quarter GDP number has been 1.8% for a few months now and I am sticking with that.  But I also expect the second quarter to bounce back up to around 2.5%.  Taken together, that means first half growth will likely come in at about 2.25%, which is where I have growth for the year.  Is that bad?  Not at all – it is trend growth or maybe even a touch higher.It’s just the expectations we will get 3% growth for the next decade were overblown as we will probably see that level (or close to it), for only one year.  That is not even good for government work, but the administration’s economists at the Office of Management and Budget tend to be politically directed.  Instead, we are seeing something closer to the nonpartisan Congressional Budget Office economists’ forecasts, which mirrored the private sector forecasts.  As for Friday, I think we will be in the 160,000 to 175,000-range.  That would put the three month average also in that range, which is where it should be.  That is not so strong or weak that the ad-libbers at the Fed will have to change course again, but it is solid enough to push back at those who want to see rates cut.

February Durable Goods Orders and March Small Business Hiring

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.    

February Retail Sales and March Manufacturing Activity

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.

Linking the Economic Environment to Your Business Strategy