Lately there has been a trillion-dollar question on pretty much everyone’s minds: When is the Fed going to next scale back its $65 billion a month in bond buying and to what degree? In fact, Wall Street’s curiosity surrounding the Fed has evolved into an obsession as the central bank’s policies has driven more and more investors into the stock market. No one wants to be stuck holding the bag when the Fed announces the end to Quantitative Easing, so many have been frantically reading the tea leaves to figure out when this will happen.
So here’s a little insight from an former analyst for the Fed: It pays to keep tabs on the economy. Former Chairman Ben Bernanke all but pledged to keep the money pump on until there is conclusive evidence of robust economic growth—and it looks like his successor Janet Yellen will follow suit.
However, with breaking economic news coming out nearly every day, I understand that it can be a hassle keeping up with each and every report. So every Friday in this blog I hit the past week’s highlights and provide my take on the latest economic trends. Let’s take a look at this week’s big headlines:
The Good (Personal Income, Construction Spending and Jobless Claims)
In January, personal income rose $43.9 billion, or 0.3%, which was above economists’ estimates of 0.2% growth. Meanwhile, personal spending rose 0.4%, also outperforming economists’ estimates of a 0.1% decline. Notably, spending on services jumped by 0.9%—the largest such increase since October 2001. Much of this came from increased demand for utilities during the unseasonably cold winter months. Frankly, it is fascinating that personal income continues to steadily rise despite slowing job growth in recent months. The good news is that consumer spending is expected to explode this spring.
In January, construction activity unexpectedly rose at a 0.1% annual rate to $943.1 billion. Economists had expected construction spending to fall 0.5% in January so the report topped expectations. Breaking it down, private construction spending rose 0.5% while public construction spending fell by 0.8%. Meanwhile, December’s construction spending growth was revised up to 1.5%. Once again, the private sector—specifically home builders—led the way in the construction market. Compared with a year ago, construction spending is up 9.3%.
Last week, initial claims for unemployment plunged by 26,000 to an annual rate of 323,000. Economists had called for a 335,000 rate so this was stronger than expected. Meanwhile, the more stable four-week moving average slipped 2,000 to 336,500. The key takeaway from this report is that jobless claims are now at a three-month low. In any event, this report was soon overshadowed by the surprising payroll report, which I’ll cover shortly.
The Bad (Factory Goods Orders)
In January, U.S. factory orders fell 0.7% compared with December. This was a steeper than expected drop; economists had called for a 0.3% decline. Meanwhile, December’s orders were revised to reflect a 2% drop, down from a 1.5% decline earlier. Excluding transportation, total orders ticked up 0.2% and durable goods orders rose 1.1%. While the headline figure wasn’t as good as it could have been, it’s clear that the volatile transportation category accounted for much of the drag. The general expectation is that when the weather improves orders will rebound as manufacturers have an opportunity to clear their shelves of excess factory goods.
The Ugly (Unemployment Rate Report)
In February payrolls rose 175,000, which was significantly better than economists’ consensus estimate of a 143,000 gain. The unemployment rate rose slightly from 6.6% to 6.7%. Economists had expected the unemployment rate to fall to 6.5%. The labor force participation rate remained at a disappointing 63% and the average workweek fell from 34.3 hours to 34.2 hours. At first glance, the payroll growth looks good. However, I don’t like that the unemployment rate is rising while the labor force participation rate remains low. Additionally, the ADP report—which is created by the folks that actually do payroll processing—said that 139,000 private sector jobs were added in February. ADP also revised its January private payroll down to 160,000 from its original estimate of 175,000. This deceleration seems indicative of a hiring slowdown.
Have a nice weekend,
P.S: I will be speaking at the Marina del Ray Marriott in Marina del Ray, California on Wednesday, March 12th at 7 PM. You may attend at no cost, but please call 800-454-1395 to register. I will review where investors can achieve the highest yields in both bonds and stocks, as well my current market outlook, favorite stock picks and have an extensive question and answer session.