It’s Friday and that means it’s time to review the latest economic data and identify which pockets of the economy are heating up and which are slowing down. Don’t worry about catching every headline and every report throughout the week—I recap all of the most important news impacting your wealth right here every Friday. Let’s take a look at this week’s big headlines…
Fourth-Quarter GDP (First Estimate)
Wednesday’s first estimate for fourth-quarter GDP revealed that the U.S. economy grew at an annual rate of 2.5%, down slightly from the 2.6% reading in the advance estimate. The latest figure was in line with economists’ expectations, and the softer reading doesn’t really come as a surprise given theweak retail sales and housing data that we’ve seen recently.
Peeling back the layers, growth in consumer spending, which if you recall, makes up more than two-thirds of U.S. economic activity, remained unchanged at a 3.8% annual rate in the fourth quarter. This is the fastest pace in three years. Also, higher imports (up 14% compared to the advance estimate of 13.9%) contributed to the downward revision in GDP growth. Most other figures were virtually unchanged from the advance estimate, which was a relatively solid report.
In the end, as was expected, the U.S. economy wasn’t able to keep up its swift pace from the third quarter. So economists are now trimming their first quarter GDP forecasts. While this report is not likely to influence the Fed’s decision to raise rates in its mid-March meeting, if GDP continues to soften, it could certainly help the Fed weigh whether or not, and how often they should raise key interest rates beyond March.
New Home Sales
On Monday, the Commerce Department announced that sales of newly built single-family homes plunged 7.8% in January, following the 7.6% decrease in December. January sales of new single-family homes dropped to an annualized rate of 593,000, after the downwardly revised December rate of 643,000. January’s results were substantially lower than what economists surveyed by the Wall Street Journal were expecting, which was 4.0% growth.
While weather is likely still playing a role in this weaker-than-expected housing data, two other big culprits remain at large. First, higher median prices continue to challenge buyers, particularly first-time homebuyers. Median sales prices rose 2.5% year-over-year to $323,000. And second, higher mortgage rates are causing more homebuyers to hesitate. Hopefully, December and January’s dip in new home sales is a temporary aberration and builders will start building more moderately priced homes.
Overall, if this deceleration in new home sales continues, it may give the Fed another reason to hesitate about raising rates. While I expect the Fed to raise key interest rates at the FOMC’s widely anticipated meeting in mid-March, if we continue to see weak housing data, the chances of the Fed raising rates after March become slimmer.
Durable Goods Orders
On Tuesday, the Commerce Department announced that durable goods orders were unable to post a third consecutive month of gains. New orders for manufactured durable goods decreased 3.7% in January to $239.7 billion, following increases in November and December. Excluding defense, durable goods orders fell 2.7%. Furthermore, excluding transportation, durable goods orders fell more modestly, by 0.3%. I should add that a 10% reversal in transportation orders helped drive January’s weakness. Specifically, there was a steep drop on contracts for passenger planes. Non-defense durable goods orders slipped 0.2% last month.
However, there were still some positives in this week’s report. Orders were up 5.8% for the full year 2017, the best showing in six years. And shipments of core capital goods—which are used to calculate equipment spending in GDP—inched 0.1% higher.
All-in-all, it appears that manufacturing activity is getting off to a soft start in 2018. But remember, durable goods orders are often volatile. The government tends to revise these estimates as more information and data becomes available. Additionally, the new tax bill should boost business investment, so I expect a big recovery in durable goods orders in the upcoming months.
According to The Conference Board’s Tuesday report, the Consumer Confidence Index soared 6.5 points to 130.8 in February, the sharpest rise since November 2000. Consumers were optimistic about the short-term outlook, with the percentage of consumers looking for business conditions to improve over the next six months increasing from 22.5% to 25.8%. What’s even better is that the percentage of consumers that find current business conditions to be “bad” dropped from 13.0% to 10.8%.
I should add that today, the University of Michigan’s Consumer Sentiment Index came in at 99.7. While this is slightly lower than the preliminary February reading of 99.9, this is the second-strongest reading in 14 years!
Clearly, the average American consumer has shrugged off the recent stock market correction as well as the disappointing economic numbers. This news bodes well for renewed strength in consumer spending in the coming weeks.
That’s all I have for you this week. I’ll be in touch again next week with the latest ratings out of Portfolio Grader.
Until next week,