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ECONOMY

SOUND ECONOMIC DATA IN FEBRUARY AMID GLOBAL UNCERTAINTY

U.S. economic data were sound in February, even as confidence fell amid uncertainty from global trade and political headwinds. The Conference Board’s Leading Economic Index (LEI), an aggregate of ten leading indicators, declined 0.1% in January, but grew 3.5% year over year. While the LEI declined month over month, positive year-over-year momentum signaled low odds of recession in the coming year [Figure 1].

The delayed fourth quarter gross domestic product (GDP) report was an encouraging sign to investors that global uncertainty hadn’t significantly derailed output. Fourth quarter GDP grew 2.6% from the prior quarter, higher than consensus estimates for a 2.2% gain. GDP grew 2.9% overall in 2018 and 3.1% year over year for the fourth quarter. Consumer spending contributed 1.9%, the biggest component of fourth quarter output growth, while business spending
added 0.8%.

Labor market strength was another bright spot. Nonfarm payrolls rose in January, capping jobs’ biggest two-month increase since July 2016. The participation rate also climbed to its highest point since 2013, indicating more participants were enticed by solid economic conditions to enter the workforce. The unemployment rate did tick up to 4% in January, but the increase came with caveats due to the government shutdown and higher participation.

Inflation data remained at manageable levels. Average hourly earnings rose 3.2% year over year, around the fastest pace of the cycle, but materially lower than the 4% growth that has preceded recessions historically. Pricing gauges also showed that inflationary pressures remain manageable. The core Consumer Price Index, which excludes food and energy, increased 2.2% year over year, while the core Producer Price Index climbed 2.8% year over year. Core personal consumption expenditures, the Federal Reserve’s (Fed) preferred inflation gauge, rose 1.9% year over year, its eighth-straight month within 0.1% of policymakers’ 2% target.

Manufacturing rebounded from a discouraging slide through the end of 2018. The Institute for Supply Management’s (ISM) manufacturing Purchasing Managers Index (PMI), a gauge of U.S. manufacturing health, rose to 56.6 in January. Markit’s PMI also ticked up to 54.9 in January, confirming the improvement in manufacturing activity. While recent manufacturing data are encouraging, we see the ongoing U.S.-China trade dispute as the primary obstacle to consumer and corporate health. Once trade risk subsides, we expect manufacturing activity to improve further as companies resume business investment.

Confidence continued to deteriorate though, fueling speculation of an economic slowdown. The Conference Board’s Consumer Confidence Index slid for a third straight month in January, its biggest three-month decline since 2011, while NFIB’s measure of business confidence fell for a fifth-straight month. Drops in consumer confidence have been late-cycle signals historically, as lower confidence could weigh on consumer spending, and consequently, on output [Figure 2]. Separately, a report delayed by the government shutdown showed retail sales fell the most in December on a monthly basis since 2009, boosting speculation that lower confidence could be cooling consumer activity.

Central Banks Take a Break

Major central banks around the world took a break, as the Fed, European Central Bank, and Bank of Japan did not have meetings scheduled in February. However, financial markets’ expectations for policy were consistent during the month. Fed fund futures implied an 85% probability that rates will remain unchanged through the rest of 2019, and an 11% chance that rates will be cut before the end of the year.

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