Introduction

However much the employment report for January pointed to accelerating strength for the U.S. economy, or at least for the labor market, this week's set of data are pointing more toward slowing. Behind a mixed-to-weak factory report lurked the ghost of easing foreign demand which is also an emerging specter threatening to haunt the service sector as well. And even the week's best news, a sharp contraction in the trade deficit, wasn't due at all to exports. But first we start off with an unwanted scare on the domestic side.

The economy

An early indication for trouble in the coming run of January data came early in the week as unit vehicle sales slowed abruptly, to a lower-than-expected 16.6 million annualized rate vs 17.5 million in December. Unit vehicle sales are dominated by consumer sales though business sales are also included in the mix and are not stripped out. Nevertheless, the red light is strong and marks an unwelcome start to first-quarter consumer spending. Yet the strength of consumer spending back in the fourth quarter is still very much an unknown due to the long delay in December retail sales which are now scheduled for release on Thursday, February 14. Unlike January, vehicle sales were strong in December but still didn't do much for Econoday's consensus for the month's retail sales which is only a 0.1 percent gain, both overall and when excluding autos.

Delayed data for November factory orders also offered a note of caution. Down an unexpected 0.6 percent to $499.1 billion, new orders for November fell 0.6 percent in a month that saw the price of oil collapse from $70 to $50. And largely reflecting price effects for petroluem and related products, orders for non-durables fell 1.9 percent to more than offset a 0.7 percent rise in orders for durable goods. Yet the rise in durables did not reflect demand for core capital goods (nondefense ex-aircraft) which fell 0.6 percent after a 0.5 percent rise in October with November shipments of core capital goods slipping 0.2 percent following, however, a 0.8 percent October increase. Together, these are little better than mixed indications for business investment in the fourth-quarter.

Clearly negative was a 0.1 percent decline in unfilled factory orders that followed a 0.2 percent dip in October. Fewer orders to work down hints at possible trouble for factory payrolls where growth in fact did slow to a 13,000 gain in the January employment report which was half the monthly average of the fourth quarter. The factory orders report doesn't break down domestic demand from foreign demand but results from manufacturing surveys have been pointing consistently to flat exports and the need for domestic orders to keep growing. Other results in the factory report included a 0.6 percent decline in November shipments, a reading that matches the decline in orders, and a 0.1 percent decline in inventories that will be a specific though small negative for fourth-quarter GDP.

A plus for fourth-quarter GDP came from the international trade balance, narrowing to a much lower-than-expected $49.3 billion deficit in data for November. But it was a sharp pull back in imports, not strength in exports, that trimmed the red ink. Imports, reflecting price declines for petroleum as well as a $4.3 billion drop in consumer goods especially cell phones, fell $7.7 billion in the month while exports also fell, down $1.3 billion and largely reflecting oil-related declines for supplies and materials. Country deficits showed China down $2.8 billion to $35.4 billion with imports down $2.9 billion to $42.8 billion but exports not showing any improvement, $0.1 billion lower to $7.4 billion. This comparatively low export total is a reminder of ongoing trade negotiations and the White House push for China to buy more U.S. goods and services.

Looking at the goods to services split in the trade data, the goods deficit fell $6.7 billion to $71.6 billion while the services surplus – that's right surplus not deficit – slipped $0.3 billion to $22.3 billion. However signficiant, the nation's services surplus is largely overlooked as it's swamped by the enormous imbalance on the goods side. But with this monthly surplus steadily rising from under $4 billion back in 2002, global demand for U.S. services, specifically technical and managerial expertise, is in fact one of the most important economic stories of the last 20 years. But secular trends are for the long-term and for the short-term monthly indications have been pointing to a slight slump as November's decline was the third in a row.

Due partly to weakening exports, small sample indications on the service sector have also been flattening. In fact, flat is the precise description to use for export orders in both the services PMI and ISM non-manufacturing reports. Weakness in exports is now holding down total order growth in both samples with the January PMI showing the lowest growth rate for total new orders since late 2017. New orders for ISM slipped 5.0 points but at 57.7 do remain very strong though growth here is also the slowest since late 2017. The ISM index, the blue line in the graph, was posting a rare and robust run over 60 late last year but has since slowed noticeably, to 56.7 in January. The PMI index has been steadier but at 54.2 in January isn't showing any acceleration.

Definitely not slumping has been the strength of the nation's labor market although signals from jobless claims the past few weeks have been hard to read. Easing in claims from Federal employees following the government's reopening helped pull down initial filings by 19,000 in the February 2 week to what, nevertheless, was a higher-than-expected 234,000. And though the 4-week average for initial claims (blue line in graph) rose 4,500 to 224,750 for a second increase in a row, the level was tracking only several thousand higher than mid-January which is an early and favorable indication for February's labor conditions. The 4-week average for continuing claims (green columns) was also up but only marginally, 4,000 higher to 1.741 million in lagging data for the January 26 week. Initial claims have been erratic, hitting 50-year lows in mid-January then spiking 53,000 late in the month yet the underlying signal, putting aside Federal workers and the effects of the government shutdown, points to very strong demand for labor.

Markets: Stocks not attracting foreign investors

Data from the Treasury, like those from the bureaus of economic analysis and census, have also been delayed because of the government shutdown. One set that was released late in the prior week is nearly always overlooked, and that's Treasury International Capital. This report tracks cross-border investment flows which due to foreign demand for Treasuries are typically very favorable for the U.S., helping to offset the nation's deep deficits in trade and government spending. But recent inflows have been subdued largely because of heavy selling of U.S. equities by foreign accounts. November was a rough month for the global stocks markets and foreign accounts sold a net $5.6 billion of U.S. equities to extend an uninterrupted run of liquidation to seven months in a row and nine out of the last ten. This series goes back 40 years and this is the worst run for U.S. equities ever. Yet after hitting peaks over $25 billion each month in May and April, the pace of equity liquidation does appear to have eased.

Last year was indeed a rough year for the stock market and foreign accounts were no help. But this year has been a good one so far for as indexes posted gains in the week with the Dow, at 25,106, up 0.2 percent and the Nasdaq, at 7,298, up 0.5 percent. Year-to-date gains are very favorable, at 7.6 percent for the Dow and 10.0 percent for the Nasdaq in what, however, may be an unwanted reminder of last year, when gains jumped out of the gate before reversing to losses by year's end. Strength in the dollar may be one factor keeping foreign investors out of the U.S. market as lower foreign currencies buy fewer U.S. shares. And the dollar, after rising 4.1 percent last year on the dollar index, is now showing increasing strength as slowing growth in Germany hurts the euro and Brexit uncertainty hurts sterling. At 96.64, the dollar index rose 1.1 percent in the week to lift it to a 0.6 percent year-to-date gain.

The bottom line

Updates on the factory and services sectors proved soft with weak foreign demand the culprit, evident again in foreign participation in the U.S. stock market. And the trade report, despite the headline improvement, showed a decline for exports which tailed off through the second half of last year. It was a light week for indicators but the upcoming one will see the long-awaited return of the monthly retail sales report and the final and definitive verdict on holiday sales.

Week of February 11 to February 15

Retail sales for December, which have been delayed for a month due to the government shutdown, look to the highlight of what will be a busy week. Job openings in the JOLTS report will be Tuesday's focus amid what appears to be a swelling in the labor market. Inflation concerns have moved to the back burner amid slowing global growth and comparatively low oil prices, but the week does get a full slate: consumer prices on Wednesday, producer prices on Thursday, and import & export prices on Friday. All of these reports are expected to show very subdued pressures. Subdued is also the outlook for retail sales which are not expected, despite the strength of the labor market, to show much punch at all in holiday spending. A reversal for manufacturing output, which spiked in December, is expected to hold down Friday's industrial production to yet another one of the week's expected modest results. The week ends which consumer sentiment and here too not much of a bounce is expected following January's plunge on the government shutdown.

Tuesday

Small Business Optimism Index for January

Consensus Forecast: 103.0

Consensus Range: 102.0 to 104.4

The small business optimism index is expected to slip to 103.0 in January vs December's 104.4 which was a 14-month low. December saw a second straight month of easing in economic optimism along with declining plans for business investment.

JOLTS: Job Openings for December

Consensus Forecast: 6.950 million

Consensus Range: 6.888 to 7.063 million

Pressures in the JOLTS report eased in November as the number of openings and the number of quits both fell. Forecasters see job openings rising to 6.950 million in December vs 6.888 million in November.

Wednesday

Consumer Price Index for January

Consensus Forecast, Month-to-Month Change: 0.1%

Consensus Range: 0.0% to 0.3%

Consumer Price Index

Consensus Forecast, Year-on-Year Change: 1.5%

Consensus Range: 1.3% to 1.9%

CPI Core, Less Food & Energy

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.2% to 0.2%

CPI Core, Less Food & Energy

Consensus Forecast, Year-on-Year Change: 2.1%

Consensus Range: 2.0% to 2.3%

Subdued pressure is the call for January's consumer price index, at a consensus increase of only 0.1 percent following a 0.1 percent dip in December that was tied to that month's weakness in oil prices. The consensus for the ex-food ex-energy core rate is a fourth straight increase of only 0.2 percent in what would underscore how flat pressures are. Year-on-year rates for January are seen at 1.5 percent overall and 2.1 percent for the core and down from December's respective rates of 1.9 percent and 2.2 percent.

Thursday

Initial Jobless Claims for February 9 week

Consensus Forecast: 225,000

Consensus Range: 222,000 to 225,000

Initial claims hit 50-year lows at mid-January then spiked 53,000 late in the month before falling back 19,000 in the February 2 week as claims from former Federal workers slowed sharply. For the February 9 week, forecasters see initial claims falling 9,000 to 225,000.

PPI-FD for January

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.2% to 0.3%

Forecasters expect producer prices in January to rise a modest 0.2 percent following December's 0.2 percent dip that reflected weak oil prices.

Retail Sales for December

Consensus Forecast: 0.1%

Consensus Range: -0.1% to 0.4%

Retail Sales Ex-Autos

Consensus Forecast: 0.1%

Consensus Range: -0.2% to 0.4%

Retail Sales Ex-Autos Ex-Gas

Consensus Forecast: 0.4%

Consensus Range: 0.3% to 0.5%

Retail Sales Control Group (Ex-Food Services, Ex-Autos, Ex-Gas, Ex-Building Materials)

Consensus Forecast: 0.4%

Consensus Range: 0.2% to 0.5%

Fractional headline growth is expected for retail sales in December, at a 0.1 percent gain vs only a 0.2 percent November increase. Ex-auto sales are also expected at plus 0.1 percent. Unit vehicle sales were steady in December and gasoline prices were soft which should boost the strength of the ex-auto ex-gasoline reading where the consensus increase is 0.4 percent and very near November's 0.5 percent gain. November at 0.9 percent and October at 0.7 percent were unusually strong months for the control group and less but still solid strength is the expectation for December, at a consensus 0.4 percent gain.

Business Inventories for November

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.1% to 0.4%

A modest 0.2 percent increase is the consensus for November business inventories in what would be the ninth straight constructive monthly build.

Friday

Empire State Index for February

Consensus Forecast: 7.0

Consensus Range: 6.0 to 11.5

At a consensus 7.0 vs 3.9 in January, modest growth is the expectation for February's Empire State index. New orders for this sample barely grew in January which points to generally subdued activity for February.

Import Prices for January

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: -0.1% to 0.3%

Export Prices

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: -0.3% to 0.3%

Forecasters see January import prices rising 0.2 percent after two prior months of oil-driven contraction, of minus 1.0 percent in December and minus 1.9 percent in November. Export prices, which fell 0.6 percent in December reflecting oil-related weakness for nondurable industrial supplies, are expected to firm 0.2 percent.

Industrial Production for January

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: -0.3% to 0.4%        

Manufacturing Production

Consensus Forecast,  Month-to-Month Change: 0.1%

Consensus Range: -0.4% to 0.2%

Capacity Utilization Rate

Consensus Forecast: 78.8%

Consensus Range: 78.5% to 78.9%

Moderation in manufacturing is expected to headline January industrial production which forecasters see coming in at a slight 0.2 percent gain following a 0.3 percent increase in December. Manufacturing production surged 1.1 percent in December on a spike in vehicle production and only a 0.1 percent gain is the call for January. Capacity utilization is expected to tighten 1 tenth higher to 78.8 percent.

Consumer Sentiment Index, Preliminary February

Consensus Forecast: 92.5

Consensus Range: 86.0 to 94.5

At a consensus 92.5, the consumer sentiment index is expected to firm only moderately from January which, due to the government shutdown, dropped very sharply to 91.2. January's preliminary reading was 90.7.