Introduction

Unsettling was the deep drop in December retail sales of the prior week and now in the latest week it's the details of the December durable goods orders. These are central barometers of the nation's economic health — retail sales on the consumer side and capital goods on the business side — and both may be pointing to the risk of slowing growth. Durable goods did look strong on the headline but were weak underneath as capital goods orders, which track business investment, fell sharply for a second straight month. This together with the first outright contraction for the Philadelphia Fed index since the middle of 2017 are raising new questions over the outlook for manufacturing, a sector on the front line of cross-border trade that's considered to offer advance signals of economic change.

The economy

A second month of weakness for core capital goods was the lowlight of the December durable goods report. The 1.2 percent headline rise for orders masks weakness for business investment. New orders for core capital goods sank an unexpected 0.7 percent that fell well below Econoday's consensus range. Magnifying what may be an emerging pivot lower for capital goods was a sharp downward revision to November, now at minus 1.0 percent. Significant declines for a second month in a row were posted by machinery and also computers as well as communications equipment which are all central to the capital goods group. But these are orders. Shipments of core capital goods actually rose 0.5 percent which will help offset a 0.2 percent shipment decline in November and may actually give a small boost to nonresidential fixed investment in the coming week's fourth-quarter GDP report.

Jumping more than 50 percent, aircraft orders, as they often do in the durable goods report, skewed December's headline higher. Vehicle orders were also strong, rising 2.1 percent and, together with the previously released vehicle surge in the manufacturing component of the industrial production report, point to a burst of late-year activity for the auto sector. But when excluding aircraft and vehicles as well as all other transportation equipment, orders inched only 0.1 percent higher in December. The graph tracks ex-transportation orders, at $164.2 billion in December, against ex-transportation shipments, at $168.3 billion. Shipments have kept climbing even as new orders have flattened which suggests that year-on-year growth, at 4.4 percent for shipments, may begin to fall back to orders where the gain is 3.5 percent. And underlying softness is further indicated by total unfilled orders which have posted small declines in each of the last three reports.

Less-than-favorable indications are also the message of the Philadelphia Fed's manufacturing survey which has now joined other regional reports indicating a visible shift lower for the factory sector. The Philadelphia Fed's manufacturing index, at minus 4.1 for the February report, is now in contraction for the first time since May 2016. Confirming the trouble is the first negative score for new orders, at minus 2.4, since August 2016. February shipments, at minus 5.3, also contracted though after these readings the picture is less grim. Unfilled orders are building for this sample and are likely boosting hiring which posted a solid gain. Another positive is increasing traction for selling prices and not buckling at all was the 6-month outlook, holding steady at 31.3 which is solidly favorable for this reading. Still, the headline drop that follows a year of gradual slowing is certainly an unwanted signal that will not be lifting forecasts for other regional reports including in the coming week for the Dallas Fed whose general activity index, as seen in the light columns of the graph, dipped suddenly into contraction during December.

Yet another unwanted signal is coming from what has been the most consistently steady of all the small-sample factory reports, the manufacturing PMI which in the  February flash slowed by a tangible 1.2 points to 53.7. Manufacturers in the sample are reporting a "soft spot" in client demand and are citing global slowing as a cause, a refrain of course of recent Federal Reserve warnings. Production in the sample is also slowing though manufacturers are still adding workers at a solid pace in what underscores a consistent and underlying theme of U.S. data — uninterrupted strength in the labor market. The sister report on the services side, released with the manufacturing PMI, showed unusual strength but it's manufacturing, and it's greater reliance on foreign markets, where the warning lights are flashing. Note that the closely watched ISM manufacturing report, which has also been sliding, will be a highlight of the coming week's calendar.

A pending slowdown isn't a question for the housing sector which slipped lower all last year. Existing homes in January sold at an annualized rate of 4.940 million for a 1.2 percent monthly decline and a three-year low, this despite lower mortgage rates and an easy comparison against a very weak December. Sagging permits for single-family homes have been cited as a concern by the Federal Reserve and single-family resales in this report are also down, 1.8 percent lower to a 4.370 million rate. Condo resales, up 3.6 percent at a 570,000 rate, helped offset some of the month's weakness. The West is often a driving force for the housing market and trouble here may be brewing. Like indications in other housing data especially for home prices, the West right now looks very soft. This follows prior years of strong gains and talk of price bubbles. Resales in the region fell 2.9 percent in January to a 1.000 million rate which is down 13.8 percent from last year. The South, which is the nation's largest housing region, is also softening with resales down 1.0 percent in the month at 2.080 million and down 8.4 percent year-on-year.

Home prices are still going up but not nearly as much as before. Price discounting apparently gave sales of existing homes a boost as the median fell a monthly 2.8 percent to $247,500. Year-on-year, the median is still in the plus column at 2.8 percent but given where total year-on-year sales are, at minus 8.5 percent, further discounting may be in store. The accompanying graph tracks this separation. The yearly median price gain of 2.8 percent marks the slowest annual result since 2012 which should be no surprise given clear slumps underway in Case-Shiller and FHFA price data, updates for which are also scheduled in the coming week. Trouble in housing has only been a minor theme in the Fed's economic assessment though more reports like this one could raise their level of concern.

Turning now to the economy's great strength, demand for labor looks as strong as ever based on the lack of unemployment claims. Initial claims had shifted higher early in the year due to the effects of the government shutdown, but these effects are now waning and don't look to derail February's employment report. Initial claims fell a very sharp and unexpected 23,000 in the February 16 week to a 216,000 level yet the 4-week average, still reflecting the prior shutdown-related swelling, rose 4,000 to 235,750. What all this indicates for February's employment report is, however, a bit unclear. The February 16 week was the sample week for the monthly employment report and comparisons with the sample week for the January report do point to easing strength, up 4,000 at the headline level in February and up a sizable 15,250 for the 4-week average. But the enormous strength of January's employment report, headlined by a 304,000 surge in non-farm payrolls, suggests that even a little softer results could still equate to a very strong employment report for February.

Minutes from January's FOMC were another highlight of the week, a meeting that produced one of the most important shifts in years as guidance moved from further rate hikes to neutral. The Fed highlighted the risks of global slowing for its downshift yet the economic assessment at the meeting was far from soft with labor market conditions described as strengthening and GDP as solid. Manufacturing back in January was also judged as solid as was business investment. Strong was the word for household spending though December retail sales, which since turned out to be very weak, had yet to be released. Areas of weakness in the economic assessment included residential investment and also government spending due to the effects of the shutdown.

The Fed's balance sheet was another hot topic at the meeting with members strongly agreeing that — sometime later in the year — they are very likely to stop the ongoing run-off. Concerns in the financial markets that the run-off was behind late year volatility were cited in the minutes though members were skeptical saying that the unwinding had no significant effect. Specific targets for the balance sheet were not mentioned but if the Fed's $50 billion of monthly run off is extended through the entire year the balance sheet will fall to just under $3.5 trillion by year end. As of the latest week, the run-off had reduced the balance sheet from $4.460 trillion back in October 2017 to $3.981 trillion, a decrease of $479 billion. That's $479 billion which over this time has not been reinvested into Treasuries and mortgage-backed securities, markets that unlike equities, however, have not shown unusual volatility.

Markets: Stocks and bonds both steady and firm

Financial markets were mostly steady in the week with the Dow, rising at week's end on hopes for a trade agreement with China, posting a 0.6 percent gain to lift its year-to-date increase to a very strong 11.6 percent. The Nasdaq continues to lead the pace but not by an oversized degree, up 0.7 percent in the week for a year-to-date gain of 13.4 percent. And the gains for stocks didn't come at the expense of the Treasury market where yields fell on the short-end of the curve with the 2-year yield down 3 basis points to 2.49 percent vs a 1 basis point decline for the 10-year to 2.65 percent. Talk of global slowing and the possibility of new central bank accommodation may be the reason for the strong demand for Treasuries. And though the risk of yield curve inversion and it's commonly accepted signal of approaching recession is still alive, the spread between the 2- and 10-year yields, at 16 basis points, is only 2 basis points narrower than at year end. Commodities also rose on the week including gold which flirted with a challenge at $1,350 before settling back to end at $1,333 for a 0.6 percent gain on the week. Oil was also a mover, briefly testing an approach of $60 for West Texas Intermediate before ending the week at $57.29 for a gain of more than $1.

The bottom line

The factory sector was the economy's star performer in 2018 and, on the surface at least, ended last year in strength especially for autos. But weakness in capital goods, and its negative implications for business investment and future productivity growth, hint at a hesitance among businesses consistent with an easing in business confidence. However large the service sector is, manufacturing and its exposure to global demand is considered the leading sector for indications on general economic conditions and the ripples in the week's data may be pointing to visible slowing in the first-quarter economy.

Week of February 25 to March 1

Unless Jerome Powell breaks character and offers surprises at his semiannual reports to Congress, the headliner in an unusually heavy week for economic news is likely to be Thursday's initial estimate for fourth-quarter GDP, a report that has been delayed by a month because of the government shutdown. Solid but slowing growth of 2.4 percent is Econoday's consensus. Surprises earlier in the week for any of GDP's inputs, whether inventories or international trade in goods, could very well shift expectations going into the report on Thursday. Powell's two days on Capitol Hill will start Tuesday and end Wednesday and given his emphasis as a communicator he is likely to underscore the Federal Reserve's new wait-and-see approach for the next rate action, an approach that may not stir up much controversy. Housing will also be a heavy theme in the week starting with starts and permits on Tuesday, where strength is not the call, followed by home price data on Tuesday and on Wednesday by pending home sales and the latest on what is an ailing resale market. The long list of the week's other data includes consumer confidence on Tuesday, factory orders on Wednesday, the Chicago PMI on Thursday and on Friday both ISM manufacturing and consumer sentiment. As Federal Reserve policy is in neutral, the results of the week's economic data, if tracking in a single convincing direction, could well tip expectations one way or another whether rates go higher, stay steady or, if weakness is the consistent theme, even turn lower.

Monday

National Activity Index for January

Consensus Forecast: 0.13

Consensus Range: 0.11 to 0.15

Forecasters see the national activity index coming in at a moderate 0.13 vs what was an unexpectedly strong 0.27 in December. Production-related indicators, which surged in December, look to be softer in January with employment indicators, however, looking very strong.

Wholesale Inventories for December

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

Consensus Range: 0.1% to 0.3%

Wholesale inventories are expected to rise 0.2 percent in December following a 0.3 percent build in November. Even with moderate builds, inventory growth in the wholesale sector appears to be getting ahead of sales growth.

Dallas Fed General Activity Index for February

Consensus Forecast: 3.0

Consensus Range: 2.0 to 11.7 

Consensus for the Dallas general activity index is a subdued 3.0 in February vs a nearly dead flat plus 1.0 in a January report that saw strength in production but weakness in orders.

Tuesday

Housing Starts for December

Consensus Forecast, Annualized Rate: 1.256 million

Consensus Range: 1.200 to 1.330 million

Building Permits

Consensus Forecast: 1.280 million

Consensus Range: 1.230 to 1.305 million

Housing starts and permits have been struggling with no improvement the expectation for December. Forecasters see starts coming in at a 1.256 million annualized rate which would match November's rate. Permits are expected to come in at 1.280 million and well down from November's 1.322 million (since revised to 1.328 million). Single-family data, which are the dominant component in this report, have been especially weak in recent reports in contrast to noticeable acceleration for multi-family units.

Case-Shiller, 20-City Unadjusted Index

Consensus Forecast, Year-on-Year Change: 4.5%

Consensus Range: 4.5% to 4.9.%

Clear weakening in the West has been the recent theme for home prices especially in November when flat results and outright contraction in San Francisco and Seattle held down Case-Shiller's 20-city adjusted index. Econoday's consensus for December's year-on-year growth, coming off November's 3-1/2 year low of 4.7 percent, is 4.5 percent.

FHFA House Price Index for December

Consensus Forecast, Month-to-Month Change: 0.4%

Consensus Range: 0.4% to 0.5%

Steady strength is what forecasters see for the FHFA house price index in December, at a consensus gain of 0.4 percent in what would match November's rise. The year-on-year rate in November and October was 5.8 percent, down from 6 percent and even 7 percent levels early in 2018.

Consumer Confidence Index for February

Consensus Forecast: 124.5

Consensus Range: 119.0 to 127.2

The reopening of the government points to a rebound for the consumer confidence index which sank sharply in both December and January. Econoday's consensus is 124.5 vs January's lower-than-expected 120.0.

Richmond Fed Manufacturing Index for February

Consensus Forecast: 1

Consensus Range: 0 to 3 

Orders and backlogs contracted suddenly and sharply in the last two manufacturing reports from the Richmond Fed yet subdued improvement in composite activity index is the expectation for February. Econoday's consensus for Richmond's February index is plus 1 vs minus 2 in January and minus 8 in December.

Wednesday

International Trade In Goods for December

Consensus Forecast, Month-to-Month Change: -$73.0 billion

Consensus Range: -$73.7 to -$73.0 billion

The advance goods deficit for November was canceled due to the government shutdown but the census basis total in the subsequent international trade report narrowed sharply to $70.5 billion. Forecasters see a widening for December to $73.0 billion.

Factory Orders for December

Consensus Forecast, Month-to-Month Change: 0.6%

Consensus Range: 0.1% to 2.1%

Advance data for the durables side of the December factory orders report rose 1.2 percent. Ex-transportation orders, however, inched only 0.1 percent higher with core capital goods orders down a steep 0.7 percent. Forecasters see headline factory orders in December, which will include initial data on non-durable goods, rising 0.6 percent.

Pending Home Sales Index for January

Consensus Forecast, Month-to-Month Change: -3.0%

Consensus Range: -11.0% to 1.0%

No bounce back is the forecast for January pending home sales which are expected to decrease 3.0 percent after falling 2.2 percent, 0.9 percent and 2.6 percent in the last three reports. Pending sales were down a year-on-year 9.8 percent in the December, right in line with the 8.5 percent decline in final resales.

Thursday

Real GDP: 4th Quarter, "Initial" Estimate, Annualized Rate

Consensus Forecast: 2.4%

Consensus Range: 1.8% to 2.8%

GDP Price Index

Consensus Forecast: 1.6%

Consensus Range: 1.3% to 2.3%

Consensus for the "initial" fourth-quarter GDP estimate, which due to the government shutdown will be a compression of the first and second estimates, is an annualized growth rate of 2.4 percent vs 3.4 percent in the third quarter. The GDP price index is seen at 1.6 percent vs 1.8 percent in the third quarter.

Chicago PMI for February

Consensus Forecast: 55.8

Consensus Range: 55.0 to 60.0 

No new acceleration after an abrupt slowing is the call for the Chicago PMI with the February consensus at 55.8 vs 56.7 in January that marked a 7-point slump. Growth in new orders slowed to a 2-year low and production to a 10-month low in January.

Friday

Personal Income for December

Consensus Forecast, Month-to-Month Change: 0.4%

Consensus Range: 0.3% to 0.5%

Personal Income for January

Consensus Forecast, Month-to-Month Change: 0.4%

Consensus Range: 0.3% to 0.5%

Consumer Spending for December

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

Consensus Range: -0.3% to 0.3%

PCE Price Index for December

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

Consensus Range: 0.0% to 0.5%

PCE Price Index for December

Consensus Forecast, Year-on-Year Change: 1.8%

Consensus Range: 1.7% to 1.9%

Core PCE Price Index for December

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

Consensus Range: 0.2% to 0.3%

Core PCE Price Index for December

Consensus Forecast, Year-on-Year Change: 1.9%

Consensus Range: 1.5% to 2.1%

Personal income is seen rising a solid 0.4 percent in December. January data on income will also be released with this report and is also expected to rise 0.4 percent. Consumer spending had been strong but not following December's 1.2 percent drop in retail sales. Expectations for December spending see a 0.2 percent decline (January data on spending as well as inflation will not be released with this report). The core PCE price index, which excludes both food and energy, is seen posting a 0.2 percent December rise for a year-on-year rate of 1.9 percent. The consensus for the overall PCE price index is 0.2 percent for a year-on-year rate of 1.8 percent.

ISM Manufacturing Index for February

Consensus Forecast: 55.0

Consensus Range: 53.0 to 57.2

No greater strength is the call for the February ISM manufacturing index which rebounded in January after falling dramatically in December. February's consensus for the headline composite index is 55.0 vs January's 56.6.

Consumer Sentiment Index, Final February

Consensus Forecast: 95.5

Consensus Range: 90.5 to 96.0

Econoday's consensus for the final consumer sentiment index for February is 95.5 which would be unchanged from the better-than-expected 5-point rebound in the month's preliminary reading. January's 7-point plunge in this index was tied to the government shutdown with February's bounce back in turn tied to the government's reopening.