Introduction

We finally got some old news and it was good news. GDP for the fourth quarter, which was delayed a month because of the government shutdown, beat expectations and showed fundamental strength in two key components: consumer spending and business spending. However, residential investment didn't pass the test and seperate indications on housing aren't pointing to any quick rebound. And less than positive indications are also what continues to come out of the factory sector. But we'll begin our run down where we should, with the week's big news.

The economy

Fourth-quarter GDP proved very solid at 2.6 percent which was the high end of expectations. For 2018 as a whole, GDP came in at 2.9 percent. Consumer spending, despite the sharp drop in December retail sales, led the fourth quarter, rising at a 2.8 percent annualized rate which was down from outsized rates of 3.5 and 3.8 percent in the prior two quarters but still very strong. Business investment was another positive surprise, rising 6.2 percent for nonresidential fixed investment and back near the high single-digit increases of early 2018 when the corporate tax cut was boosting spending. Residential investment at year end, however, did prove weak, down 3.5 percent for the fourth straight quarterly decline in a string that offers definitive evidence of how weak the housing sector has become.

Turning from rates of growth to contributions, consumer spending leads the way as it should at 1.92 percentage points with services making up more than half (1.11 points) of this gain. Business investment added 0.82 points with the intellectual property subcomponent showing the most strength. Inventories contributed 0.13 points in what, given the general strength in demand, looks like a favorable build. Trade, as it often does, pulled down GDP but only by 0.22 points in the quarter. Government purchases were a fractional plus in the quarter.

The fourth-quarter strength of consumer spending was a surprise given the plunge in December retail sales, and the early indications on spending so far in the first quarter have been soft, whether vehicle sales or the weekly same-store sales reports from Redbook. How well first-quarter GDP fares, and early expectations are looking at another quarter in the 2 percent area, will depend of course on the consumer. And a consumer who makes money will be a consumer who spends money. Though job creation has been unusually strong, wage growth has been more in the moderate camp. The blue line of the graph tracks year-on-year change in wages & salaries which came in at 4.2 percent annual growth in January, which is a respectable nominal rate but down from highs of 4.7 percent in October. Spending like income has also been moderating in recent data, rising at a 4.0 percent rate in the latest available data which are for December. This is sharply down from recent months when wages & salaries, back in August, hit an expansion peak of 5.4 percent. But even though these trends aren't climbing, they're still favorable as is the savings rate which is enormously strong at 7.6 percent and, for retailers especially, represents a pool of funds for future spending.

Another key for first-quarter GDP will be business investment which, much like consumer spending, showed unexpected strength in the fourth quarter. Leading indications on business investment were turning lower in November and December and had, in fact, been soft throughout the second half of last year. Remember it was the first half of last year that saw a spike that was fed by the 2018 corporate tax cut. Whether business investment runs out of gas will be an important story for the 2019 economy but, judging by orders and shipments for capital goods, there wasn't much momentum at all going into the year. Orders for core capital goods (nondefense ex-aircraft) fell very sharply in December and November, down 1.1 percent and 1.0 percent. But it won't be orders that will be tallied in first-quarter GDP but shipments instead, and here the outlook is no more favorable. That shipments were able to do as well as they did, at no change in December and down 0.2 percent in November, was because manufacturers had backlogs to work down. Without new orders coming, capital goods shipments are certain to suffer.

And there's wider evidence of turbulence right now in the factory sector. ISM manufacturing is perhaps the most closely watched of any privately produced reports and for February joined a number of other advance indications that are pointing to slowing. ISM's index posted a 2.4-point drop to 54.2 with slowing visible through the many of the readings including a 2.7-point drop in new orders, a 3.2-point drop for employment, and a 5.7-point slide for production. This report gets close attention from the Fed and the results fit right in with their general warnings on slowing and the need for patience in monetary policy. Note that the graph tracks ISM's index against actual monthly change in factory orders and both have been sputtering of late.

Cross-border trade is usually a negative for GDP but the negative that has been unrelenting is residential investment. Housing starts fell 11.2 percent in December to a 1.078 million rate that was far below Econoday's consensus range. This compares with a long trend in the 1.200 to 1.300 million range and is the weakest showing since September 2016. Wildfires in the West may have been at play and responsible for at least in part of the 26 percent monthly drop in the region. But starts were also down in the Midwest, 13 percent lower, with the South down 6.0 percent to 630,000. But there was good news in the report. Permits, which are less impacted by weather or one-time effects, rose 0.3 percent in December to a 1.326 million rate that exceeded Econoday's high estimate. But for timing, starts follow permits by a half year at least which means even accelerating gains for permits won't mean much for immediate residential investment.

The drop in housing hasn't been much of a focus at all for the Federal Reserve, though it does fit in with their central concern over economic slowing. Home prices are central to household wealth and recent news is pointing to less strength. Case-Shiller's 20-city index managed only an adjusted monthly 0.2 percent gain in December which was half of what forecasters expected. Year-on-year prices were up only 4.2 percent for the lowest growth rate since November 2014. Year-on-year change in FHFA's data also released in the week showed less deterioration but still deterioration, at 5.6 percent for the lowest rate since February 2016. Prices in the West, like starts in the region, continue to come down and are evoking two years of talk that the region's cities, whether San Francisco, Los Angeles, San Diego, Portland or Seattle, were in another price bubble.

Many of the indications for the first-quarter don't look that great right now, but what actual data do we have for the first quarter? The national activity is a composite of separate indicators and its initial reading on January was not favorable, at minus 0.43 which was unexpected. It was January's 0.9 percent plunge in the manufacturing component of the industrial production that did its share of damage to this index. Production in total subtracted 0.45 points from January's index with other contributions nearly neutral.

We close the week's economic run with a look at the PCE price indexes. These are the specific indexes followed by the Fed for monetary policy and the latest numbers also fit in with their wait-and-see directive. Core PCE prices ticked 0.2 percent higher for a second straight month in December with the year-on-year rate also unchanged for a second straight month, at 1.9 percent. Overall PCE prices edged 0.1 percent higher on the month for a December year-on-year showing of only 1.7 percent, down 1 tenth from November. Along with these year-on-year rates, the graph also tracks growth in average hourly earnings (red columns). At 3.2 percent in January, earnings were near an expansion high but the trends of the PCE indexes aren't pointing to any acceleration.

Markets: Lots of news, not lots movement

The week opened amid optimism for a substantial U.S.-China trade accord but ended the week with less enthusiasm. U.S. Trade Representative Robert Lighthizer sounded cautious in his late week testimony to the House Ways and Means Committee, saying that promises by China to purchase more U.S. goods would not substitute for structural changes, including better protection of intellectual property, and would not secure a trade deal between the two countries. But Lighthizer did at least confirm that tariffs on $200 billion of in Chinese goods, that were set to rise to 25 percent from 10 percent on March 2, would be shelved. The Dow ended the week nearly unchanged, at 26,026 and holding on to its very strong year-to-date gain of 11.6 percent. Gold fell in the week, down more than $30 to $1,292, as did demand for Treasuries as the 10-year yield jumped 10 basis points to 2.75 percent. This is a sizable move for Treasuries but probably not enough to signal a downshift in demand for safe-haven assets, a shift away from risk that incidentally has been driving down State Street's investor confidence index to a 10-year low. State Street's report back in January cited "warp speed" deterioration in confidence among professional managers, deterioration that has since stabilized. This index edged higher in February to 70.9 vs readings well over 100 through the first half of last year.

The bottom line

Last year was a very favorable one for the economy which posted four quarters of solid growth and ended the year with a 2.9 percent GDP gain. Yet 2019 has so far been a year of caution highlighted most dramatically in January by the Fed's shift to neutral, and the outlook for the first quarter is up in the air given possible slowing underway for consumer spending and more signficant slowing for housing. One area, however, that has shown nothing but strength is the most important piece of the economy of all, that is employment which will be the highlight of the coming week of data.

Week of March 4 to March 8

It looks to be a week of contrasts, highlighted by the Beige Book on Wednesday and the employment report on Friday. The last Beige Book offered enough of a hint to suspect that a policy shift was possible at the subsequent FOMC, a meeting where policy makers did in fact change guidance from continuing rate hikes to no rate actions at all. The Beige Book prepared for the FOMC's meeting later this month could offer a new hint whether policy could will begin to shift from neutral to perhaps the accommodative side, a shift possibly tied to slowing in consumer spending and emerging weakness in manufacturing. Housing, where data have been the softest of all, opens the week with construction spending on Monday followed by new home sales on Tuesday, two reports that have been delayed and will update results from December. A non-manufacturing update on Tuesday from the ISM is expected to show another month of slowing with the day's data to be capped off by another Treasury statement, one that isn't, however, expected to show more red ink for the government. December trade data on Wednesday will offer early updates for fourth-quarter GDP revisions while the latest on productivity will offer argument points for policy makers and pundits on Thursday. All this will lead up to the week's big news: the February employment report where forecasters are calling for yet another strong report, one that would contrast with all the talk of slowing.

Monday

Construction Spending for December

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

Consensus Range: 0.2% to 1.0%

Residential multi-unit as well as public building drove construction spending up 0.8 percent in November. Econoday's consensus for December is a 0.6 percent increase. Total year-on-year growth in November was only 3.4 percent.

Tuesday

PMI Services for February Final

Consensus Forecast: 56.2

Consensus Range: 53.9 to 56.2

In contrast to slowing for the manufacturing PMI, wide strength was the indication from the PMI services flash for February which jumped 2 points to 56.2 which is the consensus for February's final. This index ended January at 54.2.

New Home Sales for December

Consensus Forecast, Annualized Rate: 591,000

Consensus Range: 550,000 to 649,000

Driven by an impressive gain in the South, new home sales reversed a run of weakness with a 16.9 percent surge in November to a 657,000 annualized rate. The consensus for December is a slip back to a 591,000 rate.

ISM Non-Manufacturing Index for February

Consensus Forecast: 57.2

Consensus Range: 56.0 to 58.0

ISM's non-manufacturing sample reported sustainable and solid growth in January which was near consensus yet 1 point lower than December. For February, forecasters see no further slowing with the consensus at 57.2 vs January's 56.7.

Treasury Budget for January

Consensus Forecast: $0.0 billion

Consensus Range: -$57.6 billion to $10.0 billion

December's deficit, at $13.5 billion, was close to consensus and contributed to a $318.9 billion deficit three months into the government's fiscal year. This was 42 percent deeper than three months into the prior fiscal year. Econoday's January consensus for the Treasury Budget is no change with the consensus range spread between a deficit of $57.6 billion to a  surplus of $10.0 billion.

Wednesday

ADP, Private Payrolls for February

Consensus Forecast: 180,000

Consensus Range: 166,000 to 220,000

Econoday's consensus for ADP's private payroll estimate in February is 180,000 which would compare with 213,000 for ADP's January estimate and against 296,000 in the government's data for January.

International Trade Balance for December

Consensus Forecast: -$57.6 billion

Consensus Range: -$58.2 to -$45.0 billion

Forecasters see the December international trade balance at a consensus deficit of $57.6 billion. This would compare with a monthly average of $52.5 billion in the first two months of the fourth quarter and a monthly average of $52.9 billion in the third quarter. Advance data for the goods portion of this report showed a larger-than-expected deficit of $79.5 billion.

Beige Book

Prepared for the FOMC Meeting on March 19 & 20

The last Beige Book was incrementally soft, repeating that economic growth was modest-to-moderate but adding that optimism was tilting more to the modest than the moderate side. The book correctly predicted weakness in holiday sales with manufacturing said at the time to be slowing and housing flat. March's edition is in preparation for the March 19 & 20 meeting.

Thursday

Nonfarm Productivity, 2nd Estimate 4th Quarter

Consensus Forecast, Annualized Rate: 1.6%

Consensus Range: 1.0% to 1.8%

Unit Labor Costs

Consensus Forecast, Annualized Rate: 1.8%

Consensus Range: 1.6% to 2.2%

Only an abbreviated form of this report was released for the first estimate which did not include headline rates for either nonfarm productivity or unit labor costs. For the second estimate, forecasters see a 1.6 percent gain for productivity and a 1.8 percent increase in costs.

Consumer Credit for January

Consensus Forecast: $17.3 billion

Consensus Range: $15.0 to $20.0 billion

Steady growth of $17.3 billion is expected for consumer credit in January following December's increase of $16.6 billion that showed, however, a subdued rise for revolving credit.

Friday

Nonfarm Payrolls for February

Consensus Forecast: 178,000

Consensus Range: 130,000 to 200,000

Unemployment Rate

Consensus Forecast: 3.9%

Consensus Range: 3.8% to 3.9%

Private Payrolls 

Consensus Forecast: 175,000

Consensus Range: 135,000 to 195,000

Manufacturing Payrolls 

Consensus Forecast: 10,000

Consensus Range: 0 to 15,000

Average Hourly Earnings

Consensus Forecast, Month-to-Month Change: 0.3%

Consensus Range: 0.2% to 0.3%

Average Hourly Earnings

Consensus Forecast, Year-on-Year Change: 3.4%

Consensus Range: 3.2% to 3.4%

Average Workweek

Consensus Forecast: 34.5 hours

Consensus Range: 34.5 to 34.5 hours

Moderation but still very substantial nonfarm payroll growth is the expectation for February's employment report. The consensus is 178,000 vs January's 304,000 total that far surpassed Econoday's consensus range. The unemployment rate is seen moving 1 tenth lower to 3.9 percent with average hourly earnings reheating to 0.3 percent from what was a lower-than-expected gain of 0.1 percent in January. The year-on-year rate for earnings is expected to hold to rise 2 tenths to 3.4 percent. Private payrolls are seen rising 175,000 with manufacturing payrolls expected to increase 10,000 to extend a run of gains. The workweek is seen steady 34.5 hours.

Housing Starts for January

Consensus Forecast, Annualized Rate: 1.170 million

Consensus Range: 1.100 to 1.227 million

Building Permits

Consensus Forecast: 1.280 million

Consensus Range: 1.220 to 1.352 million

Wild fires in California contributed to a very sharp drop in housing starts in December, and a bounce back to a 1.170 million annualized rate is the consensus from 1.078 million. Permits held steady at a 1.326 million rate with January's consensus looking for a drop to 1.280 million.