Introduction

The first big input for first-quarter GDP proved modest-to-moderate at the very most and together with cautious expectations for February retail sales are pointing to the risk of a first-quarter consumer disappointment. Inflation and its erosion is another risk for the economy and poses the question whether the next move for the wait-and-see Federal Reserve is in fact a rate cut. But there was also favorable data in the week led by the housing sector where improvement is now a lot easier to find. We'll begin, however, with the consumer where good news is still a little scarce.

The economy

Consumer spending in January wasn't able to meet expectations, up only marginally at 0.1 percent even against the easy comparison of December when spending fell 0.6 percent. Weakness in January spending was centered in durable goods and reflected the month's very sharp drop in vehicle sales. The Bureau of Economic Analysis is still catching up following the government shutdown and the  latest report is split between lagging data on both spending and prices and up-to-date data on personal income which was also subdued, up 0.2 percent in data for February. However soft income was, January's opening to 2019 consumer spending points to early trouble for first-quarter GDP and apparently isn't helping expectations much for February retail sales.

The red column on the right of the graph is Econoday's consensus for February retail sales which will open the coming week's round of economic data. Forecasters are only looking for a 0.3 percent gain though expectations for the control group component in the report, an input for GDP, are a little better, at 0.4 percent. Retail sales collapsed in colossal fashion in December in what was the worst month for the nation's retailers since the last recession. January's bounce was minimal with only limited strength shown for most components. Another result like this for February would not help expectations for first-quarter consumer spending nor for first-quarter GDP.

And not helping policy makers much was a very subdued run of PCE price results for January. The year-on-year rate for the core, as tracked in the red line, slipped unexpectedly back 2 tenths to 1.8 percent. The monthly rate also missed expectations at only a 0.1 percent gain. It was about this time last year when the yearly core was climbing to the 2 percent line and triggering a guidance response from the Federal Reserve who said it would defend the upside of the 2 percent line as vigorously as it had the downside. Well, now it looks like it could be the downside all over again. Jerome Powell repeatedly underscores the importance of inflation expectations as the very foundation for managing inflation. The blue and green lines track consumer and business expectations and they haven't been showing much promise at all the last two months, both extending a visible slope lower.

As the consumer sector appears at the risk of slumping, the housing sector thankfully – getting a specific boost from lower mortgage rates – appears to be showing emerging strength. But it's hard to see much of anything through all the enormous volatility of housing data. New home sales surged 4.9 percent in February alone to a 667,000 annual rate but revisions pulled down the prior two months by a net 35,000. Here's where the 3-month average is useful and it shows a 2.9 percent monthly increase to a 630,000 rate for the best showing since June last year. The graph also tracks final sales of single-family existing home sales which likewise showed a sudden pivot higher in February, to a 4.583 million rate on the 3-month average and a 2.3 percent monthly rise.

A negative for new home sales has been limited supply on the market, the result of a lack of housing completions that in turn reflects a prior lack of permits and starts. Unlike sales, construction readings are not yet showing much of a bounce. Single-family completions fell 10.0 percent in February to an 816,000 annual rate while starts dropped 8.7 percent to an 805,000 rate. Permits for single-family homes were unchanged at 821,000. Perhaps the most unfavorable news comes from the West which had been in what was arguably an unsustainable boom the last couple of years. This region is a key one for home builders. Starts in the West were down 9.4 percent year-on-year in February with permits down a much steeper 22.0 percent. The graph tracks annual rates for both single-family homes and also multi-family homes which have likewise been soft.

Though positives may be appearing in the housing data, they are still elusive. Prices are on a clear downturn, reflected in the median price of a new home which at $315,000 in February was down 3.6 percent from a year ago. Other price data in the week included Case-Shiller's 20-city adjusted index which, at plus 3.6 percent, posted its lowest year-on-year rate since September 2012. California cities continued to pull down Case-Shiller's numbers with San Diego and San Francisco both posting monthly price declines and yearly growth rates that are at the very bottom of the 20-city group, at only 1.3 and 1.7 percent respectively. Next lowest is Chicago at 2.3 percent and next after that is Los Angeles at only 2.9 percent. The background area of the graph is FHFA's house price index where 5.6 percent year-on-year growth is a 2-1/2-year low.

But let's remind ourselves again of the pop higher in the new sales and resales data. The latest pending home sales index, though dipping, may actually be offering more good news. A 1.0 percent decline in February to 101.9 follows, however, a 4.3 percent shot higher in January. Though lower in February, the index didn't fall back by much which may, combined with January, be a favorable indication for final resales in March and perhaps April as well. Housing again and again proves itself very sensitive to how high or low mortgages are, and the ongoing move lower in rates is taking its grip right as the Spring housing season opens. This could spell a rebound year for the sector. How low are mortgage rates? In the week's data from the Mortgage Bankers Association the average 30-year mortgage for a conforming loan ($484,350 or less) dropped 10 full basis points to 4.45 percent, a rate that was over 5 percent only late last year.

Other news in the week included corporate profits which, in contrast to much of the other data, look unquestionably bullish. Pre-tax corporate profits rose a year-on-year 7.4 percent to a $2.311 trillion annual rate at the end of last year with after-tax profits at $2.076 trillion for a 14.3 percent gain. The latter is a very sharp gain especially compared against the year's 5.6 percent decline for the Dow. Taxes on corporate income, at $234.7 billion, fell 29.7 percent year-on-year in what is the definitive measurement of the 2018 corporate tax cut.

Positive news definitely came from the January trade report where the nation's deficit proved much smaller than expected at $51.1 billion. Exports rose a solid 0.9 percent to $207.3 billion while imports fell a sharp 2.6 percent to $258.5 billion. The goods deficit was the surprise in the report, at a still steep $73.3 billion but 10.1 percent lower than December's outsized $81.5 billion gap. The nation's surplus on services exports rose 2.4 percent to $22.1 billion. Details showed a very welcome $1.3 billion rise in food exports, which had been shrinking in prior months, as well as a $1.2 billion gain for vehicle exports. Imports of capital goods fell $3.0 billion, which is good for the deficit but a negative for business investment, while imports of industrial supplies, reflecting a decline for oil, fell $2.3 billion. Country data showed another deep deficit with China, at $34.5 billion but one that was a little less steep than $36.8 billion in December. Deficits with all other major trading partners likewise narrowed.

The best news to wish for in any of the economic reports would be a big bounce back in nonfarm payroll which came in at a frighteningly thin 20,000 in February. The report for March will cap off the coming week and Econoday's consensus is looking for a more than respectable 169,000 increase. Early indications on the health of March's labor market have been mixed but a mostly favorable picture is emerging from the month's jobless claims data. Initial claims in the March 23 week easily beat expectations, coming in at 211,000 for the best showing since early in the year. This pulled down the 4-week average by down a noticeable 3,250 to 217,250. This average has been trending 5,000 to 10,000 lower over the past month or so. Continuing claims held steady in the latest report, up slightly by 13,000 in lagging data for the March 16 week but with the 4-week average 5,000 lower at 1.751 million. At 1.2 percent, the unemployment rate for insured workers shows how healthy the labor market still is.

Markets: Steam boat policy: full speed ahead!

The decline in mortgage rates, at least the latest burst lower, is tied directly to the Federal Reserve's decision in the prior week to end quantitative tightening, that is by October to wind down balance-sheet reduction. But October is still months and months away, a contrast to the market's immediate response in what, by juxtaposition, helps illustrate the institutional pace that the Federal Reserve is famous for: nimble and quick is not their nickname. It was just back in December, only three months ago, that they were in fact still raising rates even as many indicators, especially those from housing but also the manufacturing sector, were showing cracks. Putting aside favorable news such as corporate profits or jobless claims, there is a risk that the economy will continue to slow. If it does, the question why quantitative tightening would still be taking place, even in a tapered down form, would inevitably be asked. And down the Fed's holdings of Treasuries and mortgage-backed securities continue to move, to $2.176 trillion for Treasuries in the latest week and to $1.593 trillion for MBS. Since October 2017, the central bank's holdings of Treasuries have fallen by $289.9 billion and of MBS by $175.4 billion. These are sizable sums not reinvested in an unwinding that in fact, to the Fed's great credit, hasn't lowered demand for bonds very much.

The bottom line

Whether the expectations balance for monetary policy will shift to the downside and a rate cut will turn on the March employment report and whether the economy produces a second straight month of paltry payroll growth. Even if all goes well with employment, consumer spending still hasn't straightened itself out following the holiday shopping debacle. And against all of this is the erosion beginning to appear in inflation measures. Though the outlook for the next rate move is up in the air, a slight tilt to a cut appears to be an emerging bias.

Week of April 1 to April 5

Focus on Friday's nonfarm payroll headline will be as concentrated as it gets. Another 20,000 print would instantly bring the word "rate-cut" quickly to mind. Expectations are solidly the other way with the consensus at 169,000 and Econoday's low estimate at a still heathy 145,000. Soft growth would be much better than marginal growth and soft but acceptable is the general consensus for the week's data going into Friday's employment report. The week opens with a heavy Monday morning and not much strength is expected for headline retail sales nor ISM manufacturing nor construction spending. And an unexpected jump in business inventories, also posted on Monday, could have people asking if overhang, given the general slowing, is suddenly an economic issue. The week's other data will include monthly vehicle sales, durable goods orders, and ISM non-manufacturing where limited results are all the call.

Monday

Retail Sales for February

Consensus Forecast: 0.3%

Consensus Range: 0.0% to 1.1%

Retail Sales Less Autos

Consensus Forecast: 0.4%

Consensus Range: 0.0% to 0.6%

Retail Sales Less Autos & Gas

Consensus Forecast: 0.4%

Consensus Range: 0.2% to 0.6%

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

Consensus Forecast: 0.4%

Consensus Range: 0.2% to 1.3%

Incremental acceleration is what forecasters see for retail sales in February, at a headline consensus increase of 0.3 percent vs 0.2 percent in January. Unit vehicle sales were weak in February which should give a relative boost to ex-auto sales where a respectable 0.4 percent rise is the call. Gains of 0.4 percent are also the consensus forecasts for less autos and less gasoline as well as the control group.

PMI Manufacturing for March, Final

Consensus Forecast: 52.5      

Consensus Range: 52.5 to 52.8

The manufacturing PMI, reflecting slowing global growth, has been sinking and missing expectations the past couple of reports. No change from the 52.5 flash is expected for February's final. This index ended February at 53.0.

ISM Manufacturing Index for March

Consensus Forecast: 54.0

Consensus Range: 53.0 to 55.0

At a consensus 54.0, no bounce-back strength is the call for the March ISM manufacturing index which slowed noticeably in February to 54.2 after slowing dramatically in December.

Business Inventories for January

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

Consensus Range: 0.1% to 0.5%

A moderate 0.3 percent increase is the consensus for January business inventories vs a 0.6 percent build in November. Inventories relative to sales may be rising too far too fast.

Construction Spending for February

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

Consensus Range: -1.0% to 0.4%

Despite further contraction for single-family homes, construction spending rose 1.3 percent in January on strength in both public and private nonresidential building. Yet total year-on-year growth, reflecting weakness in single-family homes, was only 0.3 percent in January. Consensus for February construction spending is a decrease of 0.1 percent.

Tuesday

Total Unit Vehicle Sales for March

Consensus Forecast, Annualized Rate: 16.8 million

Consensus Range: 16.6 to 17.0 million

Total unit vehicle sales in March are expected to improve to a 16.8 million annual rate vs 16.5 million in February. Vehicle sales were very weak in both January and February.

Durable Goods Orders for February

Consensus Forecast, Month-to-Month Change: -1.9%

Consensus Range: -4.0% to 0.7%

Durable Goods Orders, Ex-Transportation

Consensus Forecast: 0.0%

Consensus Range: -0.3% to 0.4%

Core Capital Goods Orders (Nondefense Ex-Aircraft)

Consensus Forecast: 0.2%

Consensus Range: 0.1% to 0.3%

A revival for core capital goods was the highlight of the January durable goods report but only limited strength is the consensus for core capital goods orders in February, at a gain of 0.2 percent. Headline durable goods are expected to fall 1.9 percent in February vs January's 0.3 percent aircraft-boosted gain (revised from 0.4 percent in the advance report)

with ex-transportation orders seen no better than unchanged following January's dip of 0.2 percent (revised from an initial minus 0.1 percent).

Wednesday

ADP, Private Payrolls for March

Consensus Forecast: 160,000

Consensus Range: 150,000 to 185,000

Econoday's consensus for ADP's private payroll estimate in March is 160,000 which would compare with 183,000 for ADP's February estimate and against only 25,000 in the government's data for February.

PMI Services for March, Final

Consensus Forecast: 54.8

Consensus Range: 54.8 to 55.1

Solid growth in the services PMI has been contrasting with slowing growth in the manufacturing PMI, the latter reflecting falling demand for exports. Still, the services PMI did slow in the March flash and also missed expectations. The consensus for March's services final is no change from the flash at 54.8. This index ended February at 56.0.

ISM Non-Manufacturing Index for March

Consensus Forecast: 58.0

Consensus Range: 54.0 to 59.5

ISM's non-manufacturing sample reported sharp acceleration in February with the 59.7 headline easily exceeding Econoday's consensus range. For March, forecasters see understandable moderation to a consensus 58.0.

Thursday

Initial Jobless Claims for March 30 week

Consensus Forecast: 216,000

Consensus Range: 215,000 to 219,000

Initial jobless claims had been steady in a narrow range between 220,000 to 230,000 before an unexpected drop to 211,000 in the March 23 week. Initial claims for the March 30 are expected to hold in a lower range at 216,000.

Friday

Nonfarm Payrolls for March

Consensus Forecast: 169,000

Consensus Range: 145,000 to 218,000

Unemployment Rate

Consensus Forecast: 3.8%

Consensus Range: 3.8% to 3.9%

Private Payrolls 

Consensus Forecast: 165,000

Consensus Range: 140,000 to 188,000

Manufacturing Payrolls 

Consensus Forecast: 9,000

Consensus Range: 5,000 to 12,000

Average Hourly Earnings

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

Consensus Range: 0.0% to 0.4%

Average Hourly Earnings

Consensus Forecast, Year-on-Year Change: 3.5%

Consensus Range: 3.1% to 3.9%

Average Workweek

Consensus Forecast: 34.5 hours

Consensus Range: 34.4 to 34.5 hours

A major rebound is expected for nonfarm payrolls in the March employment report, to a consensus 169,000 vs February's minimal and very unexpected increase of only 20,000. The unemployment rate is seen holding steady at 3.8 percent with average hourly earnings cooling from February's 0.4 percent jump to an increase of 0.2 percent. Nevertheless, the year-on-year rate for earnings is expected to edge 1 tenth higher to 3.5 percent. Private payrolls are seen rising 165,000 with manufacturing payrolls expected to increase 9,000. The workweek is seen rising incrementally to 34.5 hours.

Consumer Credit for February

Consensus Forecast: $17.0 billion

Consensus Range: $14.8 to $18.0 billion

Another month of steady growth is expected for consumer credit, at $17.0 billion in February to match January's increase.