Coming into the Week of March 4th, Economic Data Is Positive
In our last economic update, we mentioned how the fourth week of February had a number of releases, including a first look at GDP corporate profits.
On the whole, the economic releases were positive, with declines in inflation, gains in home sales, and a solid increase in corporate profits, which are all good things for future economic growth. The negatives were real disposable income and weakness in manufacturing, which could be headwinds for future economic growth.
Also, the increased costs of shipping due to restricted flow of goods through the Red Sea are likely to show up in future inflation readings. While future recession fears continue to lower, the question remains: when will the Fed lower rates? While we continue to get generally positive economic news, the Fed has less and less incentive to lower rates, but they also do not want to hold rates too high for too long.
Personal Consumption Expenditures (PCE) Index
We begin with the Personal Consumption Expenditures (PCE) index, which is the Fed’s preferred measure of inflation. The headline PCE was 2.4% year-over-year, while the core (less food and energy) index was 2.85% year-over-year.
While the downward trends for the year-over-year numbers are encouraging, the one-month increases are something that will need to be watched in the future. However, if we annualize the last 3 months of the PCE Core index, we get 2.4%.
When we examine the components of the PCE index, we again see that the declines in PCE are disproportionately borne by deflation in goods, while services inflation is too high.
While many market participants believe the Fed will begin cutting rates in June, we contend that this viewpoint is in jeopardy until the rate of inflation in services also begins to decline.
Real Disposable Income and Personal Spending
What is also concerning is that real (inflation-adjusted) disposable income and personal spending declined in the prior month.
It was encouraging in prior months to see real disposable income rise into positive territory, so this last reading’s movement to negative for the month is something that we will watch for some insight into near-term economic growth. We would take continued or sustained declines in Real Disposable Income as an indication of weakening economic growth as people would see their purchasing power weaken in an ongoing fashion.
ISM Manufacturing Data
On Friday of last week, the ISM manufacturing data came out, with the ISM manufacturing index falling deeper into contraction territory at 47.8. This number means that manufacturing has been in contraction for 16 consecutive months.
Again, the data points to ongoing weakness in manufacturing, which will likely be a drag on future economic growth.
Durable Goods
Durable Goods was also released with a month-over-month decline of 6.1%.
However, when we take out the volatile transportation and defense sectors, we see that durable goods increased slightly for the month.
New Home Sales
New home sales were also encouraging, with a monthly gain in both the number of homes sold and an increase in median price.
When combined with the increase in existing homes sold, perhaps we are seeing housing finding its footing after the increase in mortgage rates.
U.S. Corporate Profits
Finally, we got our first look at US corporate profits from the GDP report.
The solid increase in corporate profits is an encouraging sign.
Outlook for Next Week
For the first full week of March, we will get readings on ISM Services, Trade, Payrolls, and Earnings. Another full week.
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