Following a raft of disappointing economic news a few days earlier, there are new encouraging signs about the health of the American economic, with improvements in some of the most closely watched measures – including the beleaguered manufacturing sector.

U.S. economic activity in the fourth quarter of last year was greater that first thought, according to a new Commerce Department report, with the gross domestic product increasing at an annual rate of 1%.

This compares to a 0.7% rate reported a month ago. The news was a surprise to many economists, who had expected it to be revised down to a 0.4% rate.

Despite the improvement, the GDP rate compares to 2% in the third quarter of 2015, 3.9% in the second quarter an just 0.6% in the first quarter of last year.

For all of 2015, the GDP increased 2.4% from the year before, the same annual improvement seen in 2014 from 2013.

According to CNBC, first-quarter GDP growth estimates are as high as a 2.5% rate, “but the risks are tilted to the downside amid slowing world economies, a strong dollar and a recent global stock market sell-off that has tightened financial market conditions.”

The first quarter government report isn’t expected until sometime in April.

Domestic demand and final sales both slowed in fourth quarter, following robust gains in the prior two quarters, according to Josh Nye, economist at RBC Economics, but he says that is not expected to continue.

“Strong January reports for retail sales, durable goods orders, existing home sales and industrial production indicate the U.S. economy has started the year on a solid footing."

“We view this slowdown as temporary, given support to the domestic economy from strong employment growth, low energy prices and stimulative monetary policy. Data in hand for first quarter supports our expectation that growth will rebound,” he said. “Strong January reports for retail sales, durable goods orders, existing home sales and industrial production indicate the U.S. economy has started the year on a solid footing. Our forecast assumes GDP growth will pick up to an above 2% annualized pace in the first quarter after fourth quarter’s disappointing slowdown.”

Weighing down the GDP has been continued high inventories. ATA Chief Economist Bob Costello said on his Twitter feed that “trucking needs those stocks cleared out before freight volumes start to improve,” echoing comments he made a few days earlier when the group released figures showing truck tonnage fell 1.4% in January.

Capital Spending Pushes Durable Orders, Shipments Higher

Another report shows improvements for new orders and shipments of manufactured durable goods in January, including the biggest jump in a year in a half in an indicator of future business investment.

New orders increased 4.9% from the month before, following two consecutive monthly declines (including its worst annual performance since the Great Recession), while shipments of these items designed to last three years or more posted a 1.9% gain. Both gains were led by improvements in the transportation sector.

The Wall Street Journal reported most major categories were still below their January 2015 levels, and “economists were quick to caution that one month of improved data does not necessarily signal a manufacturing resurgence.”

“Economists were quick to caution that one month of improved data does not necessarily signal a manufacturing resurgence.”

Nondefense new orders for capital goods in January increased a whopping 21.6%. Orders for nondefense capital goods excluding aircraft, considered a proxy for business spending on equipment, rose 3.9%, the largest monthly increase since June 2014 – but it was 4.4% lower than a year earlier.

“This morning’s durable goods report shows widespread strength across a plethora of sectors with headline orders rising to a near one-year high,” said Lindsey Piegza, chief economist at Stifel Fixed Income. “Of course the January rebound comes against the backdrop of sizable weakness at the end of last year, and fails to reverse the still-negative trend in investment. While less negative at the start of the new year, the theme among U.S. businesses remains a lack of investment.” 

RBC Economics said the report remains consistent with its expectation that business equipment investment will rise 3% in first quarter of the year after posting the first decline in a year in final quarter of 2015, falling at 2.5% annualized rate.

“We expect the improvement, albeit modest, in business investment, along with indications of stronger household spending and less of a drag from inventories, will be sufficient to offset continued weakness in net trade tied to a weaker external backdrop and strong U.S. dollar,” said Nathan Janzen, Senior Economist at RBC.

New Home Sales Ease After Nearly Hitting One-Year High

While this latest string of economic reports doesn’t have any dark clouds, there was at least a slightly gray one.

The Commerce Department reported sales of new single-family homes couldn’t keep December’s strong pace and receded in January from last month’s 10-month high.

Overall, sales dropped 9.2% to a seasonally adjusted annual rate of 494,000 units, propelled by a big drop in the West. New-home sales there are seeing a surge in home prices while inventories remain tight. Sales plunged 32.1% in January compared to a year earlier and are at the lowest level since July 2014. However, gains were recorded in the other three regions of the country.

Moderation in the pace of new home sales in January followed three consecutive monthly gains that saw the level of sales climb by a cumulative 19% over the final three months of 2015, according to RBC Economics.

“Consumers are exhibiting caution in the face of some uncertain market conditions,” says David Crowe, chief economist of the National Association of Home Builders. “The average of the December-January reports shows that housing is moving forward at a modest pace, buoyed by relatively low interest rates and ongoing job creation.”

Consumer Incomes, Spending Fueling Optimism

The increase in new jobs that Crowe referred to was likely reflected in a separate report from the Commerce Department showing personal incomes in January increased 0.5%, the biggest gain in eight months, following a 0.3% rise each month in December through October.

Personal spending last month also increased by 0.5%, following gains of 0.1% in December and 0.4% in November. Personal savings, defined by the government as personal saving as a percentage of disposable personal income, increased 5.2% in January, the same as December’s improvement.

Analysts at RBC Economics described the performance as robust and above market expectations.

This came as a final report for February showed consumer confidence nearly recovered the entire small loss it recorded at mid month, according to the University of Michigan Survey of Consumers.

Its Consumer Sentiment Index finished the month just 0.3 points below January.

“Although consumers are not as optimistic as at the start of last year, the Sentiment Index is just 6.5% below the cyclical peak of 98.1 set in January 2015,” said Surveys of Consumers Chief Economist Richard Curtin. “Such a small decline is hardly consistent with the onset of a downturn in consumer spending.

He said most of the decline from last year’s peak has been in how consumers view year-ahead prospects for the economy, while the outlook for their personal financial situation has improved to its best level in ten years.

“Rather modest wage gains as well as very low inflation have meant that consumers expect increases in their real incomes during the year ahead. Consumers’ most important concern involves how much the slowdown in GDP growth will affect employment growth. At present, consumers anticipate only a slight negative impact on jobs,” Curtin said.

About the author
Evan Lockridge

Evan Lockridge

Former Business Contributing Editor

Trucking journalist since 1990, in the news business since early ‘80s.

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