Economic Watch: Conditions Not as Bad as Recent Hard Numbers Suggest

There are good indications the U.S. economy will further strengthen following recent reports that conditions slowed a bit in the first quarter of the year and at the beginning of the second quarter.

Manufacturing growth lost some momentum this month, falling back to its slowest pace since September 2016, according to the preliminary Flash Manufacturing Purchasing Managers’ Index released Friday by financial information services provider IHS Markit.

It registered 52.8, down from 53.3 in March, indicating another moderation in manufacturing growth from the near two-year peak seen in January. A reading above 50 indicates manufacturing activity is expanding while below 50 shows contractions.

Slower rates of output and new order growth were the main factors that weighed on the headline index in April. The main positive development was a slight rebound in manufacturing job creation from the seven-month low seen during March.

“The survey responses indicate that some froth has come off the economy since the post-election bounce seen at the end of last year,” said Chris Williamson, chief business economist at IHS Markit. “However, with inflows of new business picking up slightly in April and business optimism about the year ahead also brightening, there’s good reason to believe that growth could revive again in coming months.”

Existing Home Sales Best in More than a Decade

Meantime, a separate report, also released Friday, showed existing-home sales took off in March to their highest pace in over 10 years, as severe supply shortages resulted in the typical home coming off the market significantly faster than in February and than a year ago, according to the National Association of Realtors.

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, improved 4.4% to a seasonally adjusted annual rate of 5.71 million in March from a downwardly revised 5.47 million in February. March's sales pace is 5.9% above a year ago and surpasses January as the strongest month of sales since February 2007.

"The early returns so far this spring buying season look very promising as a rising number of households dipped their toes into the market and were successfully able to close on a home last month," said Lawrence Yun, NAR chief economist.

Single-family home sales, the lion’s share of the market, climbed 4.3% to a seasonally adjusted annual rate of 5.08 million in March, 6.1% above the 4.79 million pace a year ago.

Leading Indictors Show Continued Improvements

This followed numbers released Thursday from the private research group The Conference Board that showed its Leading Economic Index for the U.S., which measures expectations over the next few months, increased 0.4% in March to a reading of 126.7, the third straight monthly gain. This follows a downwardly revised 0.5% increase in February and a 0.6% increase in January.

“The March increase and upward trend in the U.S. LEI point to continued economic growth in 2017, with perhaps an acceleration later in the year if consumer spending and investment pick up,” said Ataman Ozyildirim, director of business cycles and growth research at The Conference Board. “The gains among the leading indicators were very widespread, with new orders in manufacturing and the interest rate spread more than offsetting declines in the labor market components in March.”

Wells Fargo Securities noted optimistic consumer expectations added to the headline figure, its largest contribution since Dec. 2004, and said the overall “upward trend continues to signal moderate economic growth in 2017.”

The Conference Board’s Coincident Economic Index for the U.S., which measures current economic conditions, increased 0.2 percent in March following the same gain in February, and no change in January. Its Lagging Economic Index for the U.S., which measures past conditions was unchanged in March, following a 0.2% increase in both February and January.

MarketWatch reported the gap between the leading index and the current economic indicator is at its highest since the eve of the recession,  “suggesting either a sharp upward turn in the economy is imminent, or that on a number of measures, confidence gauges have gotten ahead of themselves.”

Fed Beige Book Shows Rising Activity Despite Trucking Weakness

All this follows the release on Wednesday of an analysis of economic conditions across the country by the Federal Reserve that showed activity increased in each of its districts between mid-February and the end of March, though the pace of freight shipments slowed slightly.

The Beige Book reported that manufacturing continued to expand at a modest to moderate pace, while consumer spending varied as reports of stronger light-vehicle sales were accompanied by somewhat softer readings in non-auto retail spending. The report also suggested that residential construction growth accelerated somewhat even as growth in home sales slowed, in part due to a lack of inventory, while non-residential construction remained strong.

“Freight volume expanded over the period on balance, and this expansion was attributed to improving economic conditions and lean inventories. Increases were seen primarily in shipments of steel, coal, and lower-value consumer products,” the report said, referring to the Cleveland district. It noted a few carriers reported that they were able to push through rate increases.

In contrast, a nationwide freight hauler in the Richmond district described shipments as "ho-hum" and said that recent improvements in manufacturing indicators were not yet translating into increased truck freight. However, another, whose company delivers directly to end users, reported a slight acceleration in first quarter shipments from healthy fourth quarter levels

According to RBC Economics Research, the report can be added to the list of surveys and other ‘soft’ indicators that point to an improving economic backdrop in the first quarter even as ‘hard’ data have been less impressive.

“This reinforces our view that an expected moderation in first quarter gross domestic product growth to 1.5%, largely reflecting softer consumer spending, will prove temporary,” said Josh Nye, RBC economist.

He pointed out the Federal Reserve expressed a similar sentiment in March, with minutes from their policy meeting largely attributing slower first quarter activity to temporary factors.

“And while growth has faltered, labor market conditions clearly continued to tighten early this year, supporting some Federal Open Market Committee members’ views that their maximum employment objective has more or less been met,” Nye said.

The Fed is not expected to alter monetary policy following their upcoming meetings on May 2-3. However, RBC expects the central bank to reiterate that a gradual hike in interest rates remains appropriate, despite softer first quarter growth, with many Fed watchers expecting two additional increases by the end of 2017.