Once again, last week’s economic news was relatively positive.
Although the industrial sector continued to struggle, manufacturing showed further signs of stabilization, and the service sector actually improved. Net exports continued to be a weak point, driven by economic weakness abroad. (The Federal Reserve highlighted this as the major source of risk in the March meeting minutes.) Nonetheless, the fundamentals continued to show slow improvement, suggesting that the economy is moving out of the slowdown of the past two quarters.
Last week’s news: A recap
Industry continues to struggle. Reports on business and industry last week were mixed. Factory orders dropped by 1.7 percent, reversing the prior month’s increase of 1.6 percent. Durable goods orders were down again as well, declining 3 percent (1.3 percent excluding the volatile transportation sector). The manufacturing sector is clearly continuing its weak trend, despite the ISM Manufacturing survey’s move back to positive territory last week.
The service sector does better. On the other hand, the service sector showed improvement. The ISM Non-Manufacturing survey rose from 53.4 to 54.5, beating expectations and ending a run of declines. This matters because the service sector accounts for seven-eighths of the economy. Twelve industries grew, while only two declined; this strong and broad-based move bodes well not only for service sector businesses, but also possibly for consumer spending growth.
Imports still a drag on growth. Another negative data point was the international trade balance in February. The deficit rose to a six-month high of $47.1 billion, worse than the expected $46.3 billion deficit. While exports increased by 1 percent—the first increase since September and a positive sign—imports rose by 1.3 percent. With net exports set to subtract about 0.5 percent from first-quarter growth, last year’s dollar appreciation remains a headwind for the U.S. economy.
The Fed more concerned about the rest of the world. The Fed released its March meeting notes last Wednesday. The notes generally supported Janet Yellen’s public position of continued lower rates, which was positive for the markets but revealed an increasing focus on risks outside the U.S. that is at odds with past policy.
This week’s data
This week’s releases include four key reports:
The retail sales report is expected to show a modest rebound, increasing 0.1 percent. (Sales declined 0.1 percent in February.) There is very real downside risk to this number, however, as motor vehicle sales appear to have dropped off. For the core retail sales number, which excludes autos, the results should be better, with an expected increase of 0.4 percent versus a 0.1-percent decrease in February. If they come in as projected, these numbers would be an encouraging bounce-back from earlier in the year, especially at the core level.
Consumer prices are expected to move from a monthly decline of 0.2 percent to an increase of 0.2 percent, though the annual increase is expected to remain at 1 percent on a headline basis. Despite recent increases, gasoline prices are still about 20 percent lower than they were last year, which continues to hold down the annual inflation rate. Core prices, excluding food and energy, should grow a bit more slowly, with the monthly rate declining from 0.3 percent to 0.2 percent but the annual rate remaining at 2.3 percent. Inflation trends are relatively constant at this point and should not be particularly newsworthy if they come in close to expectations.
Industrial production is expected to show signs of stabilization, in line with recent surveys and the recent ISM Manufacturing survey. Although it is still expected to decline by around 0.1 percent in March, this would be an improvement from the 0.5-percent drop of the previous month. The decline reflects the continued downturn in energy production activity, as well as weak utility production. Actual manufacturing, on the other hand, is projected to show continued slow growth, with another 0.1-percent gain.
Finally, on Friday, the University of Michigan Consumer Confidence initial estimate will be released. It is expected to show a small increase from 91.0 to 92.0. This would be consistent with last month’s improvement and the increase in the Conference Board survey, and it would also support continued growth in consumer spending.