Economic Outlook – 3 March 2024

Nominal personal income increased 1.0% in January, a lot more than expected by consensus (+0.4%). The wage/salary component of income showed a 0.4% gain, whereas income derived from government transfers surged 2.3%, the most since 2021M07. Personal current taxes, meanwhile, jumped 6.0%. All this translated into a 0.3% increase in disposable income. Nominal personal spending, for its part, rose a consensus-matching 0.2%. Outlays on goods declined 1.2%, while services spending climbed 1.0%. As disposable income grew at a faster pace than spending did, the saving rate ticked up from 3.7% to 3.8%, a level that remains far below those observed before the pandemic (6.5% to 8.5%)   Still in January, the headline PCE deflator came in at 2.6%, down two ticks from the prior month and in line with consensus expectations. The core measure, meanwhile, cooled from 2.9% to a 34- month low of 2.8%. On a monthly basis, the headline index progressed 0.3%, while the gauge excluding food and energy advanced 0.4%, marking the largest gain in 12 months for this indicator   Durable goods orders decreased 6.1% in January, instead of just 5.0% as expected by the median economist forecast. Orders in the transportation category dropped 16.2% as orders for non-de-fence aircraft slumped 58.9%. Excluding transportation, orders edged down 0.3% instead of up 0.2% as per the consensus fore-cast. The report showed, also, that orders for non-defence capital goods excluding aircraft, a proxy for future capital spending, rose 0.1% MoM after gaining 0.2% in December   New-home sales increased 1.5% to 661K (seasonally adjusted and annualized) in January, a second monthly gain in a row but a weaker print than the 684K expected by consensus. Although this improvement can be explained in part by the recent reduction in mortgage interest rates, the increase in transactions should not be viewed entirely as a sign of strength in the real estate market. Indeed, the rise in new-home sales is explained, also, by the re-sale housing market being completely paralyzed by the current interest rate environment. This gain, combined with an increase in the number of homes available on the market (from 452K to 456K), kept the inventory-to-sales ratio stable at 8.3, which is still above this indicator’s historical average of 6.1   The S&P CoreLogic Case-Shiller 20-City Home Price Index rose 0.21% MoM in December to an all-time high, as expected by the median economist forecast. This was the indicator’s eleventh consecutive monthly advance, though the pace has slowed since May. Prices were up in 13 of the markets covered, led by Las Vegas (+0.81%), Los Angeles (+0.69%), and Miami (+0.64%). Year on year, prices rose 6.1% at the national level, a sixth consecutive progression. Though demand remained weak on the real estate market, very tight supply, combined with a strong labour market, will likely keep driving prices up in the following months   Construction spending decreased 0.2% in January after progressing an upwardly revised 1.1% the prior month (initially estimated at +0.9%). This came below the consensus expectation calling for a 0.2% gain. The monthly decline reflected a decrease in the public sector (-0.9%), while the private sector increased slightly (+0.1%). In the latter, spending on residential projects edged up 0.2%%, while outlays on non-residential structures were down 0.1%     The ISM Manufacturing PMI slid from 49.1 in January to 47.8 in February, instead of rising to 49.5 as per consensus. The index thus remained below the 50-point mark separating expansions from contractions for a 16th month in a row, the longest streak in more than two decades. Both the output (from 50.4 to 48.4) and new orders (from 52.5 to 49.2) gauges fell back into contraction territory (<50) in the month Weak demand conditions allowed factories to clear work back-logs (from 44.7 to 46.3) at a rapid pace and encouraged them to reduce payrolls at the fastest pace in seven month (from 47.1 to 45.9). After having greatly improved in recent months, supply conditions appeared to have stabilized, with the supplier delivery times sub-index (from 49.1 to 50.1) moving back above 50 for the first time in 17 months. The prices paid tracker (from 52.9 to 52.5), for its part, remained at a level consistent with subdued inflationary pressures   The Conference Board Consumer Confidence Index sank from 110.9 in January to 106.7 in February, instead of rising to 115.0 as per the consensus forecast. The index thus slid below the series’ pre- pandemic level. Consumer assessment of the present situation worsened, with this sub-index decreasing from 154.9 to 147.2. The share of respondents that deemed jobs hard to find increased from 11.0% to 13.5% while the proportion that deemed current business conditions bad increased from 15.3% to 17.1%. The sub-index tracking longer-term expectations worsened as well, from 81.5 to 79.8, which remained short of the series’ long-run average. This deterioration occurred on the back of a lower share of respondents that had a positive opinion of future business conditions (from 16.7% to 14.8%), employment (from 15.6% to 14.7%), and income (from 17.1% to 16.9%). However, proportionally more respondents planned to buy a car (from 10.7% to 11.4%) or major appliances (from 43.2% to 46.5%) in February, and a relatively stable proportion planned to buy a home (from 4.8% to 4.7%). Finally, consumer inflation was expected to stand at 5.3% for the next 12 months, down one tick from the prior month and the lowest level since March 2020   The second estimate of Q4 GDP growth came in at +3.2% in annualized terms, one tick weaker than both the advance estimate (+3.3%) and the median economist forecast (+3.3%). Household consumption was revised upward (from +2.8% q/q annualized to +3.0%) as higher spending on services (from 2.4% to 2.8%) was off-set only in part by weaker outlays on goods (from 3.8% to 3.2%). Business fixed investment, also, was upgraded (from 1.7% to 2.5%) as spending on structures (from 3.2% to 7.5%) and intellectual property (from 2.1% to 3.3%) proved stronger than initially re-ported. Equipment spending, on the other hand, was revised downward (from +1.0% to -1.7%). International trade had a less positive impact on headline growth than initially reported (+0.32 percentage point, down from +0.43), while inventories subtracted 0.27 pp. Final sales to domestic purchasers (i.e., household spending plus gross business investment), a good gauge of the underlying strength of an economy, expanded 2.9% annualized in the quarter, up from the 2.6% penciled in in the previous release. On the inflation front, the 12-month increase in the Personal Consumption Expenditures Price Index excluding food and energy remained unchanged at 3.2%   For the Fed, these indicators come as signs that the relentless demand that powered the U.S. economy in late-2023 might be cooling off. Next Tuesday’s February ISM services report should shed light on the much larger services sector, while Fed Chair Jerome Powell’s testimony on Wednesday will hopefully give us a better sense of how the Fed is viewing these latest numbers   The US Congress passed another stopgap government funding measure on Thursday, averting a partial government shutdown. Lawmakers aim to complete the appropriations process for the balance of the fiscal year by 22 March   Most of the major benchmarks ended the week higher, with the Nasdaq Composite joining the S&P 500 Index in record territory for the first time in over two years. The month also closed a strong February, with the S&P 500 marking its strongest beginning two months of the year since 2019, according to The Wall Street Journal. The week’s gains were also broad-based, with an equal-weighted version of the S&P 500 Index modestly outperforming its more familiar market capitalization version. For the year-to-date period, however, the capitalization-weighted version of the index remained ahead by 409 basis points (4.09 percentage points), reflecting the outperformance of large, technology-oriented growth stocks   In terms of data release, the ISM Services is out on Tuesday. Services activity started off the year on a high note. The ISM services index jumped to 53.4 in January, the highest reading since September 2023. Most of the major sub-indexes ticked higher during the month, with the new orders and employment components rising notably. Although January’s headline improvement was the latest indication that overall economic growth is still running at a solid pace, a pronounced increase in the prices paid index served as a reminder that price pressures have not fully dissipated   The Trade Balance print is out on Thursday. The United States trade balance printed largely as expected and fell to -$62.2 billion in December. Exports rose by almost $4 billion, slightly slower than the $4.2 billion gain in imports. For last year as a whole, a shrinking goods deficit and growing services surplus led to narrowing of the trade deficit over the course of 2023, reversing the substantial widening that occurred in 2022. Consequently, net exports were supportive of GDP growth in 2023.

The Nationwide Building Society said its house price index rose 0.7% sequentially in February and 1.2% year over year, marking the first annualized increase since January 2023. The Bank of England said mortgage approvals rose to 55,227—the highest level since October 2022, when the budget plans of former Prime Minister Liz Truss sparked a crisis in the bond market   British manufacturers marked a year of falling output in February as factories shed workers at the fastest rate since the onset of the COVID-19 pandemic, a survey showed on Friday. While the S&P Global/CIPS UK Manufacturing Purchasing Managers’ Index (PMI) rose last month to 47.5 from 47.0 in January – revised up from a preliminary reading of 47.1 – it has been stuck below the 50 threshold for growth since August 2022. The survey’s gauge of output, while improving in February, signaled a 12th successive monthly downturn. The weakness in British manufacturing – mirrored in other major European economies, especially Germany – contrasts with the much larger services sector which has shown signs of recovery since Britain fell into recession late last year. Most business surveys have pointed to a brighter start for companies in 2024, although high inflation and depleted consumer spending power are likely to limit economic growth – a tricky backdrop for finance minister Jeremy Hunt ahead of his annual budget on Wednesday.

Euro area disinflation continued in February but slower than expected. Headline inflation eased to 2.6 percent in February from 2.8 percent in January and core inflation eased to 3.1 percent from 3.3 percent. Both figures were higher than Bloomberg survey expectations at 2.5 percent for headline and 2.9 percent for core. The fall in core inflation was supported by lower price increases in goods at 1.6 percent, down from 2.0 percent in January, while service price inflation remains elevated at 3.9 percent, easing only marginally from 4.0 percent in January. Moreover, inflation momentum no longer signals a clear downward trend in core inflation as the average monthly inflation over the past three months now exceeds the average monthly inflation over the past six months. The negative contribution from falling energy prices is gradually fading. In February, energy prices fell by 3.7 percent YoY, compared to -11.5 percent YoY in November last year. Food inflation eased further to 4.0 percent from 5.7 percent in January, and down from a peak of 15.5 percent in March last year. Headline inflation was broadly in line with market expectations in the major economies, easing to 2.7 percent in Germany (3.1 percent in January), to 3.1 percent in France (3.4 percent in January), and to 2.9 percent in Spain (3.5 percent in January). Italian headline inflation remained unchanged and low at 0.9 percent   European Central Bank President Christine Lagarde said “we’re not there yet” on inflation and that the ECB wants prices to fall sustainably to 2%. The European economy should pick up later this year, she said, noting increasing signs that economic weakness is bottoming out   The European Commission’s economic sentiment indicator declined unexpectedly to 95.4 in February. In the industrial sector, confidence remained broadly stable amid weak production expectations and a possible bottoming out of a drop in new orders. But confidence worsened in the services sector due to lower demand. Selling price expectations eased in both goods and services   In local currency terms, the pan-European STOXX Europe 600 Index ended little changed but remained near record highs. Sticky inflation data prompted investors to reassess the magnitude and timing of interest rate cuts by the European Central Bank in 2024. Major stock indexes were mixed. Germany’s DAX rose 1.81%, while Italy’s FTSE MIB advanced 0.71% and France’s CAC 40 Index lost 0.41%.

The value of new home sales by the country’s top 100 developers slumped 60% in February from the prior-year period, accelerating from January’s 34.2% drop, according to the China Real Estate Information Corp. Sales fell 20.9% from the previous month, a drop that analysts attributed to a sales drought during the LNY holiday   The latest results showed no letup in China’s property crisis despite Beijing’s efforts to salvage the troubled sector, which increased pressures on policymakers to ramp up support. On Friday, Chinese banks approved more than RMB 200 billion of development loans to be issued under the government’s whitelist mechanism, which aims to inject liquidity into the real estate market to fund unfinished residential projects   February’s economic data continued to paint a mixed outlook for China. The official manufacturing purchasing managers index fell to 49.1 in February from 49.2 in January (remaining below the 50-mark threshold separating growth from contraction) due to declines in production and exports. Seasonal factors also contributed to weakness as factories were closed for the Lunar New Year (LNY) holiday from February 10 to February 19. The non-manufacturing PMI rose to a better-than-expected 51.4 from 50.7 in January. On the other hand, the private Caixin/S&P Global survey of manufacturing activity edged up to 50.9 in February, beating expectations and marking its fourth month of expansion   Stocks in China rose on hopes that Beijing may boost monetary easing measures to stimulate growth. The Shanghai Composite Index gained 0.74%, while the blue-chip CSI 300 added 1.38%. In Hong Kong, the benchmark Hang Seng Index gave up 0.82%, according to FactSet.    
Sources: T. Rowe Price, MFS Investments, Wells Fargo, Handelsbanken Capital Markets, TD Economics, National Bank of Canada, Reuters, M. Cassar Derjavets.