Weekly Economic Vital Signs: The Economy Is Great, Cut Rates!

Construction Spending

We must be filling every pothole nationwide, because there isn't a whole lot of spending growth outside of the public construction of streets and highways, which is up 22.8 percent year over year for the first two months of 2019. Perhaps, the president passed his own infrastructure program without telling anyone about it.

Overall construction spending rose 1.0% in February from an upwardly revised 2.5% increase in January, but the year-over-year rate of growth continues to decline to what is just 1.1%. Residential spending is the drag on the headline number, down 7.1% year over year, but this should improve in coming months. It may need to if we don't keep up the torrential pace of public spending. Either way, I don't see construction spending contributing meaningfully to the rate of economic growth in 2019.

Retail Sales

Weather likely had something to do with the 0.2% decline in retail sales in February, as it was led by an outsized 4.4% decline in building materials. However, an upward revision to the January number from a 0.2% to 0.7% increase doesn't make February's decline look so ominous. Auto sales bounced back 0.7%, and e-commerce sales were up a very strong 0.9%. I expect better weather will lead to better numbers in March.

Retails sales were up 2.2% on a year-over-year basis, which indicates that consumers are still spending at a moderate pace. Rising real wages and continued employment gains further support these modest spending increases.

Business Inventories

Inventories held by manufacturers, retailers, and wholesalers rose 0.8% in January, and December's increase was revised up from 0.6% to 0.8%. Sales only increased 0.3%, which follows a 0.9% decline in December. The inventory-to-sales ratio is rising to what is now 1.39. This inventory build was broad-based, which increases the rate of economic growth now but slows it in the future until sales catch up. This is another indicator pointing to a deceleration in the rate of economic growth in 2019.

PMI and ISM Services Indices

IHS Markit's (purchasing managers index) survey of service sector companies in March showed that strength in the service sector continues to offset weakness in manufacturing. Its PMI services index fell only modestly to 55.3 from the 56.0 reading in February, since there was strength in new orders and business activity. Yet business confidence fell to its lowest level in 15 months due to trade tensions and worries about economic growth, which is slowing the rate of job creation. This is something to keep a close eye on.

The more volatile Institute for Supply Management's non-manufacturing index declined from 59.7 in February to 56.1 in March, but every sub-index registered a reading above 50.0, indicating growth. Both surveys of the service sector suggest a rate of economic growth of approximately 2.5% in the first quarter, but this doesn't take into consideration the manufacturing sector.

PMI and ISM Manufacturing Indices

IHS Markit's manufacturing index slipped from 53.0 in February to 52.4 in March and now, reflects the weakest level of growth since the summer of 2017. New-order growth fell to a five-month low due to tariffs, which indicates continued weakness in the second quarter of this year. Production and new orders have fallen to their slowest rates of growth since the summer of 2016.

The Institute for Supply Management's manufacturing index increased from 54.2 in February to 55.3 in March, which is a bounce within what is a continued downtrend, as can be seen below. New orders, production, and employment strengthened in this survey, which balances the weaker readings recorded in the PMI. The two surveys combined show a weakening rate of growth for manufacturing.

Durable Goods Orders

New orders placed with manufacturers for durable goods do not reflect the strength we have seen in the manufacturing surveys. Orders for durable goods fell 1.6% in February, and January's increase of 0.4% was revised down to just 0.1%. This was mostly due to a decline in aircraft orders, but when we exclude transportation there was only a 0.1% increase. Most importantly, orders for non-defense capital goods, excluding aircraft (business spending), slipped 0.1%, and the shipment of these goods was flat. Capital spending is not contributing to the rate of economic growth.

March Jobs Report

There was nothing alarming or exciting about the March jobs report. It was estimated that payrolls increased by 196,000 in March, and February's estimate of just 20,000 was revised up to 33,000. The unemployment rate held steady at 3.8%, but it was discouraging to see the participation rate decline from 63.2% to 63%. One item to note is that the economy shed another 6,000 manufacturing jobs.

Average hourly earnings increased a modest 0.1%, resulting in a 3.2% increase year over year, which is a small step back in what appears to be a continued uptrend. On a positive note, the average workweek increased from 34.4 to 34.5 hours, which increases weekly take-home pay.


The rate of economic growth in the U.S. is clearly decelerating from the 3% rate we saw in the second half of 2018 to what looks to be closer to 1.5-2% in 2019. Real wage growth and continued gains in employment are supporting modest growth in real consumer spending, which is the predominant driver of our growth today. The only thing which I see derailing this outlook, outside of an exogenous shock, is a meaningful rise in borrowing costs or a substantial decline in financial asset values.

While the rate of inflation is not accelerating, it is not decelerating either. A continued increase in real wage gains should eventually put upward pressure on prices. We are starting to see a pick-up in commodity price inflation, led by the increase in oil prices. That will put upward pressure on the Consumer Price Index in the months ahead. Gasoline prices are close to increasing on a year-over-year basis for the first time in 12 months.

I don't understand the recent calls for the Federal Reserve to cut interest rates by 50 basis points or resume its policy of quantitative easing. If the economy is doing great, as our political leadership contends, then there should be no reason for additional stimulus. We should continue normalizing monetary policy, which means the Fed should continue reducing the size of its $4 trillion balance sheet.

The reality is that the economy isn't doing that great, because its growth is debt dependent. The Fed is extremely concerned that if it withdraws too much liquidity or allows financial conditions to tighten modestly, our debt-induced growth will come to screeching halt.

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