U.S. economic data released this week was mixed but consistent with ongoing moderate GDP growth through the first quarter of 2018. Financial market volatility returned after President Trump announced his intention to impose tariffs on imported steel and aluminum next week. So far, the recent spate of financial market volatility has not materially impacted the “real economy.” But there is a danger in thinking that way. One of the important lessons from the Great Recession is that we should not think of financial markets as completely separate from the “real economy.” If there is enough wealth loss due to a stock market correction, that will exert a drag on both consumer and business confidence. If there is either an aversion to U.S. Treasury bonds because of over-supply fears and weak demand, or there is a flight to Treasuries due to de-risking, that would impact business behavior. None of those scenarios are a part of our near-term U.S. outlook, but they are reasonable risk factors.
The threat of import tariffs does not necessarily need to result in trade wars. However, it is reasonable to assume that if the U.S. does impose tariffs on aluminum and steel, other countries will retaliate. This would result in higher prices for users of steel within the U.S., including auto and appliance makers. They would be expected to pass their higher costs on to their customers. Retaliatory tariffs would mean U.S. exports become more expensive and demand would ease, potentially dragging on U.S. output and employment.
Nominal personal income increased by a moderate 0.4 percent in January as wage and salary income gained 0.5 percent. Personal taxes paid dropped by 3.3 percent with the rollout of the Tax Cuts and Jobs Act of 2017. Inflation was warmer in January, as the Personal Consumption Expenditure (PCE) Price Index increased by 0.4 percent for the month. After accounting for inflation and taxes, real disposable income gained a strong 0.6 percent in January, generally supportive of consumer spending and consumer confidence. However, real consumer spending eased by 0.1 percent as auto sales dropped following the surge in auto sales last fall.
Auto sales ticked down again in February to a 17.1 million unit rate. We expect to see further gradual declines this year.
The ISM Manufacturing Index for February ticked up to a strong 60.8 in February, indicating ongoing positive conditions for the manufacturing sector. The prices sub-index is hot, increasing to 74.2 percent in February. New orders for durable goods fell by 3.7 percent in January as aircraft orders reset. Core orders (nondefense capital goods excluding aircraft) eased inconsequentially by 0.2 percent.
Initial claims for unemployment insurance fell by 10,000, to hit 210,000 for the week ending February 24. This is the lowest level of new claims since late 1969. Continuing claims gained 57,000 for the week ending February 17, to hit 1,931,000, still a very low number.
The Case-Shiller U.S. National Home Price Index for December increased by 0.2 percent for the month, and was up 6.3 percent over the previous 12 months. Tight supply will keep upward pressure on prices. Rising mortgage rates are a potential headwind for housing, but home construction is still not keeping up with demographic expansion. The bodies have to go somewhere.
New Fed Chairman Jay Powell delivered his Congressional testimony, not tipping his hand on the question of three or four rate hikes this year.
For a PDF version of this report click here: Comerica_Economic_Weekly_03022018.
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