U.S. economic data was mixed again this week even though recent labor data has been robust. It is tempting to say that this bimodal view of the U.S. economy probably can’t last. At some point one of the two poles dominates. Either the labor data deteriorates as business conditions degrade, or the labor data is so strong that other data is either irrelevant or recovers (in the case of consumer and business confidence). However, if we resist the temptation to jump to conclusions, there is another possibility. That is that the U.S. economy muddles through the year, beset and preoccupied by downside risks, but continues to grow through the year, supported by a strong household sector. Our forecast for the year follows that middle ground. We will see.
The Conference Board’s Leading Economic Index for the U.S. eased for the second time in the last four months in January, off by 0.1 percent. The Coincident Index was barely positive in January, up by 0.1 percent. The Lagging Index was still strong, showing a 0.5 percent gain.
New orders for durable goods increased by 1.2 percent in December, lifted by commercial aircraft orders. Most other categories were positive, but orders for computers and communications equipment fell noticeably. As a result, core durable goods orders, nondefense capital goods excluding aircraft, dipped by 0.7 percent in December after falling by 1.0 percent in November.
Existing home sales were down again in January, falling for the third consecutive month and extending an ugly trend that began in early 2017. Sales dipped by 1.2 percent to a 4,940,000 unit annual rate. This is the weakest sales rate since November 2015. Lower mortgage rates may be a positive factor in February.
Builder confidence increased in February according to the National Association of Home Builders. Lower mortgage rates were cited as a positive factor.
Mortgages apps increased for the week ending February 15 as refi apps gained 6.4 percent. Purchase apps were up by 1.7 percent, reversing a four-week slide. On a four-week moving average basis, refi apps are down 16.1 percent from a year ago, while purchase apps are up by 0.5 percent from a year ago. According to the Mortgage Bankers Association, the rate for a 30-year fixed-rate mortgage ticked up to 4.66 percent.
Initial claims for unemployment insurance fell by 23,000 for the week ending February 16, to hit 216,000. Initial claims data has been choppy since last November and the trend still looks like it is up slightly since the lows from last September. Continuing claims fell by 55,000 for the week ending February 9, to hit 1,725,000.
In addition to the economic data releases, the Federal Reserve released the minutes of the January 29/30 FOMC meeting. Even though there was no rate hike announced at the meeting, as was widely expected, it was an important meeting. The Fed changed their tone about future rate hikes, using the words “patient” and “flexible”. The Fed also concluded that they are sticking with the current mechanism for controlling the fed funds rate. This conclusion allows them to establish the goal for balance sheet reduction. The Fed will likely wind down balance sheet reduction by the end of this year, reaching an asset level of about $3.5 trillion dollars. Their portfolio will be dominated by Treasury bonds, but they may retain some mortgage backed securities as well. We expect balance sheet maneuvers to remain in the Fed’s tool bag.
For a PDF version of this report, click here: Comerica Economic Weekly, February 22, 2019
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