According to the latest revision from the Bureau of Economic Analysis, the U.S. economy grew 2.9 percent at the annual rate in the fourth quarter of 2017, up from the previous estimate of 2.5 percent and better than the consensus estimate of around 2.7 percent. The upward revision mainly reflected improvements in service-sector and inventory spending, even as the latter continued to be a significant drag on top-line growth. Overall, the modest growth in real GDP in the fourth quarter reflected strength in consumer, business and government spending, with net exports and inventories providing headwinds. For the year, the U.S. economy expanded 2.3 percent in 2017, but the forecast for 2018 is for growth of 3 percent. The recently enacted tax cuts should provide a sizable boost to growth, especially in terms of increased investments, and improvements in the global economy will continue to buoy activity.
With that said, manufacturing activity softened somewhat in the Dallas and Richmond Federal Reserve Bank districts, even as they continued to reflect strong growth and a promising outlook for the next six months. The headline index in Texas was the best since December 2005, so some pullback might have been expected given the elevated reading in the prior survey. Both regional reports cited accelerating pricing pressures for raw materials, with input costs rising at multiyear highs in the March data. Along those lines, respondents to the Richmond Federal Reserve’s survey noted faster wage growth, with ongoing challenges with the availability of workers reflecting the current tightness of the labor market. With that said, the personal consumption expenditure deflator suggests that inflationary pressures remain quite modest, up 0.2 percent in February or 1.8 percent over the past 12 months.
On the consumer front, Americans remain very upbeat about the economy. The University of Michigan and Thomson Reuters reported that consumer sentiment rose strongly in March, up to the highest level since January 2004. Moreover, respondents felt more positive about current economic conditions, with that measure soaring to a new all-time high.
In the competing release from the Conference Board, the Consumer Confidence index pulled back slightly in March after reaching an 18-month high in February, but Americans continued to be upbeat in their outlook, especially about the job market. The percentage of respondents feeling jobs were “plentiful” increased from 39.1 percent to 39.9 percent, with those saying jobs were “hard to get” inching down from 15.1 percent to 14.9 percent. At the same time, the percentage of respondents saying business conditions were “good” increased from 36.5 percent to 37.9 percent, with those suggesting that conditions were “bad” also rising, up from 11.3 percent to 13.4 percent.
The better assessment about the economy has lifted consumer spending. Personal spending has risen 4.6 percent year-over-year, with consumers continuing to be one of the bright spots in the economy. In addition, personal income increased 0.4 percent for the third straight month in February. Over the past 12 months, personal incomes have risen 3.7 percent in February. Even with some easing in the year-over-year rate over the past few months, income growth remains quite healthy. For manufacturers, total wages and salaries rose to $869.9 billion in February. That translated into a solid 4.6 percent increase in manufacturing wages and salaries year-over-year, up from $831.8 billion in February 2017.
This week, there will be more evidence of healthy growth in the manufacturing sector. The NAM will release the latest results of its Manufacturers’ Outlook Survey. In December, 94.6 percent of respondents felt positive about their own company’s outlook—a new all-time high in the survey’s 20-year history—with strong growth in sales, employment and capital spending. Much of that optimism was spurred by positive assessments about the impact of tax reform, which passed after the release of the previous survey, and it will be interesting to see how this impacts activity moving forward. At the same time, the Institute for Supply Management’s Manufacturing Purchasing Managers’ Index has also reflected robust growth in demand, output and hiring, and it is expected that the March data will continue that trend.
Other highlights this week include new data on construction, employment, factory orders and international trade. In February, nonfarm payrolls and manufacturing employment increased 313,000 and 31,000, respectively. The unemployment rate was unchanged at 4.1 percent and remained at the lowest level since December 2000. Given the strength of the February jobs data, the jobs figures will be watched closely, especially in light of the Federal Reserve’s recent decision to raise short-term rates (and with the prospect of at least two more rate hikes this year). I would expect continued healthy growth in employment for the sector over the coming months, with the unemployment rate falling to 3.8 percent by year’s end.