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Monthly Economic Update: March 2018

U.S. Economy: Sluggish Data Point to Lower Expectations for First Quarter Growth

Despite continuing strength in the labor market and modest wage growth, the U.S. economy opens the first quarter with recent reports showing sluggish retail sales and a dip in orders for durable goods. Pent-up demand in the housing sector, meanwhile, has been exacerbated by lumber shortages as well as tariffs imposed last year on Canadian lumber imports.

And recently imposed tariffs on aluminum and steel imports, have sparked concerns over the possibility of a trade war with key global trading partners. The tariffs, though, may ultimately be aimed more at pressuring China to end its policy of requiring U.S. firms to undergo voluntary technology transfers as a cost of doing business in the country.

The Commerce Department reported in late February that the economy grew at an annual rate of 2.5% in the fourth quarter, a downward revision from the 2.6% pace in gross domestic product (GDP) previously reported. The Commerce Department said the deceleration in real (inflation-adjusted) GDP growth reflected a downturn in private inventory investment and an increase in imports (which are subtracted when GDP is calculated).

Consumer spending, exports, and spending by local and state governments as well as the federal government offset the slowdown in GDP growth. Nonresidential fixed investment and an upturn in residential fixed investment also showed strength compared to the third quarter, according to the Commerce Department figures.

For the first quarter, the U.S. economy is currently forecast to grow at an annual rate of 1.9%, according to the Atlanta Federal Reserve’s GDPNow forecast model. As recently as March 9, the Atlanta Fed’s model calculated annual growth of 2.5% in the first quarter, down from a robust estimate of 4.2% as of Jan. 29. The estimate has declined in recent weeks over slack in consumer spending, pricing pressures and soft readings from the housing market and industrial output.

New orders for manufactured durable goods fell 3.7% in January, compared to the previous month, the Census Bureau reported in late February. Retail sales fell 0.1% in February, the third straight monthly decline, as consumers spent less on cars, furniture, electronics and groceries. Lower gas prices also pressured retail sales.

Even as consumers are spending less, the job market continues its impressive run of growth. Seasonally-adjusted total nonfarm payrolls increased by 313,000 in February and the unemployment rate remained unchanged at 4.1% for the fifth straight month, according to the Bureau of Labor Statistics. That is also a 17-year low for the unemployment rate.

Average hourly earnings rose 4 cents from the previous month to $26.75. At a monthly increase of 0.1% and 2.6% on an annualized basis, the rise in average hourly earnings was less than expected. That was in sharp contrast to the January jobs report when an unexpected 2.8% rise in average hourly earnings raised concerns over wage inflation and sparked a sharp selloff in stocks in several trading sessions following the release of that report.

Real Estate: Underlying Market Pressures Persist in U.S. Housing Market

Low inventory levels, rising prices and higher mortgage rates are beginning to take their toll on the U.S. housing market. Home builders, meanwhile, are feeling the impact of higher lumber prices and shortages in some regions.

The National Association of Realtors reported in late February that its pending home sales index fell 4.7% in January to 104.6 – the lowest reading since October 2014. The index, which tracks transactions in which a contract has been signed but the transaction hasn’t yet closed, is 3.8% below a year ago.

The number of available listings at the end of January was at an all-time low for that month and inventory levels were 9.5% below a year ago, the NAR said. For conditions in the housing market to loosen, the NAR believes that annual housing starts need to get back near their historical levels of 1.5 million starts. Privately-owned starts were 7.3% higher year-on-year in January to a seasonally adjusted rate of 1,326,000, the Census Bureau reported in mid-February.

The realtor organization also said that institutional investors unloading their portfolios of single family homes, and more hesitant homeowners deciding to sell would also help alleviate the low supply levels that are slowing sales. NAR figures show that recent sellers last year typically stayed in their homes for 10 years before selling – an all-time survey high going back to 1981.

On the homebuilding front, builders are beginning to face tighter margins from rising lumber and raw materials costs. Lumber is also in short supply due to wildfires in Canada last year and a more recent shortage of available flatbed trucks and railcars to transport wood from the Northwest. That has led to higher transportation costs and delayed shipments to builders.

The current lumber shortage in the U.S. is critical on a host of fronts. Annual domestic production hasn’t met demand in any of the past 50 years, according to the National Association of Home Builders (NAHB). More than a third of U.S. lumber consumption in 2016 was imported – with more than 95% of that from Canada. The Commerce Department finalized tariffs on Canadian lumber this past November with most producers paying a tariff of nearly 21%.

In mid-March, the NAHB said it believes the tariffs are harming housing affordability, home builders and consumers by artificially inflating lumber prices, which are running at an all-time high.

With the strong jobs market, would-be home buyers are still interested in purchasing homes. That demand, amid a lack of inventory, continues to bolster prices. Figures released in February from the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, which covers all nine U.S. census divisions, show a 6.3% annual gain in December.

Global Markets: Some Respite After Early February Selloff

As noted above, the annual increase in wages in the U.S. labor market helped spark a temporary selloff in U.S. markets. Concerns about higher inflation (partly attributed to those wage gains), central banks’ waning support from quantitative easing, and the U.S. government’s rising budget deficit and expectations of more issuance of Treasury securities also added fuel to the fire. Global markets also sold off in early February and volatility rose sharply after trending near historical lows for more than a year.

For the month of February, the Dow Jones Industrial Average fell 4.3%, while the S&P 500 declined by 3.9%. The Nasdaq Composite also finished the month in negative territory, declining by 1.9%. The monthly performance of the Dow and S&P 500 broke a string of 10-straight months in which those indexes posted gains. It was also the worst monthly percentage decline for both indexes since January 2016.

The major benchmark indexes ended February still in positive territory for the year (please see chart below) and rebounded strongly from the major selloff in late January and early February which had pushed the Dow and S&P 500 into correction territory.



Although stocks appear to have managed to shrug off inflationary concerns and the impact of higher interest rates, trade tensions have partly led to major multinational stocks dragging down the performance of the Dow relative to the S&P 500 and Nasdaq. Market participants continue to consider the impact of President Donald Trump’s steel and aluminum tariffs, and the potential emergence of a U.S. protectionist trade policy.

Through March 14, the Dow is down 1.1% for the month, while the S&P 500 has gained 1.3%. For its part, the Nasdaq continues its strong performance, up 1.3% for the month, and more than 8.5% since the start of the year.

Overall, as the market landscape appears to be shifting from one of below-average inflation and an accommodative interest rate environment, prices of risk assets have been adjusting. Bond yields have also moved higher, reflecting a resetting of market rates amid uncertainty over whether economic growth and more government spending will lead to higher inflation and push the U.S. Federal Reserve to raise rates faster than expected. After reaching a four-year high of 2.95% during February, the yield on the 10-year Treasury note has fallen to 2.83% as of March 14.

Other global stock markets also posted losses for February. The MSCI Europe ex U.K. index fell by about 5.8%, while the MSCI Pacific index declined by 2.3%. Both indexes are still up by 0.2% and 1.3%, respectively, for the year through March 14. The rout in global financial markets at the beginning of February also took its toll on shares in China. The Shanghai composite and Hang Seng Index fell by 6.4% and 6.2%, respectively.

In Europe, overall economic growth appears to be strong enough for the European Central Bank (ECB) to normalize monetary policy. The eurozone economy grew by 2.3% in 2017, compared with 1.8% in 2016, Eurostat, the European Union’s statistical provider reported in early March.

The ECB kept interest rates in the eurozone unchanged following its policy committee meeting on March 8. The central bank, however, did discard the easing bias it had included in recent policy statements regarding its asset purchase program, according to this report. Previously, the ECB had said that it stood ready to increase the level of bond purchases if the eurozone’s economic outlook deteriorated.

In Japan, the country’s central bank is still committed to its monetary stimulus as inflation remains well below its target for normalizing policy. The Bank of Japan (BOJ) may be willing to consider an exit strategy for stimulus beginning in the fiscal year which starts March 2019 if inflation is at its 2% target.

For the month of February, the Nikkei Stock Average of 225 stocks fell 4.5%. For the month through March 14, the Nikkei is down by 1.3%. Earlier in the month the index suffered a brief selloff over concerns of the impact on exporters of U.S. trade policy and tariffs. The strengthening Japanese yen is another concern for the country’s exporters. Year-to-date, the Nikkei is down by nearly 10% from its high on Jan. 23.

Commodities: Forecasts Indicate 2018 Oil Demand Strong Enough for Rising U.S. Shale Production

A report that global demand for oil will likely pick up this year and keep the market in balance amid the surge from U.S. shale production has kept oil prices steady in recent sessions. After briefly touching above $70 a barrel in late January prior to the global selloff in stocks, Brent Crude is down by about 3.0% year-to-date through March 14 at $64.89 a barrel. West Texas Intermediate crude is up by nearly 1.0% during the same period at $60.96 a barrel. Still, oil prices are roughly 20% higher than they were in the early part of 2017.

In its widely watched monthly report, the International Energy Agency (IEA) increased its estimate for global growth in 2018 by 90,000 barrels to 1.5 million barrels a day. The IEA cited strong starts for the year in China and India, which both accounted for nearly 50% of global demand in 2017.

The countries within the Organization of the Petroleum Exporting Countries (OPEC) and 10 other countries outside the group including Russia, appear to be keeping to an agreement began last year to withhold about 1.8 million barrels a day from the market to offset a global supply glut that had been pressuring prices since late 2014. And with output from Venezuela continuing to fall, the EIA estimated that quota compliance for OPEC last month was 147%.

In the U.S., domestic crude oil production reached a record 10.2 million barrels a day in February. The IEA said earlier in March that it expects the U.S. to surpass Russia as the world’s largest oil producer by 2023.




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