Economic Growth Moderating, Though U.S. Services Sector Still Strong
Leading data overseas hints at slower growth in U.S. manufacturing to come.
The tone of moderating growth for the U.S. economy emerged in February with the “initial” estimate of fourth quarter gross domestic product (GDP). After stellar quarterly growth of 4.2% in the second quarter and 3.4% in the third quarter of 2018, the GDP figure came in at 2.6% for the fourth quarter, according to the Bureau of Economic Analysis.1
Private inventory investment, personal consumption expenditures, and a contraction in spending by state and local governments contributed to the deceleration in GDP. The pace of spending by the federal government also slowed. Exports and fixed investment spending by businesses increased from the third quarter. GDP was also pushed higher by imports, which are a negative in the calculation of GDP, according to the figures.
The initial print of fourth-quarter GDP did top expectations. Economists had trimmed forecasts following, in part, a glum retail sales report in mid-February, which showed that sales in December fell 1.2% from the previous month, even as they and market participants questioned the mismatch between the strong holiday sales that online retailers and the Redbook Index had been reporting during December. The Census Bureau did acknowledge that data collection and processing were delayed because of the government shutdown.2
It’s clear, as The Conference Board points out, that economic growth in the U.S. is slowing from the average 3.8% pace of growth during the middle of last year. The recent GDP figures, though show that the business environment has improved somewhat despite headwinds in 2018 from slowing global growth, fears of tighter monetary policy, trade policy uncertainty, and the partial government shutdown.
“During 2019, growth is likely to slow down towards the economy’s long-term 2.0 percent trend as support from fiscal policy is reduced, but more gradually than anticipated at the beginning of the year,” Brian Schaitkin, The Conference Board’s senior economist, said in a release.3
One key area where activity is slowing is in the manufacturing sector. Respondents to the IHS Markit final U.S. manufacturing purchasing managers index (PMI) reported an easing in production growth in February, linked to a similar slowdown in order book growth. The index fell to 53.0, down from 54.9 in January, declining to its lowest rate since August 2017. While output and new orders increased, the pace was slower than their long-run trends, with growth rates falling to 17- and 20-month lows, IHS Markit said.4
Similar trends were notable in the Institute for Supply Management’s (ISM) manufacturing index, which fell 2.4 percentage points from the January reading to 54.2. February’s figures included a 5.7 percentage point decline in the production index and a 2.7 percentage point drop in new orders. Inventories also rose marginally.5 The headline index came in weaker than an expected 55.5 and represented its weakest reading since November 2016.6
What some market observers are noting with the recent U.S. manufacturing reports is how the data may portend to a further lag in a few months’ time, given what’s happening with new export orders in Taiwan and Singapore, for example. Taiwan is a key producer of semiconductors and other electronic components that are in end-use consumer goods. Singapore is also a big exporter of electronics and telecommunications.
These two countries are also at the beginning of the supply chain where indicators remain “palatably weak” and also point to a further slowdown in U.S. economic activity, Bryce Coward, deputy chief investment officer and portfolio manager with Knowledge Leaders Capital, said in this blog post in early March.7
Taiwan’s new export orders lead the ISM in the U.S. by about six months and are currently making a “b-line” toward the 2016 lows, he said. “If the relationship holds then the weakness we observed in today’s US ISM print should continue through July at the earliest,” he wrote. The same “exact message” comes from Singapore’s new electronics export orders, though with a slightly smaller lead time of four months.
It’s a similar story in corporate data on Samsung’s inventory to sales ratio, which is at its highest level since 2011. This, Coward writes, implies weak end use demand for semiconductors and electronic components. “No surprise then that Samsung’s inventory to sales ratio leads the US ISM by about 5 months.”
Meanwhile, the robustness of the retail sales data mentioned above may be open to debate. Yet, overall consumer spending dipped by 0.5% in December, based on personal consumption expenditures data from the Bureau of Economic Analysis.8
Along with recent weakness in residential construction (discussed under the Real Estate section below), and trends in manufacturing, model forecasts for first quarter GDP increasingly reflect a somewhat pessimistic view about U.S. economic growth in the first three months of the year.
As of March 4, the Atlanta Federal Reserve’s GDPNow model forecasts 0.3% economic growth compared to the same period a year ago. As of its March 1 update, the New York Federal Reserve’s Nowcast GDP was forecasting 0.9% growth. Each model is updated as new economic data flows in and the forecasts tend to fluctuate.
Outside of the manufacturing sector, strong growth is occurring in the services sector, however. Positive indicators emerged in early March with the ISM non-manufacturing index up by 3.0 percentage points to 59.7 for February. Compared to the previous month, the new orders index was up 7.5 percentage points to 65.2, while the business activity index rose by 5.0 percentage points to 64.7.9
Real Estate: Stable Mortgage Rates Could Help Housing’s Spring Selling Season
It was a rough year for housing in 2018, but signs are emerging that the spring selling season could be a bit more positive for the market. Since hitting a seven-year high in late November, 30-year fixed mortgage rates have been trending lower. And while government data on the housing market was delayed with the government shutdown, December’s new home sales report from the Census Bureau did show that sales hit a seven-month high.
Seasonally-adjusted sales of new homes were up by 3.7% in December compared to November at an annual rate of 621,000. One data point does not a market make, however, and the December report did include a downward revision to 599,000 units from the previously reported 657,000 units in November. For 2018, the Census Bureau figures estimate single-family home sales of 622,000, down by 1.5% compared to 2017.10
Robert Dietz, chief economist with the National Association of Home Builders (NAHB), said the current pace of sales remains off the post-Great-Recession trend due to housing affordability concerns that were made worse by the rise in mortgage rates late last year. “We expect lower mortgage rates in the early months of 2019 will lead to additional new home demand,” he said in a statement on the new home sales figures.11
According to Freddie Mac’s latest mortgage market survey, rates have trended below prior-year levels for four-straight weeks. The lower rates and strong employment picture have contributed to an uptick in purchase demand, though rates did rise slightly from the previous week.
This was noted as a factor in the 2.5% week-to-week decline in the Mortgage Banker Association’s (MBA) weekly mortgage applications survey for the period through March 6. That figure, though, followed the previous week’s report a 5.3% rise in applications for the week ended February 27. The most recent survey also found that conventional purchase loans were up 2.1% compared to last year, “indicating that homebuyers continue to be inspired by the stable rate environment and the modest increase in housing supply,” Mike Fratantoni, the MBA’s senior vice president and chief economist, said in a statement.12
Stable mortgage rates have also helped lift pending home sales, with the National Association of Realtors’ (NAR) pending home sales index up 4.6% in January, compared to the previous month. Year-over-year contract signings were down by 2.3%. Still, the positive figures for January are likely to continue with more would-be buyers taking advantage of lower rates and housing inventory on the upswing.
“Income is rising faster than home prices in many areas and mortgage rates look to remain steady. Furthermore, job creation will help lift home buying,” Lawrence Yun, NAR chief economist, said in a press release.13
Existing home sales for January were 8.5% lower from a year ago at an annual rate of 4.94 million. Yun said that was the lowest since November 2015, but that he doesn’t expect those figures to fall further going forward. That is partly due to the factors mentioned above along with moderating home prices. The full impact of the decline in mortgage rates since late November also has yet to trickle through.
“Lower mortgage rates from December 2018 had little impact on January sales, however, the lower rates will inevitably lead to more home sales,” Yun said in a statement on the January report.14
Markets: Double-Digit Gains Across Much of the Globe Continued in February
March off to a slow start, however.
Closing out the first two months of the year, stocks surged led by rebounds in China, emerging markets and smaller capitalization stocks here in the U.S. Year-to-date through February, a wide number of markets across the world have posted double-digit gains, though momentum wasn’t as strong this past month as it was at the start of the year. Indeed, trade-related sectors like industrials and telecommunications have experienced partial selloffs going into early March, while small caps have also dipped.
For February the Dow Jones Industrial Average rose 3.67% and is up by 11.10% this year, while the broader Standard & Poor’s 500 gained 2.97%, but is up 11.08% since the beginning of the year. It was the best two-month start of the year for the Dow since 1987 and the best for the S&P 500 since 1991. Technology shares as tracked by the Nasdaq Composite gained 3.44% this past month. The Nasdaq has risen by 13.52% this year through February.
Small-cap stocks were among the best performers in the U.S. with the S&P SmallCap 600 index up 4.24% in February, according to data from S&P Dow Jones Indices.15 The Russell 2000 gained 5.08%. For the year through February the SmallCap 600 has risen by 15.24%, while the Russell 2000 is up by 16.83%.
Among the leading market performers overseas this year has been China. The Shanghai Shenzhen CSI 300 Index has gained 21.9% since the beginning of the year through February. A boost to the overall market for Chinese equities came at the end of last month when MSCI Inc. said it would further add to the weighting of China A-shares traded on the Shanghai and Shenzhen exchanges to its MSCI Indexes. MSCI plans to increase the weighting from 5% to 20% in a three-step process, expected to be concluded by November 2019. At that time, the overall weighting of Chinese large- and mid-cap share will comprise about 3.3% of the MSCI Emerging Markets Index.16
Adam Goff, managing director, investment practice for Russell Investments said in a Market Week in Review post that the announcement is “a big step forward in the long progression of Chinese A-share markets from being essentially un-investable for institutional investors to becoming a mainstream market that’s part of mainstream indexes.”17
Year-to-date through February, global markets, not including the U.S. as tracked by the S&P Global Ex-U.S. Index have gained 9.34%, while emerging markets as tracked by the S&P BMI Emerging Index have gained 8.37%. Similar to the U.S., a good portion of the gains were experienced during January.
In the bond market, the benchmark 10-year Treasury note’s yield was 2.75% as of month end. The 10-year note has been trading in a somewhat narrow band since late December, a range that is well below the highs of nearly 3.25% in early November. While this year’s strong performance in equities seems to be discounting some of the U.S. and global economic data which point to a deceleration in growth, longer-term bond yields continue to reflect slower growth and lower inflation, even as lower bond yields help support the rally in risk assets.
Similar to others watching government bond yields, Guy Wagner, chief investment officer at Banque de Luxembourg Investments, notes that the significant rebound in equity markets since the start of the year hasn’t prompted a reversal in the bond markets. “The prospects of economic slowdown and a further reduction in inflationary pressures are keeping long-dated yields at low levels,” he wrote in a post in early March on the Investment Europe website.18
March is off to a tougher start for equities, with trade-related sectors like semiconductors down by 1.2% through March 6 as tracked by the Philadelphia Semiconductor Index, while the S&P 500 Industrials Sector Index has declined by 2.0%. As both sectors had already rebounded sharply from the Christmas Eve lows, it remains to be seen if the recent weakness is just a matter of investors taking profits or if market participants are beginning to position for a more complex trade picture and slowing global economic growth in the coming months.
On March 7, the European Central Bank (ECB) announced plans to stimulate the eurozone’s economy by saying it wouldn’t raise interest rates this year (it had previously signaled a so-called “liftoff” in rates by mid-year) and unveiling a new long-term lending program for the region’s banks that will launch in September.19
The latter measure comes just shy of three months after the ECB said it would phase out its bond-buying program as part of its €2.6 trillion quantitative easing measure announced in early 2015. The new stimulus package makes the ECB the first major central bank in a developed economic region to take measures in response to the slowdown in global growth.
Commodities: Higher Oil Prices for Now, But Uncertainty Over OPEC, U.S. Shale Production
Since the start of the year, oil prices have retraced some of the ground lost since the highs reached in early October. Recall that crude prices fell by nearly 40.0% in the fourth quarter, pushing the market deeply into bear territory. This year, though, West Texas Intermediate crude is up by 26.0% to $57.22 a barrel, with prices rising 6.38% in February. Brent crude has risen by 22.73% during the same period, and gained 6.69% in February.
Along with those gains have come higher prices at the pump. AAA, the motor and leisure travel organization, reported on March 4 that the national gas-price average has increased nearly 20-cents since the beginning of the year, the largest jump during the January-February timeframe since 2015. The national average of $2.42 a gallon at the end of February is 17-cents more than the previous month, though still 10-cents lower compared to a year ago.20
In late February, President Donald Trump tweeted that oil prices were getting to high and urged OPEC (the Organization of the Petroleum Exporting Countries) to lower the cost of crude oil. OPEC is also coming under scrutiny in Congress as a bill continues to move through the House Judiciary Committed known as the “No Oil Producing and Exporting Cartels Act” (NOPEC), which would give the Justice Department the legal opening to take antitrust action against OPEC’s producers.
In response to President Trump’s tweet, Khalid al-Falih, Saudi Arabia’s energy minister, said OPEC and the 10 other countries aligned with the group (known as OPEC plus) “are taking a very slow and measured approach,” adding that as the second half of 2018 proved, “we are interested in market stability first and foremost.” The Saudi energy minister’s comments came during an interview while at an OPEC symposium in Riyadh, according to this CNBC report.21
OPEC plus (Russia is among the largest producers outside of OPEC), agreed in December to cut production by 1.2 million barrels per day. While OPEC is next slated to meet about production this April, the current production agreement lasts until this June.
The Saudi energy minister said OPEC plus would remain flexible about whether or not to roll over the current agreement once June arrives, depending on market conditions. If fundamentals are tightening by June, just like in 2018, he said he would encourage OPEC plus members to ease voluntary limits and “increase supplies to ensure that there is no unnecessary tightening in the market.”
According to Ole Hansen, head of commodity strategy at Saxo Bank, the key factor determining market sentiment will be the prospects for global growth. “The market has been recently supported by the expectations related to the US-China trade deal. Will the deal become a trigger for further rally though? It was expected and priced in by investors, so the further upside potential is limited,” he said in a March 4 research post, noting that against this backdrop, trends in the U.S. shale market must also be factored in.22
Indeed, oil giants Chevron and Exxon recently announced plans to significantly ramp up production in the Permian basin, the hotbed of the nation’s shale boom. Last year’s sharp decline in oil prices has made it more difficult for smaller oil & gas producers to be profitable, but the majors are able to apply scale to their operations.
1- Bureau of Economic Analysis. (2019, February 28). Gross Domestic Product, Fourth Quarter and Annual 2018 (Initial Estimate) [Press Release]. Retrieved from: https://www.bea.gov/news/2019/initial-gross-domestic-product-4th-quarter-and-annual-2018
2- U.S. Census Bureau. (2019, February 14). Advance Monthly Sales For Retail And Food Services, December 2018 [Press Release]. Retrieved from: https://www.census.gov/retail/marts/www/marts_current.pdf
3- The Conference Board. (2019, February 28). US Economy Starts to Slow Entering 2019, but Headwinds Ease [Press Release]. Retrieved from: https://www.conference-board.org/press/pressdetail.cfm?pressid=8922
4- IHS Markit. (2019, March 1). IHS Markit US Manufacturing PMI™ [Press Release]. Retrieved from: https://www.markiteconomics.com/Survey/PressRelease.mvc/3d072ba188be4cdabd9726916094cecb
5- Institute for Supply Management. (2019, March 1). February 2019 Manufacturing ISM® Report On Business® [Press Release]. Retrieved from: https://www.instituteforsupplymanagement.org/ISMReport/MfgROB.cfm?navItemNumber=31113
6- Imbert, F. (2019, March 1). ISM manufacturing index hits lowest level since November 2016. CNBC. Retrieved from: https://www.cnbc.com/2019/03/01/ism-manufacturing-february.html
7- Coward, B. (2019, March 1). Is the Economic Slowdown Over or Just Getting Started? Part 2. Knowledge Leaders Capital. Retrieved from: https://blog.knowledgeleaderscapital.com/?p=16228
8- Bureau of Economic Analysis. (2019, March 1). Personal Income and Outlays, December 2018; Personal Income, January 2019 [Press Release]. Retrieved from: https://www.bea.gov/news/2019/personal-income-and-outlays-december-2018-personal-income-january-20199-
9- Institute for Supply Management. (2019, March 5). February 2019 Non-Manufacturing ISM® Report On Business® [Press Release]. Retrieved from: https://www.instituteforsupplymanagement.org/ISMReport/NonMfgROB.cfm?SSO=1
10- U.S. Census Bureau. (2019, March 5). Monthly New Residential Sales, December 2018 [Press Release]. Retrieved from: https://www.census.gov/construction/nrs/pdf/newressales.pdf
11- National Association of Home Builders. (2019, March 5). New Home Sales End the Year Up 1.5 Percent [Press Release]. Retrieved from: https://www.nahb.org/en/news-and-publications/press-releases/2019/02/new-home-sales-end-the-year-up-one-point-five-percent.aspx
12- Mortgage Bankers Association (2019, March 6). Mortgage Applications Decrease in Latest MBA Weekly Survey [Press Release]. Retrieved from: https://www.mba.org/2019-press-releases/march/mortgage-applications-decrease-in-latest-mba-weekly-survey
13- National Association of Realtors (2019, February 27). Pending Home Sales Jump 4.6 Percent in January [Press Release]. Retrieved from: https://www.nar.realtor/newsroom/pending-home-sales-jump-4-6-percent-in-january
14- National Association of Realtors (2019, February 21). Existing-Home Sales Drop 1.2 Percent in January [Press Release]. Retrieved from: https://www.nar.realtor/newsroom/existing-home-sales-drop-1-2-percent-in-january
15- Silverblatt, H. (2019, March 4). Market Attributes: U.S. Equities February 2019. S&P Dow Jones Indices Market Attributes®. Retrieved from: https://us.spindices.com/documents/commentary/market-attributes-us-equities-201902.pdf?force_download=true
16- MSCI Inc. (2019, February 28). MSCI Will Increase The Weight Of China A Shares In MSCI Indexes [Press Release] Retrieved from: https://www.msci.com/documents/10199/238444/China_A_Further_Weight_Increase_PR_Eng.pdf/43f3ee8b-5182-68d4-a758-2968b4206e54
17- Russell Investments (2019, March 1). Market Week In Review. Update for March 1 2019. Retrieved from: https://russellinvestments.com/us/insights/market-week-in-review
18- Wagner, G. (2019, March 6). Economic growth is continuing to slow in most regions. Investment Europe. Retrieved from: https://www.investmenteurope.net/opinion/4001222/economic-growth-continuing-slow-regions
19- European Central Bank. (2019, March 7). Monetary policy decisions [Press Release]. Retrieved from: https://www.ecb.europa.eu/press/pr/date/2019/html/ecb.mp190307~7d8a9d2665.en.html
20- AAA. (2019, March 4). National Average Nearly 20-Cents Higher Than Two Months Ago. AAA: Gas Prices. Retrieved from: https://gasprices.aaa.com/average-nearly-20-cents-higher-than-two-months-ago/
21- Turak, N. (2019, February 27). Saudi energy minister responds to Trump’s tweet that said OPEC should ‘relax’. CNBC. Retrieved from: https://www.cnbc.com/2019/02/27/saudi-oil-minister-to-trump-we-are-taking-it-easy.html
22- Hansen, O. (2019, March 4). What next for oil? Saxo Bank. Retrieved from: https://www.home.saxo/insights/content-hub/articles/2019/03/04/what-next-for-oil
Sources for Financial Data:
Silverblatt, H. (2019, March 4). Market Attributes: U.S. Equities February 2019. S&P Dow Jones Indices Market Attributes®. Retrieved from: https://us.spindices.com/documents/commentary/market-attributes-us-equities-201902.pdf?force_download=true
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