More of the Same

The economy was mixed in 2019. Consumer spending, while uneven, was relatively strong, supported by solid fundamentals. Business fixed investment and manufacturing were weak, but not “recessionary weak.” January data are to be taken with a grain of salt – seasonal adjustment is huge and weather (good or bad) can exaggerate – but figures point to more of the same. Concerns about the coronavirus COVID-19 have replaced trade policy worries.

Retail sales plunged 19.4% in January, before seasonal adjustment, reflecting the end of the holiday shopping season. That works out to a 0.3% gain in adjusted sales (±0.4%). Generally mild weather means that more people can go out shopping (general merchandise up 0.5%, eating and drinking establishments up 1.2%), but moderate temperatures can dampen sales of seasonal gear (clothing store sales down 3.1%). The UM Consumer Sentiment Index improved further in mid-February. Consumers rate their current finances and the national economy highly, but we saw a drop in views of the buying climate for durable goods. Strong job growth and wage gains are supportive, but inflation is higher than a year ago, reducing the pace of improvement in purchasing power. Rising shelter and healthcare costs are hitting middle class budgets. On balance, consumer spending growth is likely to trend at a moderate pace, but we can expect some variation from month to month and from quarter to quarter.

Scott Brown
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Business fixed investment was weak in 2019, reflecting trade policy uncertainty, slower global growth, a decrease in energy exploration, and problems at Boeing. With the Phase 1 trade deal with China, trade policy uncertainty has diminished, but has not been eliminated entirely. Boeing’s halt in production of the 737-MAX reduced the output of aircraft and parts by 10.7% in January. Global growth was widely expected to pick up this year and next, but the coronavirus has dampened that outlook. The softer global outlook has put some downward pressure on oil prices, just as the correction in oil and gas well drilling appear close to having run its course. Taken together, the outlook for business fixed investment remains soft. While the ISM Manufacturing Index edged into expansionary territory in January, factory output softened. Still, as the Fed noted in its Monetary Policy Report to Congress, “mild slowdowns have often occurred during expansionary phases of business cycles -- in contrast, a more pronounced contraction in manufacturing has historically been associated with an economy-wide recession.”