Monthly Economic Review: February 2017

The prospects for economic growth are positive
Monthly Economic Review: February 2017

Consumer and business optimism remain elevated but increased confidence does not necessarily predict higher growth. For example, during the latter half of 2014 and into early 2015, consumer sentiment accelerated and remained elevated but did not translate into an improvement in retail spending or economic activity. While measures of consumer attitudes have retreated from recent highs, their assessment of current employment conditions has improved. Likewise, business confidence measures also show gains. The National Federation of Independent Businesses’ Small Business Optimism Index is at its highest level since December 2004, while the Federal Reserve’s latest New York and Philadelphia manufacturing surveys showed surprising upticks — the New York index rose to its highest level in two and a half years and the Philadelphia index rocketed to its highest level since July 1983. Certainly, a wait-and-see attitude will be needed to determine if the current optimism translates into an acceleration in actual economic activity.

A mixture of data suggests that the economy has gathered some momentum since December. If the Conference Board’s Leading Economic Index report for January is on the mark, further growth is expected. The index, which covers 10 economic variables, jumped 0.6 percent in January, its fifth consecutive monthly increase and the fastest since June 2015. The labor market is moving in the right direction, although it has taken an erratic path. January’s strong job gains, low levels of unemployment insurance claims and decline in the unemployment rate point to the labor market being on track and positive. A key drawback, however, is that a pickup in wage inflation as shown by the Employment Cost Index and average hourly earnings has not yet materialized.

Showing ongoing consumer strength, January retail sales were stronger than expected and there were gains for nearly all retail sectors. Some of the gain, however, was likely due to higher inflation boosting top-line sales figures. Both the Consumer Price Index and the core CPI (which excludes volatile food and energy prices) jumped in January but rising prices are not keeping consumers from spending. The acceleration in prices is welcome for retailers given their lack of pricing power but could raise concerns about purchasing power if wage increases fall behind price increases.

Stronger manufacturing activity was evident in the January industrial production numbers. Notably, factory output excluding automobiles was up 0.5 percent from the previous month. It was the strongest reading since November 2014 and indicated that firms are recovering from the strong dollar and global headwinds that have dampened activity. Unlike many indicators, factory output is not measured in dollars, so higher prices are not a factor in its improvement.

The National Retail Federation’s 2017 economic forecast projects that retail industry sales — excluding automobiles, gasoline stations and restaurants — will grow between 3.7 and 4.2 percent over 2016. Online and other non-store sales, which are included in the overall number, are expected to increase between 8 and 12 percent.

Download this month’s report, which includes the following charts and highlights:

  • Consumer sentiment
  • E-commerce sales
  • Payroll
  • Employment
  • GDP Growth
  • Conference board index
  • Income and consumption
  • Consumer price index