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Monthly Economic Review: February 2018

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Indicators point to economic strength

Data from key indicators shows solid growth for the national economy and bodes well for the months ahead. As expected, fourth quarter 2017 gross domestic product growth slowed slightly to 2.5 percent from the 3 percent pace of the two prior quarters but remained solid. The fourth quarter’s strength was driven by consumer spending increasing at a 3.8 percent pace and business fixed investment rising 7.9 percent. The 2017 tax reform law is expected to provide an upward shift in consumer and business spending. Prospects are bright as tax cuts began to impact paychecks this month.

Meanwhile, the Conference Board’s Leading Economic Index continues to offer evidence that the U.S. economy is doing well. Surging by 1 percent, the January reading was the second-highest monthly gain in over five years. The index measures business commitments and expectations regarding the labor, product, resource and financial markets and is a useful short-term forecasting tool, especially over the coming six to nine months. The recent flow of strong readings from the index suggests continued economic improvement in 2018.

The Chicago Federal Reserve Bank’s National Financial Conditions Index — a weekly composite indicator that measures financial stress in the market — is below zero, which reinforces the growth narrative. A zero value for the NFCI can be thought of as the U.S. financial system operating at historical average levels of risk, credit and leverage. The index was at -0.8 for the week ending February 16, suggesting that looser-than-average financial conditions exist.     

Consumers continue to be optimistic about current economic conditions. The preliminary February consumer sentiment report from the University of Michigan jumped to a four-month high. Sentiment hit 99.9, the second-highest reading since 2004. With confidence in the economy remaining high, U.S. households added to outstanding credit in the later months of 2017. Household credit balances expanded during the holiday season and supported spending. Total outstanding credit increased by $18.4 billion in December after posting a record $31 billion gain in November. While revolving and nonrevolving credit increased, their year-over-year rates of growth slowed. The expansion of credit provides further credence to the claim that consumers feel confident about the economy and their ability to repay over time.

It appears that U.S. small businesses are entering 2018 with stronger sales growth, improved profitability and positive hiring trends. The National Federation of Independent Business Small Business Optimism Index rose two points in January, reversing most of December’s drop. Small business confidence remains close to its high for this expansion and is just 1.1 points below its July 1983 all-time high.

January’s inflation numbers came in higher than expected, showing solid gains in both the headline and core Consumer Price Index. Consumer prices had risen 2.1 percent year-over-year, with core inflation up 1.8 percent since January 2017. Stronger demand for goods and services is fueling the upswing in inflation. Although the Federal Reserve targets its policies using the personal consumption expenditures price index, the upward trend in the CPI should be sufficient for the Fed to proceed with its tightening campaign. According to the minutes of the late-January Federal Open Market Committee meeting, participants believed that the economy continued to grow at an above-trend pace from mid-December through late-January, generally revising up their economic projections since then. As such, look for the Fed to raise rates in March, followed by two additional hikes later in the year.

Against this backdrop the National Retail Federation recently released its 2018 economic forecast, projecting that retail industry sales — excluding automobiles, gasoline stations and restaurants — will grow between 3.8 and 4.4 percent over 2017. Online and other non-store sales (included in the overall number) are expected to increase between 10 and 12 percent.


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

  • Consumer sentiment
  • GDP
  • NRF Forecast
  • Ecommerce
  • Payroll
  • Retail jobs