Monthly Economic Update for April, 2017
“Reality is something you rise above.”
- Liza Minnelli
Do you live in a flood-prone region? Are you moving to one? A homeowner insurance policy will not cover flood damage. Consider buying a flood insurance policy, either from an insurance company or the National Flood Insurance Program (NFIP).
Three sisters walk toward school with just one small umbrella, which they must all try to fit under. When they reach their school, none of them are the slightest bit wet. How is this possible?
Last month’s riddle:
Last month’s answer:
Latitude and longitude.
THE MONTH IN BRIEF
DOMESTIC ECONOMIC HEALTH
Last month, most of the major indicators affirmed the health of the economy. The only question mark concerned household spending, and the 0.1% February gain may have just been an aberration. Consumer incomes did increase 0.4% in February, so it appeared households were pocketing more of what they had made; in fact, there was only a 0.1% February rise in retail sales. Speaking of consumer spending, the Bureau of Economic Analysis revised fourth-quarter growth up to 2.1% as the month ended; even with that upgrade to the Q4 GDP number, the economy grew just 1.6% last year, a full percentage point less than in 2015.3,4
Americans felt very confident about the state of the economy in March. The Conference Board’s index jumped up 9.5 points in a month to a remarkably high reading of 125.6. The University of Michigan’s monthly index of consumer sentiment finished March at 96.9, up 0.6 points from its final February mark.5,6
The labor market showed further strength. Department of Labor data showed the economy adding 235,000 net new jobs in February, with the construction and education/health care sectors accounting for 120,000 of them. This sent the U-3 unemployment rate down 0.1% further to 4.7%, while the U-6 rate measuring “total” unemployment declined another 0.2% to 9.2%.7
In the opening week of March, the latest Institute for Supply Management gauges of manufacturing and service sector activity showed both sectors in good shape during February. At 57.6, the ISM services PMI reached its highest point since October 2015; the U.S. service sector saw its eighty-sixth straight month of expansion. The ISM factory PMI rose 1.7 points in February to 57.7.8
The Federal Reserve’s preferred inflation gauge, the PCE price index, showed a 2.1% annualized gain for the year ending in February. That was a 5-year peak. Surpassing that, the headline Consumer Price Index rose 2.7% in the 12 months concluding in February, even with a mere 0.1% monthly advance. Producer prices were up 2.2% year-over-year with a February increase of 0.3%.3,5
GLOBAL ECONOMIC HEALTH
By World Bank projections, five Asian economies will expand by 6.5% or more this year: Laos (7.0%); Cambodia, Myanmar, and the Philippines (6.9%); and China (6.5%). China’s growth is at a 26-year low in 2017, but foreign investment in the Chinese economy is forecast to rise to 15.0% this year, compared to only 4.1% in 2016. The March impeachment of South Korean President Park Geun-hye delivered another black eye to the fourth largest economy in Asia; Park and several Samsung officials were disgraced with corruption charges this winter, an especially troubling development given that the Samsung conglomerate accounts for about 15% of the South Korean economy. South Korea has already seen the collapse of Hanjin Shipping, one of the world’s major cargo lines, and its government also recently bailed out its major shipbuilders.10,11
There were also three notable retreats. China’s Shanghai Composite declined 0.59%; Japan’s Nikkei 225 lost 1.10%; and Russia’s MICEX fell 1.96%.12
The price of both natural gas and unleaded gasoline climbed in March: the first of those two commodities gained 15.28%, the second 12.17%. Cocoa futures added 3.87% last month; wheat futures, 0.29%. In sum, that was the good news.14
The latest (January) edition of the 20-city S&P/Case-Shiller home price index displayed a 0.2% monthly gain, which left its 12-month advance at 5.7%. Housing starts rose 3.0% in February after a 1.9% dip in January, while permits for future construction fell 6.2% after a 4.6% January boost.5
Home loan rates did creep a bit higher across March. In Freddie Mac’s March 30 Primary Mortgage Market Survey, the 30-year fixed had an average interest rate of 4.14%, up from 4.10% on March 2. In the same period, the average interest rate on the 15-year FRM moved from 3.32% to 3.39%, while the average rate on the 5/1-year ARM increased from 3.14% to 3.18%.15
LOOKING BACK…LOOKING FORWARD
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends. 10-year TIPS real yield = projected return at maturity given expected inflation.
March ended quietly, with the bulls taking a breather. Will investors find hopes or fundamentals to rally around in April? The next earnings season is two weeks ahead, and FactSet forecasts annualized earnings growth of 9.1% for S&P 500 firms – a bullish projection, indeed, that would represent the best year-over-year improvement since Q4 2011. Any nascent plans for tax reform could also stoke bullish sentiment, even though reforms could take many months to enact. While the rally waned at the end of March, it could find some fresh legs as the second quarter begins, with the markets experiencing relatively placid weather so far in 2017.19
UPCOMING ECONOMIC RELEASES: What major news items will Wall Street watch for in April? The March Challenger job-cut report (4/6), the Department of Labor’s March employment report (4/7), the March PPI and the preliminary April consumer sentiment index from the University of Michigan (4/13), March retail sales and the March CPI (4/14), March industrial production, housing starts and building permits (4/18), a new Federal Reserve Beige Book (4/19), the Conference Board’s latest leading indicators report (4/20), March existing home sales (4/21), the April Conference Board consumer confidence index and March new home sales (4/25), March hard goods orders and pending home sales (4/27), and then, the federal government’s initial estimate of first-quarter growth and the final April consumer sentiment index from the University of Michigan (4/28). The March consumer spending report and PCE price index will both be released on May 1.
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The MSCI Emerging Markets Index is a float-adjusted market capitalization index consisting of indices in more than 25 emerging economies. The Hang Seng Index is a free float-adjusted market capitalization-weighted stock market index that is the main indicator of the overall market performance in Hong Kong. The S&P/TSX Composite Index is an index of the stock (equity) prices of the largest companies on the Toronto Stock Exchange (TSX) as measured by market capitalization. The FTSE 100 Index is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. The MSCI World Index is a free-float weighted equity index that includes developed world markets, and does not include emerging markets. The SSE Composite Index is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. Nikkei 225 (Ticker: ^N225) is a stock market index for the Tokyo Stock Exchange (TSE). 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