As March Ends, a Mostly Positive Economy

Surprisingly healthy data on personal income and spending, but a strong inflation reading and a dip in consumer sentiment to offset them

Following the upside surprise for fourth-quarter U.S. GDP growth contained in a Mar. 29 report, data released on Mar. 30 tallying February income and spending provided a boost to prospects for the first quarter. Encouraging signals also came from other reports released on the final trading day of March: a big upside surprise for the March Chicago purchasing managers' index report, as well as weather-defying strength in the February nonresidential construction figures.

The one weak spot in the day's data: University of Michigan consumer sentiment index for March was revised slightly lower, but even these numbers remain consistent with the view that the monthly U.S. economic reports are set up for a strong set of March data.

The stronger than expected round of personal income, construction, and Chicago PMI sent bond yields to five-week highs in early trading Mar. 30 before the combination of U.S. duties levied against China, and rumored U.S. security preparations in Bahrain, conspired to knock yield sharply lower along with stocks and the dollar.

Here is Action Economics' rundown of the data released on Mar. 30:

Personal income and spending: February personal income increased 0.6%—above economists' median forecast of a 0.4% gain, while consumption also jumped 0.6% (median 0.3%). Income was again boosted by the lagged cash-basis for end-of-year bonuses.

The surprisingly strong gain in consumption relative to retail sales was due to an outsized 1.0% gain in services, as utility demand, spurred by cold weather in large portions of the U.S., provided a big boost. Both durable and nondurable consumption revealed the expected restraint.

The personal consumption expenditures (PCE) price index, an inflation measure favored by the Federal Reserve, increased 0.4%, while the core index, which excludes food and energy prices, climbed 0.3%. The PCE price figures, both overall and for the core, overshot our forecasts by 0.1% each, because of a surprising 0.2% bounce in ex-auto durable prices in February that followed declines in each of the past three months of 0.1% to 0.5%. This left the respective year-over-year figures at 2.3% and 2.4%—above the Fed's comfort zone for these inflation figures.

The mix left real (adjusted for inflation) consumption rising 0.2%, and leaves first-quarter real consumption poised for a solid 3.7% growth clip, following the 4.2% rate in the fourth quarter. Our first-quarter consumption forecast is now just a few tenths of a percent away from achieving the strongest two-quarter growth combination since the second and third quarters of 2003.

The savings rate remained the same–1.2%—as in January. Surging real sales over the last two quarters, and a lean saving rate, defy market fears of a more cautious consumer. The data imply first-quarter GDP growth at a 2.0% annual rate, as strength in consumption, trade, and government spending are partly offset by weakness in fixed and inventory investment.

Chicago purchasing managers' index: The March Chicago PMI surged to 61.7 (median 49.0) from February's weaker-than-expected level of 47.9. Strength was paced by big gains in new orders and production, while employment and deliveries declined. Surprisingly, prices-paid moderated to 59.1 from 63.2, despite the continued rise in oil prices.

Although the various manufacturing sentiment indexes have exhibited volatile swings around this smooth trend in the averages in recent quarters, the broad pattern is right in line with the view that sentiment is only gradually moderating.

University of Michigan consumer sentiment index: The final reading for March Michigan sentiment moderated to 88.4 from the preliminary reading of 88.8 (median 88.2), compared with the already weaker-than-expected February level of 91.3. The drop in sentiment in February and March likely reflected the effect of falling stock prices, rising gasoline prices, and negative news related to subprime mortgage problems.

All the major confidence indexes for March posted a correction from robust levels in January and February, but remain at solid levels. For the Michigan data, January marked the post-2004 high, and we still remain above the 2006 average of 87.3.

The Conference Board's consumer confidence index dropped back to 107.2 in March from its expansion high of 111.2 in February, though this measure is also above its 2006 average of 105.9. The figures are in line with the strength we expect in March consumer spending, as also suggested by rapid income growth, strength in refunds, and the early Easter.

Construction spending: U.S. construction spending rebounded 0.3% in February after an upwardly revised 0.5% decline in January (0.8% previously). Residential spending remained weak, tumbling 1.0% after a 1.8% drop in January. Nonresidential spending rose 1.5% after a revised 0.7% rise in January (0.2% previously). On a year-over-year basis, residential spending is down 15.0% in contrast to a 13.6% growth pace for nonresidential.

Although the residential component of today's construction report revealed the expected effect of adverse weather, the private, nonresidential figures defied the weather with a 2.3% bounce that accounts for the small headline gain in total construction.

We have modestly boosted our construction estimates for the first-quarter GDP report to a 20% residential drop that would mark the third quarterly decline in the 18% to 20% range, and a 10% nonresidential growth clip.

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