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Economic Watch: Latest Readings Full of Positives

A gauge of the health of the American economy has increased again, hitting its highest level in more than a decade. Meanwhile, manufacturing activity outpaced overall industrial output, consumer sentiment hit its highest level in over a decade, and homebuilding continues to trend up, according to a basket of reports issued Friday and Thursday.

by Staff
March 17, 2017
Economic Watch: Latest Readings Full of Positives

 

4 min to read


A gauge of the health of the American economy has increased again, hitting its highest level in more than a decade. Meanwhile, manufacturing activity outpaced overall industrial output, consumer sentiment hit its highest level in over a decade, and homebuilding continues to trend up, according to a basket of reports issued Friday and Thursday.

The Conference Board’s Leading Economic Index (LEI) for the U.S. increased 0.6% in February to 126.2. That follows a 0.6% improvement in January and a 0.6% hike in December. The latest performance is the best since March 2006.

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“After six consecutive monthly gains, the U.S. LEI is at its highest level in over a decade,” said Ataman Ozyildirim, director of business cycles and growth research at the private research group. “Widespread gains across a majority of the leading indicators point to an improving economic outlook for 2017, although GDP growth is likely to remain moderate.”

The LEI is made up of 10 components. Only housing permits contributed negatively to the LEI in February, reversing gains over the previous two months.

The gauge in February was helped out the most by strength in new orders for manufactured goods, according to analysis from Wells Fargo Securities, as well as an improving interest rate spread, which is the difference between the average yield a financial institution receives from loans and other interest-accruing activities and the average rate it pays on deposits and borrowings.

Manufacturing Shines Despite Dull Industrial Output Numbers

A separate report released Friday by the Federal Reserve showed the total output from the nation’s factories, mines and utilities was unchanged in February, lower than an advance consensus estimate from analysts.

This measure of industrial production follows a January level that showed a 0.1% decline. But the manufacturing sector improved in February for the sixth straight month, posting a 0.5% jump from January and it came in 1.2% higher than the same time a year earlier.

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Mining output jumped 2.7%, but the index for utilities fell 5.7%, as continued unseasonably warm weather further reduced demand for heating.

At 104.7% of its 2012 average, total industrial production in February was 0.3% above its level of a year earlier. Capacity utilization for the industrial sector declined 0.1 percentage point in February to 75.4%, a rate that is 4.5 percentage points below its long 1972–2016 average.

According to Diane Swonk, economist at DS Economics, the decline in the utilities sector offset larger than expected increases in the production of construction materials and business equipment, but was due to relatively mild February weather.

Consumers Sentiment Highest Since 2000, Expectations Mixed

Meantime, a separate and preliminary report showed the overall level of consumer sentiment remained quite favorable in early March due to renewed strength in current economic conditions as well as the extraordinary influence of partisanship on economic prospects, according to the University of Michigan Survey of Consumers.

The Current Economic Conditions reading reached its highest level since 2000, largely due to improved personal finances, but the results were vastly different about expectations when respondents were divided up politically.

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Among Democrats, the Expectations Index at 55.3 signaled that a deep recession was imminent, while among Republicans the Index at 122.4 indicated a new era of robust economic growth was ahead. Interestingly, those who self-identified as Independents had an Expectations Index of 88.3, which was nearly equal to the midpoint of the partisan difference.

“Importantly, there was no moderation in these extreme views from last month, with the maintenance of the partisan divide fueled by selective attention to economic news, with Democrats more frequently reporting unfavorable developments and Republicans more frequently hearing of favorable changes,” said Surveys of Consumers Chief Economist, Richard Curtin.

According to Curtin, overall, the sentiment data has been characterized by rising optimism as well as by rising uncertainty due to the partisan divide.

“Optimism promotes discretionary spending, and uncertainty makes consumers more cautious spenders. This combination will result in uneven spending gains over time and across products,” Curtin said.

Housing Continues Recent Surge

This follows a Thursday report from the Commerce Department that showed housing starts in the U.S. during February improved 3% from the revised January level and is 6.2% better than for the same time a year ago.

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The adjusted-annual rate came in at 1.29 million homes, slightly better than analysts’ expectations, with single family homebuilding getting close to a nine-and-a-half-year high. Single-family home starts, the largest share of the market, posted a February gain of 6.5% above January while starts for the volatile multi-family housing sector fell 3.7%.

In contrast, the number of building permits issued, an indicator of future activity, fell 6.2% in February from the month before but was still 4.4% better than the same time a year ago.

After remaining range-bound for much of last year, housing starts picked up toward the end of 2016, a trend that has continued so far this year with activity remaining firm in January and February, according to RBC Economics Research.

“We see a number of fundamentals, including a strong labor market and income growth, accommodative financial conditions, further easing in mortgage lending standards, and tight supply in the resale market, supporting continued improvement in homebuilding this year,” said Josh Nye, RBC Economist. “Solid permit issuance and rising homebuilders’ confidence point to activity remaining strong in the near-term, even if some of the recent warm-weather boost trails off in the coming months.”

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