The economy is attempting to turn the corner toward a bit faster growth, but the momentum has been slower than expected. For the first months of the year, the economy was weak to moderate, similar to the first quarter in the last few years. No single factor dominated this year’s slower start. The rate of improvement in the labor market continues in a roller coaster pattern, but it is moving in the right direction. Payrolls increased by 235,000 in February and net job gains were revised upward by 9,000 for the two previous months combined. In the past three months, employment growth averaged 209,000 jobs per month, a pickup over the monthly pace of 187,000 jobs recorded in 2016. The average workweek for all employees on private, non-farm payrolls was unchanged at 34.4 hours in February but average hourly earnings increased 2.8 percent over the same month a year ago. One of the challenges within the labor market is that wage inflation has yet to gain traction despite a significant number of job openings and firms reporting a shortage of qualified workers. Until wage gains accelerate, overall economic demand and retail sales are expected to continue on a moderate path.
Complicating the outlook are policy uncertainties due to the wrangling of issues by the administration and Congress. Nonetheless, the Federal Reserve says “economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further.” With that in mind, the Fed raised short-term interest rates by one quarter of one percentage point in March. While future rate changes will depend on incoming data, the Fed expects at least two additional changes in 2017.
While the economy depends on the pace of household spending, the housing and the manufacturing sectors are expected to provide added strength this year. Both sectors have been spotty, however. The housing sector has been improving by most measures since 2011. Existing home sales fell in February but new home sales were better than expected. Job and income growth should generate underlying strength in the economy, thereby supporting housing demand. Business spending at the beginning of the year was not commensurate with recent elevated business optimism readings. Non-defense capital goods orders, excluding aircraft, posted a decline in February. Interestingly, manufacturing saw its third monthly gain in February, adding 28,000 jobs, the largest increase since mid-2013. The marked improvement in manufacturing employment should translate into real economic activity in the coming months. Spending paints a mixed picture at this juncture but these sectors are all poised to improve throughout the year.
Download this month’s report, which includes the following charts and highlights:
- Consumer sentiment
- Payroll
- GDP Growth
- Employment
- Income and consumption
- Conference board index
- Consumer price index
- Home sales