A large amount of economic data released over the past two days show that the U.S. economy continues to gain momentum, but the overall pace remains moderate. The current expansion is now the third longest in U.S. history, though the average pace of growth during the expansion has been tepid. At the same time, recent speeches by Federal Reserve officials have taken a decidedly more hawkish tone, pushing futures markets to price in a much higher probability for a federal funds rate hike at the March 14-15 Federal Open Market Committee meeting. Our analysis suggests a rate hike is appropriate.
Data from the U.S. Department of Labor on weekly initial claims for unemployment insurance show the pace of layoffs is extremely low by historical measures. For the week ending Feb. 25, initial claims totaled 223,000, down 19,000 from the prior week. Because of the volatility in the data, a four-week moving average is often the preferred measure. That figure came in at 234,250, down 6,250 from the previous week’s four-week average. The four-week average is at the lowest level since April 1973. Anything below 300,000 is generally considered to be low. Because the number of people employed in the economy generally grows over time, we also measure claims as a percentage of employment in order to get a more accurate historical perspective. Estimating a 150,000 gain in payrolls for February (the February employment report will be released on Fri., March 10), the four-week average weekly initial claims as a share of payroll employment would be 0.16 percent, the lowest on record.
Other data include monthly unit sales of light vehicles (cars and light trucks such as SUVs) and the Purchasing Managers Index from the Institute for Supply Management for February, as well as personal income and construction spending for January. The estimated sales rate for light vehicles sold in the U.S. was 17.5 million units in February at a seasonally-adjusted annual rate. That is down from a recent peak of 18.3 million units in December but still a very high rate historically. The Purchasing Managers Index, a survey of purchasing managers at manufacturing companies, came in at 57.7, up from 56.0 in January. This index, like our Leaders index, has 50 as a neutral level. The PMI has been above 50 for six consecutive months. Among its key components, the new orders index rose to a very strong 65.1 from 60.4 in January, and the production index increased to 62.9 versus 61.4 in the prior month. Both new orders and production have been above 50 for six consecutive months as well. The employment index fell back slightly, to 54.2 from 56.1, but still suggests net hiring for manufacturing in February.
Personal income for the month of January rose 0.4 percent while disposable income increased 0.3 percent. After adjusting for a 0.4 percent increase in the personal consumption expenditures, or PCE, price index, real disposable personal income fell 0.2 percent but is up 2 percent from a year ago. The PCE index, the Fed’s preferred measure for prices, is now up 1.9 percent from a year ago, close to the Fed’s stated goal of 2 percent inflation over the medium term.
Finally, total construction expenditures for January fell 1 percent, led by a 1.9 percent drop in nonresidential expenditures. The primary cause for the fall was a 4.7 percent decline in public nonresidential spending. Within the private sector, total private construction expenditures rose 0.2 percent, led by a 0.5 percent gain in residential spending, while private nonresidential spending was flat.
On balance, the recent economic data show the economy to be expanding at a moderate pace. These data combined with Fed officials’ comments significantly increase the odds of a rate hike on March 15. We believe a hike is appropriate but are not completely convinced that it will happen in March.