What I Saw Last Week
Consumer Credit increased by $8.8B in January – well below my forecast for an increase of $17B – after increasing an upwardly revised $14.8B (from $14.2B) in December.
January marked the slowest pace of consumer credit expansion since December 2015.
The growth in January was entirely due to the increase in non-revolving credit, which was up $12.6 billion from December to $2.78T trillion. Revolving credit decreased by $3.8 billion to $995 billion – the first month-over-month decline since February 2016.
Consumer credit increased at a seasonally adjusted annual rate of 2.75% in January, with revolving credit decreasing at an annual rate of 4.50% and non-revolving credit increasing at an annual rate of 5.50%.
The key takeaway from the report is that consumer credit decelerated in January, which is apt to contribute to subdued expectations for the pace of consumer spending and GDP growth in the first quarter.
February Non-Farm Payrolls took almost everyone by surprise with an additional 235,000 payroll jobs added to the economy. I had forecast an additional 188,000 new jobs. January payrolls were revised up to 238,000 from 227,000 while the December numbers were revised down to 155,000 from 157,000.
Employment is generally regarded as a lagging indicator, yet the February report is the coincident indicator the stock market was seeking to corroborate its leading view that the Federal Reserve will be raising the fed funds rate soon for the right economic reasons. Moreover, average hourly earnings rose 0.2%, leaving them up 2.8% year-over-year, further lending credence that the Fed will raise the target range for the fed funds rate at its March 14-15 FOMC meeting.
That is the key takeaway from this report, followed closely by the encouraging understanding that the labor market is strengthening, which is aiding the prospects for stronger economic growth.
Given the strength in employment growth, it was unsurprising to see the U.S. Unemployment Rate meet my forecast with a drop back down to 4.7% from the January figure of 4.8%.
The fact that the unemployment rate dropped in February while the labor force participation rate rose supports the notion that the labor market is strengthening as the number of employed workers increased by 447,000 while the number of unemployed workers decreased by 107,000.
The employment-to-population ratio, in turn, increased from 59.9% to 60.0%, which is the highest it’s been since February of 2009.
What to Watch for This Week
Inflation – as measured by the Consumer Price Index – rose by 0.6% in January and I anticipate that we will see a further increase in February, but the increase will be much more modest. I am looking for overall inflation to have risen by 0.1% and the core rate up by 0.2%.
U.S. Retail Sales rose by 0.4% in January and the February figure will show a slowdown with total and core sales up by 0.1%.
All eyes will be on the Federal Reserve meeting this week and I now fully anticipate the they will raise short-term rates from 0.625% to 0.825%.
U.S. Housing Starts were disappointing in January with a contraction of 2.6%; that said, single family starts rose by 1.9%. I am looking for a a turnaround with total starts rising by 1.1%.
U.S. Building Permits rose 4.6% in January and the February figure is likely to show a sharp contraction of 2.6%.
Consumer Sentiment in early March should be modestly above the final February figure of 96.3. My call is for it to have risen to 96.8.