The construction spending report includes the total value of all new construction activity for residential, non-residential and public projects. Overall construction spending rose 0.8 percent in February, and the year-on-year rate of growth was 3percent. The construction of single family (+1.2 percent) and multi-family homes (+2 percent) made progress, while non-residential construction continues to be soft, as businesses remain cautious with respect to capital spending.
Spending by federal, state and local governments continues to decline on a year-on-year basis, dragging down overall construction activity. A Trump administration’s success in enacting a major infrastructure programme would have a meaningful impact on this segment of the economy.
Factory orders measure the change in dollar value for both durable and non-durable goods orders. This report updates the most recent durable goods report with more information.
The increase in factory orders is all about transportation (aircraft). Orders rose 1 percent in February, but excluding transportation they rose just 0.04 percent, and core capital goods (excluding defence and aircraft) declined 0.1 percent. What is discouraging in this report is that inventories have risen in seven of the past eight months, while unfilled orders, which saw no change last month, declined in the previous three months. These developments do not bode well for future production or employment.
Business investment, as measured by new orders for non-defence capital goods excluding aircraft, fell 0.1 percent in February, which runs completely contrary to the surge in business confidence evidenced by surveys.
Nothing concerns me more about the rate of economic growth than the ongoing decline in car sales, which is a huge factor in overall retail sales. The chart indicates that the current sales cycle is over, as year-on-year sales declined 1.6 percent in March.
Inventories are at the highest level in a decade, incentives have reached a level not seen since the financial crisis, and financial conditions for borrowers are beginning to tighten. This segment of the economy will undoubtedly be a drag on growth in 2017.
The Institute for Supply Management’s (ISM) service sector survey declined to a still respectable reading of 55.2 points in March, which indicates continued growth for the service side of the economy. Readings above 50 points indicate expansion, while readings below 50 points indicate contraction. The weakest category of this report was the employment sub-index, which was an early warning sign that job creation for March would disappoint.
The ISM indicates that a reading of 55.2 points corresponds to an annualised rate of economic growth of 2.4 percent, based on historical analysis, but this appears to be an overestimation in my view. Because this index is a survey of purchasing managers, with no weighting as to the size of the firm or measurement of how much better or worse off business conditions may be, it has limitations. Yet it is closely followed by economists and market participants. It is likely that many of the pro-growth proposals from the Trump administration could be impacting the survey results.
Markit’s PMI Services index fell to a six-month low of 52.8 points in March, down from 53.8 points in February, wiping out all the post-election gains. Yet this survey still indicates a continued modest level of growth for the service sector.
The SM's manufacturing index edged lower to 57.2 points in March from 57.7 points in February, which was the first monthly decline since August. Still, this is a very strong report across the board and indicates continued strength for the manufacturing sector. A key source of this strength is the rebound in energy exploration and production.
What remains troubling is that the hard data has yet to catch up with the level of strength we see in this survey. The ISM suggests that current readings are consistent with an economy growing at an annualised rate north of 4 percent, but that is clearly not happening.
Markit’s PMI Manufacturing index continues to show less strength than the ISM report, falling for a second month in a row, from 54.2 points in February to 53.3 points in March. The new orders index was a five-month low, while inventories, output and employment all weakened as well.
Investors, including President Trump, celebrated the initial estimate that 235 000 jobs were created in February. Little attention was paid to the fact that the unseasonably warm weather was a significant factor. The payback came in March, during which just 98 000 jobs were supposedly created, while February’s figure was revised lower by 16 000 and January’s figure was revised lower by 24 000. In 10 of the past 12 months for which we have a final estimate, that number was lower than the initial estimate, which indicates to me that the rate of job creation is slowing demonstrably.
It is important to place far more emphasis on the income that workers earn than the number of new workers entering the workforce. It is income growth that fuels consumer spending more so than additional jobs. On this count, the data does not look good. Average hourly earnings in March rose 2.7 percent on a year-on-year basis, down from 2.8 percent in February, and the length of the workweek shortened from 34.4 hours to 34.3.