A business climate that’s tricky to read

An ‘unprecedented’ political division looms behind otherwise positive yardsticks, economists say
Consumer confidence has been running at its highest levels since 2004 and boat sales were off to a strong start for 2017.

Consumer confidence has been running at its highest levels since 2004 and boat sales were off to a strong start for 2017.

To boost the economy, President Donald Trump has said he wants “historic tax reform” that would benefit corporations and the middle class, a 10 percent increase in defense spending and $1 trillion worth of infrastructure improvements over the next decade.

Such goals come with a high price tag, and the nation is as divided about the likely effects of Trump’s economic plans as it is about his policies on immigration and social issues.

The divide is so great that companies within and outside the marine industry may be finding it difficult to gauge Americans’ willingness to spend. Consumer confidence surveys that usually offer good guidance are seeing their results skewed by the optimism of Republicans and the pessimism of Democrats.

Richard Curtin, chief economist of the University of Michigan’s Surveys of Consumers, said at the end of February that the university’s Consumer Sentiment Index had been higher during the past three months than at any time since 2004. The index fell to 96.3 from 98.5 at the end of January, but remained at a relatively high overall level.

“Normally, the implication would be that consumers expected Trump’s election to have a positive economic impact,” Curtin said in a statement that accompanied the survey’s results. “That is not the case, since the gain represents the result of an unprecedented partisan divergence, with Democrats expecting recession and Republicans expecting robust growth.”

Curtin said that because neither recession nor strong growth is expected this year, “both extremes must eventually converge.”

When that might happen is anyone’s guess, so the hard numbers from reports about the goods Americans are buying now and how much they’re paying for them figure to be a better predictor of the consumer’s mood than surveys, at least early in the year.

Recreational boat sales had a strong start to the year (see Page 55). Statistical Surveys says sales rose 8 percent in January in the main powerboat segments and 9.5 percent industrywide from the same month last year in 28 states that represent about 59 percent of the U.S. market.

In the housing market, reports on sales of new and existing homes for January showed that consumers believed the economy was solid as the new year began.

Home resales reached a 10-year high, climbing 3.3 percent, to a seasonally adjusted annual rate of 5.69 million units, the National Association of Realtors reported. The Commerce Department said new-home sales rose 3.7 percent in January, to a seasonally adjusted annual rate of 555,000 units, a pace that was slower than expected.

“It is clear that the economy is moving forward solidly,” Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pa., told Reuters. “Consumers are confident and are buying homes, but builders are not getting their share of that demand.”

Taken together, the housing data show that consumers who have enough money to consider a house are confident about the future, regardless of what the politically skewed results of consumer confidence surveys show.

Reports on retail sales, building permits and the leading economic index for January — the most recent data available — also gave economy watchers reason to cheer.

The Conference Board says its Leading Economic Index rose 0.6 percent in January, to 125.5, after a 0.5 percent increase in December, “pointing to a positive economic outlook in the first half of this year,” Ataman Ozyildirim, the Conference Board’s director of business cycles and growth research, said in a statement. “The January gain was broad-based among the leading indicators. If this trend continues, the U.S. economy may even accelerate in the near term.”

Retail sales increased 0.4 percent in January, the Commerce Department said, exceeding forecasts and coming on the heels of a 1 percent gain in December that was higher than previously reported.

“This much-better-than-expected result for retail sales to start this year is going to add some credence and support to the strong recovery in consumer confidence we have seen since the presidential election,” a team at Wells Fargo Securities said in a research note that U.S. News & World Report quoted in a story about the retail sales numbers.

There certainly is room for the economy to grow. Often the second estimate of the nation’s gross domestic product reveals progress not apparent in the first reading, but that was not the case in the fourth quarter last year.

The Commerce Department’s initial estimate that growth occurred at an annual rate of 1.9 percent during the quarter was not revised upward when the final estimate was released at the end of February despite strong consumer spending. Business and government investment were revised downward for the quarter.

Nonetheless, Paul Ashworth, chief U.S. economist at Capital Economics, told the Associated Press that the second half of last year was significantly better than the first half and that the results of business and consumer surveys were encouraging.

“The marked improvement in the survey evidence recently suggests that growth will continue at a decent pace in the first half of this year,” Ashworth said.

He is predicting GDP growth of 2.5 percent in the first quarter.

Reports of improvements in the economy and consumer sentiment have attracted the attention of the Federal Reserve, which was strongly considering a rare increase in interest rates at the time this issue of Soundings Trade Only went to press.

Fed chairman Janet Yellen told the Executives Club of Chicago on March 3 that at its mid-March meeting the central bank’s policy-setting Federal Open Market Committee would evaluate “whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.”

Interestingly, Yellen said the Fed was responding to information in current economic reports and not on plans President Trump has to promote growth.

“At this point there is a great deal of uncertainty about just what policy changes will be put into effect. … We should be patient to see what happens,” she said.

This article originally appeared in the April 2017 issue.


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