Three reasons 2017 could be a growth year

A trio of strong reports last week gave U.S. economy watchers reason to cheer — retail sales, building permits and the leading economic index.
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A trio of strong reports last week gave U.S. economy watchers reason to cheer — retail sales, building permits and the leading economic index.

Together they portray an economy that may be poised to ride a trend of increasing consumer confidence to steady, sustained growth in 2017, although there are signs that inflation is on the rise, as well.

The Conference Board said Friday that its Leading Economic Index rose 0.6 percent in January, to 125.5, after an 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.”

Ian Shepherdson, chief economist at Pantheon Macroeconomics, told MarketWatch that the rebound in the leading economic index since the presidential election is consistent with plenty of survey and hard data.

“What we don’t yet know, though, is how long it will last,” he said.

The retail sales increase of 0.4 percent exceeded forecasts and came on the heels of a 1 percent gain in December that was higher than previously reported, the Commerce Department said.

Bloomberg described the advance as broad-based and said steady hiring, modest wage gains and price discounts were keeping consumers spending.

"Consumers are spending, with a big gain in January retail sales and a large upward revision to December sales," Gus Faucher, deputy chief economist at The PNC Financial Services Group, wrote in a research note that U.S. News & World Report quoted in a story about the results. "Some of it is because higher gasoline prices have pushed up nominal consumer spending, but much more is because of better fundamental conditions for household spending."

U.S. News said sales at sporting goods, hobby, book and music stores rose 1.8 percent for the month; spending at food and drinking establishments was up 1.4 percent, and electronics and appliance stores had a 1.6 percent sales gain.

"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 of researchers at Wells Fargo Securities wrote in a research note Wednesday that U.S. News also quoted.

In the housing industry, starts fell 2.6 percent, to a seasonally adjusted annual rate of 1.25 million units, in January, the Commerce Department said Thursday, but permits for future construction jumped 4.6 percent for the month, to a rate of 1.29 million units. That was the highest level since November 2015.

"The uptick should also be good news for inventory-constrained home buyers, as permits eventually become starts, which eventually become new homes for sale," Ralph McLaughlin, chief economist at the real estate hub Trulia, told U.S. News & World Report on Thursday. "As a result, we shouldn’t be surprised to see a strong increase in starts in mid-2017."

Amid the strengthening economy, inflation claimed a seat at the table as the cost of living rose the most in nearly four years. The Consumer Price Index rose 0.6 percent in January after a gain of 0.3 percent in December, the Labor Department reported Wednesday.

Against that backdrop, Federal Reserve chairman Janet Yellen said in congressional testimony last week that it “would be unwise” to delay further interest-rate increases too long.

Nonetheless, Barron’s said last week that the probability of a rate move at the Fed’s March 14-15 meeting has roughly doubled, but remains less than an even bet. Yellen acknowledged in her remarks before Congress that the nation’s fiscal path remains uncertain. President Donald Trump has only been in office for about a month.

"Of course, it is too early to know what policy changes will be put in place or how their economic effects will unfold," she said. "While it is not my intention to opine on specific tax or spending proposals, I would point to the importance of improving the pace of longer-run economic growth and raising American living standards with policies aimed at improving productivity."

Some who watch the Fed believe the central bank would be more likely to act at its May 2-3 meeting, although Yellen is not scheduled to speak publicly at the end of that meeting.

“We don’t think the absence of a press conference at the May meeting is an obstacle,” JP Morgan chief U.S. economist Michael Feroli wrote in a client note that Barron’s quoted in its story. “To the contrary, the FOMC may well be looking for an opportunity to move at a non-press conference meeting in order to convince the markets that every meeting is truly ‘live.’ ”

This week’s calendar of business reports is markedly thinner than last week’s. The housing market is the one to watch: The January report on home resales is set for today, and new-home sales data for the month will be released Friday.

Existing-home sales are forecast to have occurred at a seasonally adjusted annualized pace of 5.55 million for the month, up from 5.49 million in December. New-home sales are expected to have increased to a pace of 583,000 from 536,000 in December.

Consumer confidence, as expressed by the final February report of the University of Michigan’s Consumer Sentiment Index, is expected to have edged upward to 96.0 from a mid-month reading of 95.7.

Consumers appear ready to lift the economy more vigorously this year if it is managed well. Decision-makers should take notice.

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