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Weekly Economic Vital Signs - Wages Keep Growing


  • This is a weekly series focused on analyzing the previous week's economic data releases.
  • The objective is to concentrate on leading indicators of economic activity to determine whether the economy is strengthening or weakening, and the rate of inflation is increasing or decreasing.
  • This week we examine construction spending, new home sales and starts, ISM and PMI Services Indices, the trade deficit, and the jobs report for February.
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Construction Spending

Construction spending declined 0.6% in December, when it was expected to increase 0.3%, and the year-over-year rate fell 1.6%, which was the weakest growth rate in three years. What heavily weighed on this number was a 3.2% drop in single-family homes, which I expect to bounce back. Still, this report was weak across the board and reflects a slowing rate of economic growth, as can be seen below.

New Home Sales and Housing Starts

New homes sales rebounded 3.7% in December to an annual rate of 621,000, but the prior two months were revised lower by 71,000, and the year-over-year rate declined 2.4%.

We saw near-term strength in December in what was otherwise a very weak quarter, but I think we will see continued improvement in sales this year as median prices have declined 7.2% year over year.

Housing starts rebounded sharply in January from December’s wildfire-induced decline to an annual rate of 1.23 million. Permits rose 1.4% for the month to 1.345 million. This will give the sequential rate of economic growth a significant boost, but we still have a year-over-year decline of 7.8% for new construction.

I always focus on year-over-year growth rates, and for residential construction and new home sales, I see very modest improvement in 2019. It doesn’t weigh heavily into the rate of economic growth, but it doesn’t detract from it either.

PMI and ISM Services Indices

The service sector remains strong, which I attribute to new expansion highs in real-wage growth.

Markit’s survey of service sector companies in February showed business activity accelerating to a seven-month high. Its PMI services index rose to 56.0 from January’s reading of 54.2.

The survey saw improvement in new business, backlogs, employment and export orders. What I found notable was that inflationary pressures picked up, with faster increases in both

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This article was written by

Lawrence Fuller profile picture

Lawrence Fuller has been managing portfolios for individual investors for 30 years, starting his career at Merrill Lynch in 1993 and working in the same capacity with several other Wall Street firms before realizing his long-term goal of complete independence when he founded Fuller Asset Management.

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Comments (3)

Good article with lots of relevant information for us institutional investors. We remain positive on the prospects for the economy and the equity markets. The companies that we talk to are actually more positive now than they have been in a very long time. This would be about sixty-seventy predominantly US domiciled companies that we invest in. Thanks for your posts. They are very instructive.
JHHAlpha profile picture
Agree that modest wage increases (large increase cannot develop while there is yet global competition for products AND services) plus Treasury borrowing to cover a trillion dollar budget deficit, ought to be pushing debt instrument supply over demand, creating higher interest rates, although the long end may be stable as the economy declines.

I do not think it fair to state that trade policy now is not working, "December’s trade deficit of $59.8 billion was the largest since October 2008 during the financial crisis. Imports rose, while exports declined, which begs serious questions about the effectiveness of current trade policy. " There was a binge of importing to beat possibly increased tariffs, and new trade deals are not yet in place. Even with binge buying here, China and the EU (including especially Germany), export levels shrank, reflecting a world economy saturated in debt.

Here in the USA, a new consumer survey found that 80% of wage earners live pay check to pay check, while credit card debt is historically high--implying that our consumer driven economy is on the edge of falling, so your conclusions about pressure toward interest rates and the direction of the economy makes good sense at this time. However, as the economy does decline, we can expect interest rates to decline, including at the long end, with the fed aiding rate reductions.
Lawrence Fuller profile picture
@JHHAlpha I agree that recent history would dictate falling long-term interest rates with a slowing rate of economic growth, but I think it is possible to see long rates rise in the face of that slowdown. We are at a minimum seeing a repeat of the 2016 mid-cycle slowdown when the 10 year hit 1.6%, but now we are at 2.6%. I think we are going to 3.6 before we see 1.6 again. 3.6 may be all it takes to push us into a contraction given the debt levels at consumer/corporate/gov't levels.
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