THE MONTH IN BRIEF
You could say that Wall Street breathed a collective sigh of relief in February. Investors were encouraged by new developments in U.S.-China trade negotiations and by the minutes from the Federal Reserve’s most recent policy meeting. On Main Street, consumer confidence improved, while consumer spending kept pace. Home sales declined once more, but so did mortgage rates. Optimism about the potential of the markets seemed to outweigh pessimism about possible economic deceleration. The S&P 500 gained 2.97% for the month.1
DOMESTIC ECONOMIC HEALTH
All month, investors were focused on the possible impact that higher taxes on a wide range of Chinese imports might have on the economy. Those tariffs were scheduled to take effect at the start of March. Fortunately, hints emerged that the U.S. and China were making progress toward a deal to postpone their enforcement. As the month went on, discussions between trade negotiators picked up, and President Trump saw “substantial progress” being made. On February 24, he said that he would push back the March 1 deadline for the implementation of the new tariffs, without mentioning a new cutoff date. On February 28, U.S. trade officials announced that the deadline was suspended “until further notice.”2,3
The transcript from the January Federal Reserve policy meeting arrived at mid-month, with the hint that interest rate hikes might be paused. Fed policymakers felt that leaving the benchmark interest rate in its current range (2.25%-2.5%) “posed few risks at this point,” but left a door open to resuming the cycle of tightening if the economy gathered more steam. Additionally, “almost all” participants on the Federal Open Market Committee favored ending the central bank’s long-running reduction of its huge securities portfolio before 2020.4
A great jobs report arrived in February. During January, employers added 304,000 net new jobs. The unemployment rate did tick up to 4.0%; the U-6 jobless rate, which also counts the underemployed, interestingly rose 0.5% to 8.1%. Wages increased 3.2% during the 12 months ending in January.5
Both of the key U.S. consumer confidence indices rose during the month. The Conference Board’s gauge rebounded from a (revised) 121.7 January mark, all the way to 131.4, and the University of Michigan’s consumer sentiment index went from a 91.2 final January level to a 93.8 final February reading.5
Was the economy at risk of cooling off? Some of the most-watched economic indicators seemed to suggest as much. Consumer spending, as an example, had declined by 0.5% in December – not surprising given the 1.2% December fall for retail sales. Inflation was tepid, also: the Consumer Price Index advanced only 1.6% during the 12 months ending in January; though, the pace of core inflation (minus food and energy prices) reached 2.2%.5,6
As the month ended, the Bureau of Economic Analysis released its initial estimate of fourth-quarter growth: 2.6%, down from 3.4% in Q3. (The economy grew 2.9% across 2018.) Industrial output retreated 0.6% in January, and manufacturing output, 0.9%. On the bright side, the Institute for Supply Management’s Purchasing Manager Index, measuring the pace of the nation’s factory activity, improved 2.3 points in January to 56.6. (ISM’s service sector PMI went in the other direction, however, dipping 1.3 points to 56.7.)5,7
GLOBAL ECONOMIC HEALTH
The Brexit drama took yet another turn in late February. The March 29 deadline for the United Kingdom’s planned departure from the European Union remained, but a March 12 vote was scheduled in Parliament, giving lawmakers a choice to accept or reject a revised version of the Brexit deal that Prime Minister Theresa May presented to them in January. If May’s deal is spurned again, then Parliament will have the choice to vote for either a “limited” extension of the Brexit deadline (a postponement that the E.U. would have to approve), or a “hard” Brexit, with no deal in place (a move that many analysts fear would injure the U.K. economy for some time).8
Asian economies depend heavily on trade, and possible ripple effects of the U.S.-China trade disagreement were being felt last month. Chinese factory activity contracted for a third consecutive month in February. Hong Kong released data showing its GDP had shrunk 50% in the fourth quarter. South Korea, Japan, and Singapore all reported declines in exports in February. As to monetary policy, some dovish notes were being sounded. China’s central bank made noise about easing interest rates, and Japan was considering an economic stimulus.9,10
