US macro scorecard - February

A round-up of the most widely followed macro data points from the US, compared to expectations and the previous month's results.

US macro scorecard - February

Source: Bloomberg, Emirates NBD Research

Questions around the strength of the US economy have risen to the fore over the past few weeks as the collapse of several American banks in March highlighted that there are indeed facets of the economy that are already facing greater stress from higher interest rates, even if the bulk of the most-followed macroeconomic indicators have held up surprisingly well to date. That being said, even in February – which preceded the banking sector drama that began with the collapse of Silicon Valley Bank – our macro scorecard for the US was more red than green, in contrast to the previous month which displayed remarkable resilience in the most-followed data points.

With the bulk of the indicators of the past month undershooting both the previous month’s readings and expectations, and business confidence having likely taken a knock in recent weeks, the trajectory for the US could be softer over the coming months than we have seen recently. This appears to be a view held by the Federal Reserve as the economic projections unveiled at the March meeting now envisage growth of 0.4% this year, down from 0.5% previously. With the first quarter appearing to have held up fairly well, this downgrade from the December projection implies a deterioration through the rest of 2023.

Crucially for the Federal Reserve’s near-term decision making, however, the labour market continued to outperform in February (net gain of 225,000 on the NFP), while inflation, although slowing in line with expectations (6.0% y/y), remained far higher than the 2% target. The implications of these data points for the Fed’s dual mandate meant that the central bank followed through on a 25bps hike at its latest meeting despite the market turbulence in the weeks prior to the March 22 decision.

Aside from the labour market, the data releases of the past month were largely weaker. Consumer sentiment deteriorated according to the University of Michigan index, dropping to 63.4 from 67.0 previously even before the fallout from SVB really began. Persistent inflation has likely been weighing on household confidence, and there was evidence of this in the retail sales data for February also which contracted 0.4% m/m, in line with expectations. Eight out of the 13 categories measured saw a fall in spending and sales at restaurants and bars fell 2.2%, suggesting that the persistent price rises in the services sector are starting to weigh on expenditure.

There was also evidence of a slowdown in business investment as durable goods orders declined 1.0% m/m in February, missing projections of 0.2% growth. This was in part attributable to lower aircraft orders, but with a drop already in play before the banking sector turmoil, this could be exacerbated should credit conditions tighten significantly, thereby exerting a further drag on economic growth this year. There was an improvement in the manufacturing PMI for March but at 49.3 it remains in contractionary territory, as was the February ISM manufacturing survey which was at 47.7.