Equity markets sold off in response to an apparently more-subdued outlook for growth, although it is too early to really get a firm grip on how the situation will play out. Crude oil prices spiked above the US$100/barrel mark during intra-day trading on Thursday, before easing back to near $98 in Friday trading. Treasury bond yields dropped sharply on a flight to safety.

Next week, the overall economic indicators should still look quite positive. While real consumer spending was held down in January by nasty weather, the bellwether ISM gauges are expected to continue moving up in February, and motor vehicle sales are expected to be about unchanged.

Federal Reserve chairman Ben Bernanke will provide semi-annual testimony to Congress on March 1–2. The Fed's outlook has recently been upgraded, and the healing process in the financial markets is picking up pace. As a result, we expect a relatively upbeat report from Bernanke. In terms of the recent spike in crude oil and gasoline prices, Bernanke is expected to report that these shocks are likely to be temporary, and unlikely to have a material negative impact on the overall outlook for the next year or two. Despite the slightly upgraded outlook, Bernanke will strongly defend the Fed's current monetary stance and reiterate its intentions to complete the QE II program as originally planned.

Finally, we expect a sharp, positive upward bounce in U.S. February payroll employment when it is reported on Friday.

All told we are looking for a fairly positive set of indicators next week and that should be constructive for restoring confidence in the shaken financial markets.

Monday, February 28 – Personal Income, Consumption, and Prices (Jan.)

Personal Consumption, Nominal

• IHS Global Insight: 0.3%
• Consensus: 0.4%
• Last Actual: 0.7% (Dec.)

Personal Consumption, Real

• IHS Global Insight: 0.0%
• Last Actual: 0.4% (Dec.)

Core PCE Price Index

• IHS Global Insight: 0.2%
• Consensus: 0.1%
• Last Actual: 0.0% (Dec.)

Personal Income

• IHS Global Insight: 1.1%
• Consensus: 0.4%
• Last Actual: 0.4% (Dec.)

What to Look For

• Personal income to jump by 1.1%, aided by recent cut in the payroll tax rate.
• Real personal consumption spending to be flat, held down by nasty weather.
• The core PCE price index is expected to be up 0.2%, but yearly core inflation is still tracking well below 1.0%.

Implications

We expect personal income to rise 1.1% in January, after two consecutive monthly increases of 0.4%. The sharp increase reflects the cut in employee payroll taxes that was part of December's tax package. Without that boost, income growth would have slowed because wage and salary gains were weak in January, which was hit by bad weather. The winter storms that blasted the country should restrain growth in nominal personal spending to 0.3%, significantly lower than December's reading of 0.7%. After adjusting for inflation, real spending should be flat, since higher prices (especially for food and energy) will swallow up all of the nominal spending increase. Core PCE prices should increase 0.2% in January, their fastest increase since October 2009, matching the core CPI. On a year-over-year basis, the core PCE price index should rise 0.8%, up from December's 0.7%; still too low for comfort for the Federal Reserve, but no longer moving towards deflation.

Tuesday, March 1 – Construction Spending (Jan.)

Construction Put in Place

• IHS Global Insight: -0.9%
• Consensus: -0.4%
• Last Actual: -2.5% (Dec.)

Construction Excl. Residential Improvements

• IHS Global Insight: -1.0%
• Last Actual: -1.5% (Dec.)

What to Look For

• Overall construction spending is expected to decrease by 0.9%.

Implications

We are expecting a 0.9% decline in construction spending for January, due mainly to cold and snowy weather. Construction lost 32,000 jobs in January, according to the January employment report.

Tuesday, March 1 – ISM Manufacturing Index (Feb.)

• IHS Global Insight: 62.0
• Consensus: 60.8
• Last Actual: 60.8 (Jan.)

What to Look For

• The index is expected to rise to a level of 62.0.

Implications

We expect another rise in the ISM manufacturing index, which we project at 62.0 for February, reflecting rapid industrial growth. This would be the strongest reading since December 1983. All regional readings available so far for February have been very strong. The dark side of the release should be the prices index, because oil (and other raw materials) prices have continued to climb, threatening profit margins.

Tuesday, March 1 – Motor Vehicle Sales (Feb.)

• IHS Global Insight: 12.4 Mil.
• Consensus: 12.7 Mil.
• Last Actual: 12.5 Mil. (Jan.)

What to Look For

• Sales are expected to track near 12.4-million units (annual rate), about unchanged from January.

Implications

We expect a 12.4-millionunit pace for light-vehicle sales in February, keeping the monthly selling rate around the mid-12-million volume for the third consecutive month, as incentives programs continue to entice a gradually recovering consumer back to the auto market. 

Thursday, March 3 – Productivity (Final Q4)

Nonfarm Business Productivity

• IHS Global Insight: 2.2%
• Consensus: 2.6%
• Last Actual: 2.6% (Q4, preliminary)

Unit Labor Costs

• IHS Global Insight: -0.4%
• Consensus: -0.6%
• Last Actual: -0.6% (Q4, preliminary)

What to Look For

• Nonfarm business-sector productivity growth for the fourth quarter is expected to be revised down to 2.2%, from the original 2.7%, because of slower output growth in the fourth-quarter GDP revision.

Implications

Unit labor costs should be revised to show a slightly smaller decline (minus 0.4% rather than minus 0.6%), with lower output outweighing the impact of slower compensation growth.

The sharp rise in labor productivity growth during 2009 and 2010 was mostly the result of cost cutting. This strategy has reached its limit, and in order for companies to expand to meet growing demand, they will have to increase hiring. One of the drawbacks for ramping up on hiring is that labor productivity growth will drop for a while, since it takes time and manpower to train new workers. The slowdown in productivity growth will also lead to rising unit labor costs. Still, inflation is expected to remain tame.

Thursday, March 3 – ISM Non-Manufacturing Index (Feb.)

• IHS Global Insight: 60.0
• Consensus: 59.5
• Last Actual: 59.4 (Jan.)

What to Look For

• The ISM index for non-manufacturing industries is expected to climb nearly a half a point in February, to 60.0.

Implications

Activity levels are expected to pick up—freight volumes have continued to move up in recent weeks, propelled by higher levels of overall economic activity. Financial market conditions have generally improved as credit flows have started to thaw, although the jump in volatility at the end of the month due to instability in the Middle East is likely to prevent a higher reading.

Friday, March 4 – Employment Report (Feb.)

Nonfarm Payrolls

• IHS Global Insight: 190,000
• Consensus: 179,000
• Last Actual: 36,000 (Jan.)

Unemployment Rate

• IHS Global Insight: 9.2%
• Consensus: 9.1%
• Last Actual: 9.0% (Jan.)

Average Hourly Earnings

• IHS Global Insight: 0.2%
• Consensus: 0.2%
• Last Actual: 0.4% (Jan.)

What to Look For

• Payroll employment to bounce back and advance by a solid 190,000.
• Unemployment rate likely to edge back up to 9.2%.

Implications

Employment rose only 36,000 in January, but bad weather surely held back the increase. We estimate that the hit from the weather was around 70,000. February started out with another bout of extreme weather, notably in the Midwest, although conditions did improve by the time of the employment survey (in the week ended February 12). Most leading indicators, such as unemployment insurance claims and consumer confidence surveys, show the labor market improving. We expect total employment growth to climb 190,000 in February, with private employment growth just above 200,000 but government employment still declining. The unemployment rate has dropped by 0.8 percentage point in just two months, the biggest decline in more than 50 years. The drop has been so steep that we anticipate a 0.2-point correction in February, to 9.2%.