Still stuck in a modest growth environment

The brutal winter suffered by most of the country (with the great exception of the West Coast, particularly California) has been a drag on the economy. We see it in disappointing retail sales, housing starts, and builder sentiment. But that doesn't mean the economy is about to roll over and die.  It just means that where there was some hope a few months ago that economic growth was picking up steam, we now see that it was only temporary. Until the outlook for policies changes (e.g., tax reform, reduced regulatory burdens) we should expect to see the economy continue to grow at a 2-3% pace.

January retail sales were disappointingly slow.

Architecture billings looked quite promising until a few months ago.

Terrible winter weather had a predictable impact on housing starts and builder sentiment. 

But despite these signs of a slowdown, commodity prices remain firm. In fact, they haven't budged from their flat trend of the past two years.

Commercial and Industrial Loans have actually picked up in the past several months, and are now at a new all-time high. Banks are more willing to lend, and businesses are more willing to borrow on the margin, and that means confidence is coming back. A lack of confidence has been one of the major headwinds in this recovery, and the return of confidence is therefore one of the most promising developments.

Swap spreads, shown in the chart above, are about as low as they have ever been. This is an absolutely critical variable, and it shows no signs of any fundamental deterioration in the economy or in financial markets. Sooner or later the bad winter weather will pass—and we in California dearly hope the rains will resume—and the economy will likely continue to grow at a modest pace.