Business Conditions Stagger, Yet Consumers Perk Up for the Holidays: What We Learned During the Week of December 21-25

On one hand, a revised Q3 GDP estimate does not inspire nor does data on November business conditions. Yet, consumer sentiment improved as 2015 was wrapping up with Americans opening up their wallets. Here are the 5 things we learned from U.S. economic data released during the week ending December 25.

#1Final results are in: Q3 economic growth was restrained, hurt by tepid exports and a drag from inventories. The Bureau of Economic Analysis released its third estimate of third quarter Gross Domestic Product (GDP) and it barely changed from the 2nd estimate released a month earlier. GDP grew at a 2.0% seasonally adjusted annualized rate (SAAR) between the months of July and September, just off from the 2.1% gain reported a month earlier. As we saw previously, the biggest positive contributors to economic growth were consumption (adding 204-basis points to GDP growth), fixed nonresidential investment (+33 basis points), government expenditures (+32-basis points) and fixed residential investment (+27-basis points). Dragging on Q3 GDP growth were the change in private inventories (costing 72-basis points in GDP growth) and net exports (-26-basis points). Corporate profits (after adjustments for inventory valuation and capital consumption) fell 1.6% during the quarter to a SAAR of $2.050 trillion (-5.1% vs. Q3 2014).

#2Economic activity sputtered in November. The Chicago Fed National Activity Index (CFNAI), a weighted average of 85 economic indicators produced by the Federal Reserve Bank of Chicago, shed 13-basis points to a reading of -0.30. This was the measure’s lowest reading since May and the 6th time over the past 7 months in which it was below a reading of zero, indicative of below average economic growth. Most of November’s decline can be tied to a 16-point drop with economic indicators associated with production & income. graphic 122515Improving slightly during the month were indicators tied to consumption/housing, employment and sales/orders/inventories. The 3-month moving average for the CFNAI lost 2-basis points during the month to a reading of -0.20, it lowest point since March. Nevertheless, the moving average stayed above a reading of -0.70, indicating soft economic growth in the U.S. during the fall.

#3Consumers were spending more money in November. The Bureau of Economic Analysis estimates “real” personal consumption expenditures (PCE) picked up 0.3% during the month to a seasonally adjusted annualized rate of $11.323 billion (in 2009 “chained” dollars). This was the measure’s biggest increase in 3 months, yet spending up a relatively modest 2.5% from the same time a year earlier. While spending on services was flat from October, spending on goods increased 1.0%, with nearly equal gains for durables (+1.1%) and nondurables (+0.9%). Sales gains were spread out across most major categories of durable and nondurable goods. Nominal (i.e., not adjusted for inflation) spending also grew 0.3% during the month. The increased spending was funded by a 0.3% gain in nominal personal income (+4.4% vs. November 2014). Disposable income also grew 0.3% during the month, with a 0.2% increase after adjusting for inflation. The savings rate inched down 1/10th of a percentage point to +5.5% (November 2014: +4.6%).

#4A measure of consumer sentiment ended the year at a 5-month high. The Index of Consumer Sentiment from the University of Michigan added 1.3 points during December to a seasonally adjusted 92.6 (1966 Q1 = 100). This was an 8/10ths of a point improvement from the preliminary December reading reported a few weeks ago. All of December’s gain came from the present conditions index, which zoomed up 3.8 points to 108.1 (its best reading since June). The expectations index inched down 2/10ths of a point to 82.7. The press release attributes December’s increase to “lower inflation, which bolstered real income and brightened buying plans for household durables.” The group also said that the survey results also suggest a 2.8% increase in “real” consumer spending in 2016.

#5Paperwork slowdowns weighed on existing home sales during November, while new home sales perked up. The National Association of Realtors reports that sales of previously owned homes slumped 10.5% during the month to a seasonally adjusted annualized rate of 4.76 million units, its lowest point in 19 months. NAR attributes much of the decline to the new “Know Before You Owe” disclosure rules, which the association says has significantly extended closing times. As a result, NAR seemed relatively confident that November’s drop was not a sign of a “sudden, withering demand.” Sales were down in all 4 Census regions, with declines spanning from -15.4% in the Midwest to -6.2% in the South. Sales also were 3.8% below year ago levels, with the Northeast being the sole region with a positive 12-month comparable (+1.5%). Inventories of unsold homes contracted 3.3% during the month to 2.040 million units (-1.9% vs. November 2014 levels), the equivalent to a tight 5.1-month supply.

Meanwhile, the Census Bureau’s measure of new home sales grew 4.3% to a seasonally adjusted 490,000 units (+9.1% vs. November 2014 levels). Note that while NAR’s existing home sales data series tracks closed transactions, the Census Bureau’s new home sales data series measures only contract signings (and not necessarily closed transactions.) As a result, the Know Before You Owe issues largely were not in play with the new home sales data series. Sales gained on both a month-to-month and year-to-year basis in the West and South, but fell in the Northeast and Midwest. There were 232,000 new homes for sale at the end of November, up 2.2% from October and 10.5% from the same month a year ago.

Other data released over the past week that you might find of interest:
Jobless Claims (week ending December 19, 2015, seasonally adjusted): 267,000 (-5,000 vs. previous week; -13,000 vs. same week a year earlier). 4-week moving average: 272,500 (-5.5% vs. same week a year earlier).
Durable Goods (November, New Orders, seasonally adjusted): $238.8 billion (unchanged vs. October, +1.2% vs. November 2014).
FHFA House Price Index (October, seasonally adjusted): +0.5% vs. September, +6.1% vs. October 2014.

The opinions expressed here are not necessarily those of Kevin’s current and previous employers. No endorsements are implied.

Fed Raises Interest Rates, Earth Continues to Rotate Normally: What We Learned During the Week of December 14-18

The Fed finally made a move, manufacturing remained stuck in neutral and new home starts rebounded. Here are the 5 things we learned from U.S. economic data released during the week ending December 18.

#1The Fed bumps up short-term rates for the 1st time since 2006…but rates are expected to rise only at a leisurely pace going forward. There was no dissent among the voting members of the Federal Open Market Committee to increased the fed funds target from near 0-percent (where it had been since December 2008) to a range between 0.25% and 0.50%. The key point is that interest rates remain (and will remain) very low by historic measures. In fact, the Federal Reserve’s policy statement following last week’s FOMC meeting states that “the stance of monetary policy remains accommodative after this increase.” Further, the committee anticipates we will see “only gradual increases in the federal funds rate” over the intermediate term with rates remaining below normal long-term levels for some time. The policy statement noted 121815that the U.S. economy has been expanding at a “moderate pace” characterized by household spending and business investment spending each “increasing at solid rates,” a housing market that has “improved further” and a strengthening labor market. Still, net exports “have been soft” and inflation remains below the Fed’s 2 percent target rate.

So what will happen in the future with interest rates? Well, economic projections from FOMC members suggest rates will grow at a moderate pace. Forecasts for the fed funds target range for the end of 2016 from 1.1% to 2.2%, for the end of 2017 from 1.9% to 3.0% and for the end of 2018 from 2.9% to 3.5%. Each of these interest rate forecast are modest by historic standards. One reason is that FOMC members see moderate (but not spectacular) economic growth in the coming years, with forecasted GDP growth ranging from +2.3% to +2.5% in 2016 and ranging from +2.0% to +2.3% for 2017.

#2Manufacturing stuttered again as overall industrial production contracted for a 3rd straight month. The Federal Reserve estimates manufacturing output was unchanged during November and was up by only 1.0% from a year earlier. A 1.0% drop in automobile production pulled down durable goods output 0.2%, the 4th straight monthly decline (the durable goods metric was up a feeble 0.5% from November 2014 levels). Production of nondurables grew for the 1st time in 3 months with a 0.5% increase (+1.6% vs. November 2014), with most major nondurables categories experiencing gains during the month. Mining output fell by another 1.1% (its 3rd straight monthly decline), with oil & gas well drilling and servicing at levels less than half of that from a year ago. Meanwhile, utilities’ output fell 4.3% during November, thanks to relatively moderate weather conditions. Overall industrial production dropped 0.6% during November and was 1.2% below year ago levels.

#3Falling gasoline prices and the 1st drop in food prices since late winter resulted in flat consumer prices during November. The Consumer Price Index (CPI) from the Bureau of Labor Statistics was unchanged on a seasonally adjusted basis during the month and was up a mere 0.4% from a year earlier. Energy CPI dropped for the 3rd time in 4 months with a 1.3% decline as prices for gasoline (-2.4 %), fuel oil (-1.3%) and utility delivered natural gas (-1.9%) all fell. Food CPI dipped 0.1%, as prices declined for all major food groups except for the fruits/vegetables index. Net of energy and food, core CPI increased by 0.2% for the 3rd straight month and was up 2.0% from a year earlier. Core goods prices declined 0.2% (pulled down by prices for apparel and used cars/trucks) while core services prices picked up 0.3% (pushed up by higher prices for transportation services, medical care services and shelter.

#4Housing starts rebounded in November. The Census Bureau places the seasonally adjusted annualized rate of housing starts at 1.173 million units, which was up 10.5% from October and 16.5% from November 2014. Starts of single-family units gained 7.6% during the month while that for multi-family units zoomed up 16.4% (the latter data series tends to be particularly volatile month-to-month). Looking towards the future, the number of issued housing permits hit a post-recession high with a 11.0% gain to 1.289 million units (SAAR, +19.5% vs. November 2014). Month-to-month gains for single-family units and multi-family unit permits were +1.1% and 26.9%, respectively. Housing completions slipped 3.2% during November to 947,000 (SAAR), up 9.2% from the November 2014 rate.

#5A forward looking measure of economic activity finds a 2nd consecutive month of solid growth in November. The Conference Board’s Leading Economic Index added 5/10ths of a point to 124.6 (2010 = 100). This follows a 7/10ths of point gain in October that reversed 3 months of stagnation between July and September. Even with November’s gain, only 5 of the index’s 10 components improved during the month, led by building permits, the interest rate spread and stock prices. The coincident index inched up by 1/10th of a point to 113.3 with 3 of 4 index component increasing during the month (nonagricultural payrolls, personal income net of transfer payments and manufacturing/trade sales). The lagging index gained 4/10ths of a point to 119.6, with 3 of 7 components gaining during the month (outstanding commercial/industrial loans, change in consumer prices of services and the ratio consumer installment loans-to-personal income). Through its press release, the Conference Board said that “the economic outlook for the final quarter of the year and into the new year remains positive.”

Other data released over the past week that you might find of interest:
Jobless Claims (week ending December 12, 2015, seasonally adjusted): 271,000 (-11,000 vs. previous week; -18,000 vs. same week a year earlier). 4-week moving average: 270,500 (-8.1% vs. same week a year earlier).
Housing Market Index (December 2015, Diffusion Index, Seasonally Adjusted): 61 (vs 62 in November 2015, 58 in December 2014).
Regional & State Employment (November 2015, Seasonally Adjusted): Nonfarm payments expanded in 35 states and in the District of Columbia, contracted in 14 states and was unchanged in 1 other versus October 2015 levels.
Treasury International Capital Flows (October 2015, Net Domestic Purchases by Foreigners): -$50.2 billion (vs. +$9.4 billion in September 2015, $15.0 billion in October 2014).

The opinions expressed here are not necessarily those of Kevin’s current and previous employers. No endorsements are implied.

Retail Sales Start Off the Holidays Well: What We Learned During the Week of December 7 – 11

A decent start to the holiday retail season and continued solid labor market news are among last week’s highlights. Here are the 5 things we learned from U.S. economic data released during the week ending December 11.

#1Retail sales had a good start to the holiday season. The Census Bureau estimates retail sales were at a seasonally adjusted $448.1 billion. While this was up only 0.2% for the month, the pace of growth was held down by a relatively small slowdown in auto sales (-0.4%) and a price-driven drop in sales at gas stations (-0.8%). The savings from the latter appear to have been put into other retail segments. Net of sales at both auto dealers and gas stations, core retail sales were up 0.5% for the month and 3.6% above the year ago pace. Sales gains were widespread across most retail segments, with stores focused on furniture and building 121115materials being the major exceptions, each with 0.3% declines. Sales gained during the month at sporting goods/hobbies stories (+0.8%), apparel retailers (+0.8%), general merchandisers (+0.7%, although sales at non-luxury department stores were flat versus October), restaurants/bars (+0.7%) and electronics/appliance retailers (+0.7%). Sales at nonstore retailers (e.g., internet retailers, catalogs) gained 0.6% during the month and were 7.3% above their year ago pace.

#2The number of job openings remained well above year ago levels in October, but hiring activity was essentially flat. The Bureau of Labor Statistics says there were a seasonally adjusted 5.383 million job openings at the end of October. While this was a decline of 151,000 from September, it was 11.0% above year ago levels. There were 4.887 million private job opening at the end of October, off 154,000 from September but 10.1% above the October 2014 count. Industry sectors that enjoyed largest year-to-year gains in job openings were health care/social assistance (+27.0%), retail (+26.4%), government (+21.3%) and trade/transportation/utilities (+18.0%). Even with the sizable number of available jobs, employers are having difficult fill those openings. Hiring grew by 57,000 during the month to a seasonally adjusted 5.137 million. This was only 0.6% above the October 2014 pace, with private sector hiring actually 0.2% below its year ago pace at 4.790 million. The largest 12-month comparables for hiring were seen with the government (+14.5%), accommodation/food services (+8.1%) and health care/social assistance (+4.8%). Separations were essentially unchanged for the month at a seasonally adjusted 4.863 million (-0.9% vs. October 2014). Versus a year earlier, layoffs were down 4.3% while voluntary quits increased 1.2%—both signs of a solidifying labor market.

#3Wholesale prices grew at their fastest pace since the summer, but most of it was centered around larger margins at retailers & wholesalers. The Bureau of Labor Statistics’ final demand Producer Price Index (PPI) jumped 0.3% on a seasonally adjusted basis during November following 3 consecutive monthly declines (-1.3% vs. November 2014 levels). Falling for a 5th straight month was PPI for final demand goods (-0.1%), with a 0.6% drop for PPI for final demand energy goods (gasoline: -1.3%) and a 0.3% gain the prices for final demand food (fresh fruit/vegetables: +11.6%, eggs: +10.8%). PPI for final demand core goods (net of energy and food) slipped 0.1% for the month and was unchanged when compared to that of November 2014. Meanwhile, PPI for final demand services jumped 0.5% after 2 straight monthly declines. The metric for trade services, which measures increased margins of retailers and wholesalers, surged 1.2%. BLS attributes 40% of that gain to increased margins at retailers focused on apparel, jewelry, footwear and accessories.

#4The labor market outlook for Q1 2016 is positive. Twenty percent of the 11,000+ U.S. employers questioned for the Manpower Employment Outlook Survey indicate they will expand payrolls in during the first 3 months of 2016 while 6 percent anticipate a contraction in company employment. After seasonal adjustments, the difference of +14 gives us a Net Employment Outlook of +17. This was down a point from the Q4 2015 reading and up a point from the same quarter a year earlier. All 13-tracked industry segments had positive Net Employment Outlook readings, with the largest values seen for leisure/hospitality, transportation/utilities, wholesale/retail trade and professional/business services. The laggards include mining (think lower oil prices slowing drilling activity) and the government. As noted its press release, Manpower anticipates job growth in 2016 but indicated that “employers will increasingly feel the impact of rising wages and the on-going skills mismatch.”

#5The growth in credit card debt slowed sharply in October, checking the overall gain in consumer credit. The Federal Reserve estimates outstanding balances of non-real estate backed debt increased by $16.0 billion to $3.512 trillion (+7.0% vs. October 2014). This was the 2nd smallest gain in consumer credit balances since April. Revolving credit balances (i.e., credit cards) totaled $923.6 billion, up a mere $0.2 billion for the month (+4.4% vs. October 2014). Near record-level auto sales and continued growth in student loans led to additional $15.8 billion in outstanding nonrevolving credit balances, rising to $2.573 trillion (+7.9% vs November 2014).

Other data released over the past week that you might find of interest:                       
Jobless Claims (week ending December, 2015, seasonally adjusted): 282,000 (+13,000 vs. previous week; -7,000 vs. same week a year earlier). 4-week moving average: 270,750 (-8.2% vs. same week a year earlier).
Import Prices (November 2015): -0.4% vs. October 2015, -9.4% vs. November 2014.
University of Michigan Index of Consumer Sentiment (December 2015—Preliminary, Index 100=1966 Q1, Seasonally Adjusted) 91.8 (+0.5 vs. November 2015, -1.8 vs December 2014).
Treasury Budget (November 2015, Surplus/Deficit): -$64.6 billion (vs. -$136.5 billion in October 2015, -$56.8 billion in November 2014).
NFIB Small Business Optimism (November 2015, Index 100=1986): 94.8 (-1.3 vs October 2015, -3.3 vs. November 2014).

The opinions expressed here are not necessarily those of Kevin’s current and previous employers. No endorsements are implied.