The Fed Continues to Take Its Time: What We Learned During the Week of March 14-18

The Fed now says to expect 2 rate hikes in 2016 while lower prices hurt retail sales in February. Here are the 5 things we learned from U.S. economic data released during the week ending March 18.

#1The Fed stays pat and signals it will make fewer rate hikes in 2016 than previously believed. The policy statement released following last week’s 2-day meeting of the Federal Open Market Committee noted that economic activity grew “at a moderate pace despite the global economic and financial developments of recent months.” Improving were household spending, housing and the labor market while business investment and net exports were “soft.” Inflation remained below the Fed’s 2-percent target, thanks to price drops for energy
goods and imports. As a result and to the surprise of no one, the FOMC voted to keep the fed funds target rate at 031816between ¼% and ½% (although one voting member—Esther George—wanted a quarter point rate hike). Economic projections released in conjunction with the policy statement has a median prediction for the year end fed funds target rate at 0.875%, which would indicate there will be just 2 rate hikes in 2016. The Fed forecast released back in December had projected 4 rates hikes. The more recent set of projections also has GDP growing 2.2% this year with the unemployment rate at 4.7% and inflation at 1.2%.

#2Manufacturing activity inched up during February. The Federal Reserve estimates manufacturing output grew 0.2% during the month, including a 0.4% increase in durable goods production. Sectors with the largest monthly gains in output were machinery and primary metals while the production of wood products and automobiles both declined. Nondurable goods production slipped 0.1%. Overall manufacturing output has grown a relatively modest 1.8% over the past year, including a +1.6% 12-month comparable for durable goods. Overall industrial production dropped 0.5% as the aforementioned increase in manufacturing output was outweighed by slowdowns at utilities (-4.0%) and in mining (-1.4%, with big drops in crude oil extraction, coal mining and oil/gas well drilling/servicing). Overall capacity utilization decreased by 4/10ths of a percentage point to 76.7%, while that at manufacturing factories held steady at 76.1%. The 2 measures were at 78.4 and 75.7, respectively, a year earlier.

#3Lower prices pull down retail sales in February. The Census Bureau puts the seasonally adjusted value of retail sales during February at $447.3 billion, off 0.1% from January but 3.1% above year levels. Beyond February’s decline, the Census lowered its estimate of January retail sales from a 0.2% gain to a 0.4% decline. Plummeting gasoline prices translated into a 4.4% drop in sales at gas stations (note that the retail sales data are not adjusted for price changes). Net of sales at gas stations and at auto dealers (where sales chilled 0.2%), core retail sales gained 0.3% and were 4.3% above year ago levels (its best 12-month comparable since last July). Sales fell at furniture retailers (-0.5%), department stores (-0.4%), grocery stores (-0.3%) and electronics/appliance stores (-0.1%). Growing were sales at building materials stores (+1.6%), sporting goods/hobby retailers (+1.2%), restaurant/bars (+1.0%) and apparel retailers (+0.9%).

#4Both consumer and wholesale prices dropped in February with energy prices again the reason. According to the Bureau of Labor Statistics, the Consumer Price Index (CPI) failed to increase for a 3rd straight month with a 0.2% decline. Energy CPI dropped 6.0%, its largest single-month decrease in 13 months as gasoline prices plummeted 13.0%. Also falling were prices for fuel oil (-2.9%) and electricity (-0.2%). Food CPI grew for the 1st time in 4 months with a 0.2% bounce (prices for fresh fruit jumped 2.3% while those for nonalcoholic beverage gained 0.6%). Net of energy and food, core CPI increased 0.3% for a 2nd consecutive month, with higher prices for apparel (+1.6%), medical care commodities (+0.6%), medical care services (+0.5%) and shelter (+0.3%). Core prices have grown 2.3% over the past year, its largest 12-month comparable since April 2012 with higher prices for shelter (+3.3%) and medical care (+3.5%) leading the way. It is worth noting that other price measures watched more closely by the Fed have not quite risen to the 2-percent target rate.

Final demand Producer Price Index (PPI) also declined 0.2% during February, its 5th drop over the past 7 months. Wholesale prices for final demand goods slumped 0.6%, pulled down by drops of 3.4% and 0.3% for energy and food, respectively. The former reflected the impact of a 15.1% drop in wholesale gasoline prices and a 9.8% decline in diesel prices. Net of energy and food, producer prices for final demand core goods edged up 0.1%. PPI for final demand services was unchanged for the month as wholesale trade and transportation/warehousing services declined 0.4% and 0.7%, respectively. Over the past year, PPI was unchanged while PPI net of energy, food and trade services has grown by a paltry 0.9% since February 2015.

#5Even with a large number of job openings, hiring activity softened in January. The Bureau of Labor Statistics estimates there were 5.541 million job openings at the end of the month, up 4.9% from December and 11.4% from a year earlier. The count of private sector job openings was 13.9% above year ago levels to 5.075 million job, with the large year-to-year percentage gains seen in construction (+35.0%), wholesale trade (+27.1%), health care/social assistance (+26.6%), retail (+24.9%), professional/business services (+22.4%). Meanwhile, hiring slowed 6.9% to 5.029 workers, (-0.5% vs. January 2015), while separations declined by 225,000 people to 4,903 million workers (+4.1% vs. January 2015). Layoffs were 5.3% below the year ago pace while voluntary quits were 1.2% above year ago levels.

Other data released over the past week that you might find of interest:
Jobless Claims (week ending March 12, 2016, First-Time Claims, seasonally adjusted): 265,000 (+7,000 vs. previous week; -28,000 vs. the same week a year earlier). 4-week moving average: 268,000 (-12.2% vs. the same week a year earlier).
Housing Starts (February 2016, seasonally adjusted annualized rate): 1.178 million units (+5.2% vs. January 2016, +30.9% vs. February 2015).
Housing Market Index (March 2016, > 50 = “Good,” seasonally adjusted): 58 (vs. February 2016: 58, March 2015: 52).
University of Michigan Index of Consumer Sentiment (March 2016-preliminary, Index (1966 Q1 = 100, seasonally adjusted): 90.0 (vs. February 2016: 91.7, vs. March 2015: 93.0).
Leading Indicators (February 2016, Index: 2010 = 100, seasonally adjusted): 123.2 (vs. January 2016: 123.1, vs. February 2015: 120.9).
Manufacturers’ and Trade Inventories (January 2016, seasonally adjusted): $1.812 trillion (+0.1% vs. December 2015, +1.8% vs. January 2015).
Treasury International Capital Flows (January 2016, Domestic Securities Purchases by Foreigners): -$33.5 billion (vs. December 2015: -$43.4 billion, vs. January 2015: -$23.6 billion).

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

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