Business Activity Was Rocky This Spring: What We Learned During the Week of June 20 – 24

As the world considers the economic and political implications of the Brexit vote, we learned last week that U.S. economic activity lagged during the spring. Here are the 5 things we learned from U.S. economic data released during the week ending June 24.

#1Two indicators of economic activity show soft business conditions this spring. The Chicago Fed National Activity Index (CFNAI), a monthly index based on 85 economic indicators that tracks overall economic activity, dropped 56-basis points during May to a reading of -0.51. While all 4 major categories of index components deteriorated from their April readings, the bulk of decline was associated with production/income-related economic indicators. 062416These measures made a negative contribution to the CFNAI of 32-basis points (a 45-basis point drop from their April contribution of +0.13). The other 3 major categories of index components also losing stream during May were: consumption/housing (off 7-basis points to -0.09), employment (off 3-basis points to -0.09) and sales/orders (off a basis point to -0.01). The CFNAI’s 3-month moving average shed 11-basis points to -0.36. This was the moving average’s lowest reading in nearly 4 years. Nevertheless, the reading is not indicative of an U.S. economy that was in a recession since it remained above -0.70. Rather, the moving average reading of -0.36 is consistent with below average economic growth.

The Conference Board’s Leading Economic Index lost 2/10ths of a point during May to a reading of 123.7. The index was unchanged from 6 months earlier and was up by only 1.2% from a year earlier. 6 of 10 components made a positive contribution to May’s leading index reading, including the interest rate spread, factory orders for nondefense/non aircraft capital goods, and building permits. The main drag was a bump up in 1st time unemployment insurance claims. The coincident index was unchanged for the month and was up 1.9% from a year earlier. 3 of the coincident index’s 4 components improved during May. The lagging index added 3/10ths of a point during the month to 121.5 (+3.8% vs. May 2015), as 5 of 7 index components enjoyed gains. The press release said the index readings suggest “moderate” economic growth over the coming months but warns that “volatility in financial markets and a moderating outlook in labor markets could pose downside risks to growth.”

#2Sales of previously owned homes inched ahead to a post-recession high during May. Existing home sales were a seasonally adjusted annualized rate of 5.53 million units during the month, up 1.8% from April, up 4.5% from a year earlier, and the fastest sales pace since February 2007. According to the National Association of Realtors, sales of previously owned homes improved in 3 of 4 Census regions during the month: West (+5.4%), South (+4.6%), and Northeast (+4.1%). Sales slowed 6.5% in the Midwest. There were 2.15 million homes available for sale at the end of May, up 1.4% from April but off 5.7% from May 2015. The resulting tight 4.7 month supply led to a 4.7% year-to-year increase in the median sales price of previously owned homes to $239,700. While warning that first-time homebuyers were “still struggling to enter the market,” NAR’s press release did predict that home sales “have the potential to mostly maintain their current pace through the summer.”

#3Even with a drop in May, new home sales also remained their near post-recession highs. The Census Bureau reports that new home sales were at a seasonally adjusted annualized rate of 551,000 units. Despite being down 6.0% for the month, new home sales were 8.7% above their year ago pace. Sales slowed in 3 of 4 regions—the Northeast, West, and South—but improved in the Midwest. 3 of 4 Census regions—the Northeast, Midwest, and South had positive year-to-year sales gains. Homebuilders had 244,000 homes on the market at the end of May (+1.2% vs. April 2016, +16.2% vs. May 2015), the equivalent to a 5.3 month supply.

#4Durable goods orders stumbled in May following 2 monthly gains. The Census Bureau estimates the value of new orders for durable manufactured goods declined 2.2% to a seasonally adjusted $230.7 billion (+1.5% vs. May 2015). Transportation goods orders fell 5.6% during the month as orders for vehicles (-2.8%) and defense aircraft (-34.1%) both slowed. Civilian aircraft orders grew 1.0% in May following the previous month’s 69.4% surge. Orders for non-transportation durable goods declined 0.3% during the month following gains of 0.3% and 0.5% during the 2 previous months. While orders for communications equipment jumped 4.7%, orders dropped for computers (-2.5%), primary metals (-1.4%), and fabricated metals (-0.3%). Shipments declined for the 3rd time over the past 4 months with a 0.2% drop. Non-transportation goods shipments slowed 0.3%. The value of unfilled orders expanded for the 4th time in 5 months with a 0.2% increase while inventories of durable goods contracted for the 10th time in the past 11 months with a 0.3% decline.

#5One survey finds consumers are slightly less optimistic about economic conditions. The University of Michigan Index of Consumer Sentiment came in at a seasonally adjusted reading of 93.5 for June, off 8/10ths of a point from the preliminary June reading released a few week ago, 1.2 points from May, and 2.6 point from a year earlier. The drop from May was the result of a weaker outlook for future economic business conditions, with an index reading 82.4 being off 2.5 points from May and 5.4 points from a year earlier. The present conditions index edged up 9/10ths of a point during the month to 110.8 (+1.9 points vs. June 2015). The press release stated that consumers do not anticipate a recession but they “increasingly expect a slower pace of growth in the year ahead.” Further, the results are consistent with GDP growth of less than 2.0% and real consumer spending increased 2.6% for all of 2016.

Other data released over the past week that you might find of interest:
Jobless Claims (week ending June 18, 2016, First-Time Claims, seasonally adjusted): 259,000 (-18,000 vs. previous week; -13,000 vs. the same week a year earlier). 4-week moving average: 267,000 (-2.6% vs. the same week a year earlier).
FHFA House Price Index (April 2016, Purchase-Only Index, seasonally adjusted): +0.2% vs. March 2016, +5.9% vs. April 2015.

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

FOMC Still Expects to Make a Move or 2 in 2016: What We Learned During the Week of June 13 – 17

The Federal Reserve does not act again (although it is still expecting to do so in 2016) while manufacturing takes another break. Here are the 5 things we learned from U.S. economic data released during the week ending June 17.

#1The Fed holds still again, but is forecasting 2 rate hikes in 2016…no, seriously. Following the unexpectedly weak May employment report, it was of little surprise that the Federal Open Market Committee decided to keep the fed funds target rate at between 0.25% and 0.50%. The policy statement released following last week’s FOMC meeting did note that economic growth “appears to have picked up,” but also said that job creation had “diminished.” Further inflation remained below the Fed’s 2 percent target rate with long-term expectations having “little changed, on balance, in recent months.” All voting FOMC members concurred with the decision to stay put, including Kansas City Fed President Esther George, who had been pushing for a rate hike at recent meetings.06162016

Accompanying the policy statement was the latest set of economic forecasts from FOMC participants. The median forecast for 2016 and 2017 GDP growth slipped to +2.0% for both years (from +2.2% and 2.1%, respectively, when the last set of forecasts released in March). While the unemployment rate for 2016 and 2017 held steady from the March forecasts of 4.7% and 4.6%, respectively, the forecast for core personal consumption expenditures (PCE) inflation edged up 1/10th of a percentage point to +1.7% and 1.8%, respectively.  Meanwhile, the median forecast sees 2 quarter-point hikes in the fed funds target rate before this year ends, although 6 FOMC participants only anticipate a single rate hike by this December. The median forecast for the fed funds target rate at the end of 2017 is now at 1.625%, down from the March’s forecast of 1.875%. Further, the end of 2018 rate forecast of 2.375% is down from the 3.00% forecast reported in March.

#2A slowdown at auto plants weighs on manufacturing activity during May. The Federal Reserve estimates manufacturing activity slowed 0.4% during May, its 2nd decline in 3 months. Output of durable goods slowed 0.7%, hurt by a 4.2% drop in auto production and a declines greater than 1.0% for wood products and machinery. Manufacturing activity for nondurable goods was flat for the month as increased output of food/beverage products and paper outweighed drops for most other nondurable goods products. Manufacturing output was 0.2% below year ago levels. This data comes from the Fed’s Industrial Production report, which has overall factory output declining for the 3rd time in 4 months (-0.4%) and being down 1.4% from a year earlier. Mining output (e.g., oil, coal) eked out a 0.2% gain following 8 consecutive monthly declines that left the measure 11.5% below year ago levels. Output at utilities fell for the 3rd time in 4 months with a 1.0% drop. Factory utilization slowed by 4/10ths of a percentage point to 74.9%–the same measure for the manufacturing sector also shed 4/10ths of a percentage point to 74.8%.

#3Retail sales have been decent this spring. The Census Bureau estimates retail sales during May were at $455.6 billion on a seasonally adjusted basis, up 0.5% for the month and 2.5% from a year earlier. Some of the gain was the result of higher gasoline prices (the index is not adjusted for price variations) with sales at gas stations growing 2.1%. Net of sales at gas stations and at auto and parts dealers (where sales were up 0.5% for the month), core retail sales gained 0.3%, its 4th straight monthly increase. The biggest sales gains were at sporting goods/hobby stores (+1.3%), apparel retailers (+0.8%), restaurants/bars (+0.8%), and health/personal care stores (+0.6%). Sales slowed 1.8% at building materials retailers and 0.9% at department stores. Nonstore retailers (e.g., web retailers) enjoyed a 1.8% gain in sales during May, with activity up 12.2% from a year earlier.

#4Homebuilders’ optimism is improving while housing starts hold steady. The Census Bureau reports housing starts slipped 0.3% during May to a seasonally adjusted annualized rate (SAAR) of 1.164 million units. Even with the small decline, housing starts were 9.5% above year ago levels. During the month, starts of single-family homes edged up 0.3% while those of multi-family homes slowed 1.2%. Looking towards the future, the SAAR of issued housing permits increased 0.7% to 1.138 million permits, fueled by a 5.9% bump in the count of issued permits for multifamily homes (Single-family home permits declined 2.0% during the month). Even with the gain, the number of issued permits was 10.1% below year ago levels (although single-family home permits were 4.8% above year ago levels). Total housing completions were at 988,000 units (SAAR), up 5.1% for the month but 3.5% under the year ago pace.

The National Association of Home Builders’ (NAHB) measure of builder confidence, the Housing Market Index (HMI), added 2 points during June to a seasonally adjusted reading of 60. This was the HMI’s best reading since January and the 24th straight month with a reading above 50 (indicative of a greater percentage of homebuilders characterizing the housing market as “good” as opposed to being “poor.”)  The index improved in 3 of 4 Census regions—South (64), Northeast (39) and West (64)—but slipped in the Midwest (56). The index for current sales of single-family homes grew by a point to 64 while the expectations index surged 5 points to match the post-recession high of 70 attained several times last year. The index measuring traffic of prospective buyers gained 3 points to 47, its best reading of 2016. The press release noted that homebuilders were seeing “higher traffic and more committed buyers.”

#5Both consumer and wholesale prices perk up in May. The Bureau of Labor Statistics estimates the Consumer Price Index (CPI) increased 0.3% on a seasonally adjusted basis during the month, its 3rd consecutive monthly gain. Also rising for a 3rd straight month were energy prices (+1.2%), reflecting higher prices for fuel oil (+6.2%), gasoline (+2.3%), and utility delivered natural gas (+1.7%). Food prices declined for the 2nd time in 3 months (-0.2%), pulled down by a 0.5% in prices for food at home (e.g., groceries). Net of energy and food, core consumer prices increased 0.2%, with gains in prices for apparel, medical care services, shelter, and transportation prices. Meanwhile, prices new and used cars, along with medical care commodities, declined during the month. Even with the recent gains, CPI has grown only 1.0% over the past year, while the core prices have risen 2.2% over the past year, the 7th month in which the 12-mnth comparable has been at or above 2.0%.

Meanwhile, the Producer Price Index (PPI) jumped 0.4% during, its largest single-month gain since January. Producer prices for final demand goods increased 0.7%, its biggest increase in a year. Driving the gain was a 2.8% surge in wholesale energy prices (+2.8%), with PPI for gasoline swelling 6.6%. PPI for final demand food goods gained 0.3% (its 1st increase since January), pulled up by higher prices for fresh/dry vegetables and oilseeds. Net of energy and food, prices for final demand core goods grew 0.3% for a 2nd consecutive month. PPI for final demand services increased 0.2%, as the measure for trade prices—essentially margins for retailers and wholesalers—gained 1.1%. Final demand PPI was unchanged over the past year while wholesale prices for core goods were up a modest 0.7% from May 2015 levels.

Other data released over the past week that you might find of interest:
Jobless Claims (week ending June 11, 2016, First-Time Claims, seasonally adjusted): 277,000 (+13,000 vs. previous week; +6,000 vs. the same week a year earlier). 4-week moving average: 269,250 (-2.6% vs. the same week a year earlier).
NFIB Small Business Optimism Survey (May 2016, Index (100=1986), seasonally adjusted): 93.8 (2/10th of a point vs. April 2016, down 4.1 points from May 2015).
Manpower Employment Outlook Survey (3rd Quarter 2016, Net Percentage of Employers Planning to Add Workers, seasonally adjusted): +15% (vs. +16 in 2016Q2, vs. +16% in 2015Q3).
Import Prices (May 2016, not seasonally adjusted): +1.4% vs. April 2016, -5.0% vs. May 2015; nonfuel import prices: +0.3% vs. April 2016, -1.7% vs. May 2015).
Export Prices (May 2016, not seasonally adjusted): +1.1% vs. April 2016, -4.5% vs. May 2015; nonagricultural export price: +1.0% vs. April 2016, -4.4% vs. May 2015).

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

Job Openings Growing, Hiring Does Not: What We Learned During the Week of June 6 – 10

There are many jobs openings on the market. Unfortunately, employers are not filling those positions. Here are the 5 things we learned from U.S. economic data released during the week ending June 10.

#1Employers have many job openings but are not having success finding workers to fill those jobs. The Bureau of Labor Statistics estimates there were a seasonally adjusted 5.788 million job openings at the end of April, an increase of 118,000 from March, up 3.7% from a year earlier and at a post-recession high. Private sector employers were seeking to fill 5.289 million positions at the end of April, up 4.1% from a year earlier. Industry segments with the largest year-to-year percentage increases in available jobs included wholesale trade (+40.3%), manufacturing (+23.1%), construction (+17.1%), and retail (+16.4%).

But it appears that 061016companies are having difficulty finding workers to fill these positions as hiring slowed by 198,000 in April to 5.092 million jobs. This was up a mere 0.4% from April 2015 and was the softest pace of hiring in 2 years. Private sector hiring was at 4.743 million jobs, up 0.3% from a year earlier. Sectors with the biggest year-to-year percentage gains in hiring were education services (+28.8%), manufacturing (+7.5%), and accommodation/food services (+6.2%). While separations slipped by 108,000 during the month to 4.988 million people, the count of voluntary quits was up 8.6% from a year earlier at 2.912 million. An increase in the number of people voluntarily leaving their jobs is indicative of a labor force that is optimistic about their job prospects. Also positive is the continuing trend of slow layoff activity—more on that below.

#2Productivity slowed during the 1st 3 months of 2016. The Bureau of Labor Statistics reports that nonfarm business labor productivity (output per hours worked) dropped 0.6% during Q1 of this year. This is a revision from the initial Q1 productivity report that had shown a 1.0% decline. This was the 2nd straight quarter of declining output per hours worked. Output increased by only 0.9% during the quarter while the number of hours worked grew 1.5%. Perhaps a signal of some future inflationary pressure is that unit labor costs jumped 4.5% during the 1st 3 months of 2016 thanks to a 4.2% gain in real hourly compensation. Manufacturing labor productivity increased 1.3% during Q1, with nondurable goods productivity up 4.2% while durable goods productivity declined 0.6%. Versus a year earlier, nonfarm business labor productivity grew a feeble 0.7% as a 2.3% increase in output came from a 1.6% increase in the number of hours worked.

#3Consumer took on more debt again in April, albeit at a slower pace. The Federal Reserve estimates outstanding consumer credit balances (not including real estate-back loans) expanded by $13.4 billion during the month to $3.602 trillion. This was up 6.2% from April 2015, its smallest 12-month comparable in more than 2 years. Outstanding revolving credit balances (e.g., credit cards) grew by $1.6 billion (its smallest month-to-month increase since January) to $951.5 billion. This was up 1.7% from a year earlier. Non-revolving credit balances—including loans for college and vehicle purchases—expanded by $11.8 billion to $2.650 trillion, representing a 6.5% increase since April 2015.

#4Wholesalers added to their inventories for a 2nd straight month in April. Inventories at merchant wholesalers grew 0.6% during the month to a seasonally adjusted $587.9 billion. This was 0.9% above year ago levels for the Census Bureau data series. Inventories of durable goods grew 0.2% to $355.0 billion, led by increases for lumber, machinery, electrical equipment, and hardware. Durable inventories remained 1.8% below year ago levels. Nondurable inventories expanded 1.3% during the month to $232.9 billion, with greater than 1 percent inventory gains for farm products, drugs, and apparel. Nondurable inventories have grown 5.5% since April 2015. The inventory-to-sales (I/S) ratio slipped a basis point to 1.35. A year earlier, the I/S ratio was at 1.31.

#5Even though hiring remains uneven, employers are keeping layoff activity in check. The Department of Labor estimates that there were a seasonally adjusted 264,000 1st time claims made for unemployment insurance benefits during the week ending June 4th, down 4,000 claims from the week before and 13,000 from the same week in 2015. 1st time jobless have been below 300,000 for an absolutely impressive 66 consecutive weeks and for 88 of the past 91 weeks. In fact, 1st time claims were once again approaching the post-recession lows that we were seeing back in February and March.

Other data released over the past week that you might find of interest:
CoreLogic Home Price Index (April 2016, Single-Family Home Index, seasonally adjusted): +1.75% vs. March 2016, +6.15% vs. April 2015.
University of Michigan Index of Consumer Sentiment (June 2016-preliminary, Index: 100 = 1966Q1, seasonally adjusted): 94.3 (down  4/10ths of a point from May 2016, down 1.8 points from June 2015).

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