The Fed Stays Put Again (But Some Were Ready to Make a Move): What We Learned During the Week of September 19 – 23

Despite the dissent of 3 of its voting members, the FOMC keeps its interest rate target steady once again. Meanwhile, tight inventories clip home sales during August. Here are the 5 things we learned from U.S. economic data released during the week ending September 23.

#1Yes, the Federal Reserve held firm with its interest rate target …but some voting members were ready to make a move. The policy statement released following the conclusion of last week’s meeting of the Federal Open Market Committee noted that the labor market “has continued to strengthen” and that economic growth “has picked up from the modest pace” of the first half of 2016. It also characterized consumer spending as “growing softly” but did note that business investment “remained soft” and that inflation was below the Fed’s 2% target rate. The statement also reaffirmed FOMC members’ expectations that both economic growth and labor market conditions will continue to improve and that inflation will slowly move towards its 2% target rate. With all of that in the backdrop, the FOMC members’ maintained its 0.25%-0.50% target for the fed funds rate, although the committee “judge[d] that the case for an increase…has strengthened.” 3 voting members of the FOMC did not vote with the majority and instead wanted to hike the target rate by a ¼ point to 0.50%-0.75%.

Released in conjunction were the latest economic forecasts of the FOMC members, which showed only minor changes. The median forecast for 2016 GDP slipped by 2/10ths of a point to +1.8%. The 2017 and 2017 GDP forecasts held steady at +2.0%. While the median 2016 unemployment forecast inched up 1/10th of a point to 4.8%, the 2017 and 2018 remained at 4.6% and 4.5%, respectively. The Fed’s preferred measure of inflation, the personal consumption expenditure (PCE) deflator not expected to hit its target of 2.0% until 2018.  As a result, FOMC members anticipate one rate hike this year, 2 rates hikes in 2017, and 3 rate hikes in 2018.fomc-fed-funds-forecasts-092316

#2Existing home sales took a half step back for a 2nd straight month during August. The National Association of Realtors’ measure of sales of previously owned homes decreased 0.9% to a seasonally adjusted annualized rate (SAAR) to 5.33 million units (+0.8% vs. August 2015). Sales declined in 3 of 4 Census regions, with the Northeast (+6.1%) being the positive outlier. The press release links tight inventories of homes for a major reason for the lagging sales pace. Inventories of unsold homes totaled 2.040 million units, down 3.3% from July 2016, 10.1% below August 2015 levels, and a 4.6 month supply. As a result, the median sales prices was 5.1% above that of a year earlier at $240,200.

#3Housing starts slowed in August, but homebuilders grew more confident during September. The Census Bureau estimates housing starts declined 5.8% during August to a seasonally adjusted annualized rate (SAAR) of 1.142 million units. This was 0.9% above the year ago rate. Starts of single-family units declined 6.0% from the July rate to 768,000 units while multifamily properties with 5 or more units slowed 6.9% to 403,000 units. August’s slowdown was centered in the South, where starts declined 14.8% during the month. Starts improved in the Northeast (+7.6%), Midwest (+5.6%), and West (+1.8%). Looking towards the future, the number of issued construction permits slipped 0.4% during the month to 1.139 million units (SAAR), which was 2.3% below the August 2015 rate. The SAAR of issued permits for single-family units increased 3.7% during the month while the equivalent measure for multi-family units (5+ units) dropped 8.4%. While the SAAR of completions fell 3.4% during August to 1.043 million units, it represented an 8.3% gain from the August 2015 pace of completions.

Meanwhile, the Housing Market Index (HMI), a measure of homebuilder sentiment from the National Association of Home Builders, jumped 6 points to a seasonally adjusted reading of 65. This was the 27th straight month in which the index was above 50 (indicative of a greater percentage of surveyed homebuilders seeing the housing market as “good” rather than “poor”) and its highest reading since October 2005. The HMI improved in all 4 Census regions, with the highlight being a 14 points surge in the West to a reading of 82. The current and expected sales indices rose 5 and 6 points, respectively, to matching readings of 71.  The index tracking the traffic of prospective buyers added 4 points to 48. The press release said that a number of homebuilders were “ seeing more serious buyers, a positive sign that the housing market continues to move forward.”

#4Chicago Fed data indicate economic growth slowed in August. The Chicago Fed National Activity Index (CFNAI) plummeted by 79-basis points during the month to -0.55. The CFNAI is a weighted index of 85 economic index set so that a reading 0.00 indicates economic growth is at the historic average. Of those 85 indicators, just 19 made a positive contribution to the headline index while the other 66 made negative contributions. All 4 major categories of indicators were drags on the CFNAI, led by those associated with production that made a negative contribution of -0.33 (down sharply from a positive +0.15 contribution in July). All pulling down the CFNAI were indicators associated with employment (-0.09), consumption/housing (-0.08), and sales/orders (-0.05). Despite the big drop, the moving average actually improved by 2-basis points to -0.07. This reading is indicative of economic growth that is slightly below its historic average.

#5An index of leading economic indicators also slipped during August. The Conference Board’s Leading Economic Index declined by 2/10ths of a point to a seasonally adjusted 124.1. The decrease in August followed gains during the 2 prior months and left the index 1.1% above its year ago mark. Only 4 of the index’s 10 components improved from their July readings, including the interest rate spread and stock prices. The biggest drag on the index was the average weekly manufacturing hours. The coincident index eked out a 1/10th of a point increase to 114.1 (+1.6% vs. August 2015), with 3 of 4 index components gaining from their July readings (nonagricultural payrolls, personal income net of transfer payments, and manufacturing/trade sales). The adding index inched up 2/10ths of a point to 122.1 (+3.0% vs. August 2015) as 4 of 7 index components improving during the month. The press release stressed that data still “points to moderate economic growth in the months ahead” despite the decline in the leading index.

Other data released over the past week that you might find of interest:
Jobless Claims (week ending September 17, 2016, First-Time Claims, seasonally adjusted): 252,000 (-8,000 vs. previous week; -19,000 vs. the same week a year earlier). 4-week moving average: 258,500 (-5.7% vs. the same week a year earlier).
Regional/State Employment (August 2016, Nonfarm Payrolls, seasonally adjusted): vs. July 2016: increased in 4 states & District of Columbia, down in 3 states, and essentially unchanged in 43 states. Vs. August 2015: increased in 35 states, declined in 2 states and unchanged in 13 states and the District of Columbia.

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

Industrial Production & Retail Sales Wilted, But Prices Perked Up in August: What We Learned During the Week of September 12 – 16

Industrial production and retail sales both shifted into lower gear as the weather heated up in August. Here are the 5 things we learned from U.S. economic data released during the week ending September 16.

#1Manufacturing output slowed in August. According to the Federal Reserve’s Industrial Production report, manufacturing output dropped 0.4% during the month and was 0.4% below year ago levels. Durable goods production fell 0.6%, while nondurables output slowed 0.2%. The declines in durable goods production were widespread, with output drops greater than 1.5% suffered for machinery (-1.9%), wood products (-1.6%), and electrical equipment (-1.6%). On the other hand, motor vehicle output gained 1.0% during August. A 2.1% drop in textiles production weighed on nondurable production. Overall industrial production slumped 0.4% in August and was 1.1% below that of August 2015. Mining output bounced up 1.0% during the month (reflecting increased oil and gas extraction) while production at utilities dropped 1.4%. There was a bit more downtime for factories during August—capacity utilization shed 4/10ths of a point to 75.5%. Manufacturing sector utilization also decreased by 4/10ths of a point to 76.2%.

#2Retail sales wilted in the heat of August. The Census Bureau estimates retail and food services sales declined 0.3% during the month to a seasonally adjusted $456.3 billion. This was 1.9% above year ago levels. Focusing on just retailers, sales dropped 0.5% during the month and were up a mere 1.4% from August 2015 levels. Suffering from sales declines were sporting goods/hobby stores (-1.4%), building material retailers (-1.4%), auto dealers (-1.0%), gas stations (-0.8%), furniture stores (-0.7%), and department stores (-0.6%). Retail sectors enjoying higher sales during the month were restaurants/bars (0.9%), apparel retailers (+0.7%), grocery stores (+0.4%), and electronic/appliance retailers (+0.1%). Sales at nonstore retailers (e.g., internet retailers) suffered a rare monthly decline with a 0.3% drop, which nevertheless remained 10.9% above their year ago sales pace.retail-sales-data-091616

#3Consumer prices ticked up, while wholesale prices stayed closer to recent trends. The Bureau of Labor Statistics reports the seasonally adjusted Consumer Price Index (CPI) increased 0.2% during August and were 1.1% above year ago levels. CPI for energy goods was unchanged during the month, as lower prices fuel oil (-2.5%) and gasoline (-0.9%), were counterbalanced by higher prices for utility delivered natural gas (+2.1%) and electricity (+0.5%). Food CPI held steady for the month. Net of both energy and food, core CPI grew 0.3% and was 2.3% above year ago levels (both at their highest point since February). The largest price gains during the month were with medical care commodities (+1.1%) and medical care services (+0.9%), with increases also seen for shelter (+0.3%), apparel (+0.2%), and transportation services (+0.1%). While prices for new vehicles were unchanged, they fell 0.6% for used cars and trucks.

Meanwhile, the final demand Producer Price Index (PPI) was unchanged for both the month and over the past 12 months. Net of energy (-0.8%) and food (-1.6%), core final demand PPI gained 0.3%, matching both January and June as its highest marks of the year. Nevertheless, core PPI was only 1.2% above year ago levels. A drop in wholesale food prices pulled down PPI for final demand goods 0.4% for the month. Net of energy and food, core final demand goods PPI edged up 0.1%. On the services side, PPI increased 0.1% for the month, even as price measures for trade (-0.6%) and transportation/warehousing (-0.4%) each declined. Earlier in the production cycle, wholesale prices continued to soften. Intermediate demand PPI for processed and unprocessed goods fell 0.1% and 2.8%, respectively, for the month with 12 month comparables at -3.1% and -8.4%, respectively.

#4 Employers, on net, plan to further expand payrolls during Q4. According to the Manpower Employment Outlook Survey, 22% of employers intend to increase staff levels during the final 3 months of 2016 while 6% plan to decrease staff levels.  The difference of +16% turns into +18% after seasonal adjustments. This was a 3-point gain from the Q3 forecast and matches the value from Q4 2015, which was the measure’s post-recession high. The Net Employment Outlook was slightly higher in the West (+19) and South (+18) versus that in the Northeast (+16) and Midwest (+16). The index was positive in all 13 tracked industries, with the biggest readings seen for leisure/hospitality (+30), wholesale/retail trade (+22), transportation/utilities (+20), and professional/business services (+17). The press release indicated that employers were “optimistic, though hesitant, with their hiring intentions.”

#5But then there is a contrarian view from small business owners, who had a less optimistic economic outlook. The Small Business Optimism Index from the National Federation of Independent Business slipped by 2/10ths of a point in August to a seasonally adjusted 94.4 (1986=100). This continued the trend, in which the index has stayed within a tight 2-point range for all of 2016. 5 of 10 index components increased from their July readings: current opening (+4), plans to make capital outlays (+3), current inventories (+2), plans to increase inventories (+1), and whether it is a good time to expand (+1). Declining were index components for expected economic conditions (-7), hiring plans (-3), expected real sales (-2), earnings trends (-2). The press release blames “uncertainty” and “the political climate” for the pessimistic views of small business owners.

Other data released over the past week that you might find of interest:
Jobless Claims (week ending September 10, 2016, First-Time Claims, seasonally adjusted): 260,000 (+1,000 vs. previous week; -9,000 vs. the same week a year earlier). 4-week moving average: 260,750 (-4.9% vs. the same week a year earlier).
University of Michigan Index of Consumer Sentiment (September 2016-preliminary, Index (1966 Q1=100), seasonally adjusted): 89.8 (unchanged vs. August 2016, +2.6 points vs. September 2015.
Business Inventories (July 2016, Manufacturers’ and Trade Inventories, seasonally adjusted): $1.813 trillion (unchanged vs. June 2016, +0.5% vs. July 2015).
Import Prices (August 2016, not seasonally adjusted): -0.2% vs. July 2016, -2.2% vs. August 2015.
Export Prices (August 2016, not seasonally adjusted): -0.8% vs. July 2016, -2.4% vs. August 2015.
Federal Budget (August 2016, surplus/deficit): -$107.1 billion (66.3% larger than August 2015 deficit). For 1st 11 months of FY16: -$620.8 billion (17.1% larger than that for 1st 11 months of FY15).
Treasury International Capital Flows (July 2016, Foreign Purchases of U.S. Securities, Change From Previous Month): +72.6 billion (vs. June 2016: +$7.6 billion , vs. +$7.1 billion).

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

Companies Seek More Workers, Service Sector Sputters: What We Learned During the Week of September 5 – 9

The number of job openings hit another post-recession high in July. Yet, the same month was not so hot for the service sector. Here are the 5 things we learned from U.S. economic data released during the week ending September 9.

#1Employers posted more job openings during July but expanded payrolls at a slower pace. The Bureau of Labor Statistics reports that there were a seasonally adjusted 5.871 million job openings at the end of the month, up 228,000 from June, 1.4% above year ago levels, and the most in the 16+ year history of the data series. This included 5.358 million private sector job openings (+2.2% vs. July 2015), with positive 12-month comparables in construction (+41.7%), professional/business services (+12.9%), transportation/warehousing (+7.2%), retail (+3.8%), and manufacturing (+3.6%). The number of job openings was below year ago levels in mining/logging (-43.5%), wholesale trade (-21.4%), financial activities (-12.3%), and the government (-6.0%). The number of people hired during the month expanded by “only” 97,000 jobs to 5.227 million hires, 2.8% above year ago levels. Private sector hiring totaled 4.861 million, a 3.2% gain from July 2015. Industries with the largest year-to-year percentage gains in hiring were professional/business services (+13.7%), construction (+11.0%), leisure/hospitality (+10.4%), and manufacturing (+3.8%). Job separations were 3.0% above year ago levels at 4.937 million, with voluntary quits (+9.4%) higher and layoffs (-5.1%) below their July 2015 readings.job-openings-and-hires-090916

#2Service sector growth appreciably slowed in August. The headline index from the Institute for Supply Management’s Report on Business shed 4.1 points to a seasonally adjusted 51.4. While this was the 79th straight month in which the measure was above the expansionary/contractionary threshold of 50.0, it was its lowest reading since February 2010. 3 of 4 headline index components declined during the month (business activity, new orders, and employment) while the measure for supplier deliveries improved from its July mark. 11 of 18 tracked service sector industries expanded during the month, led by utilities, real estate, accommodation/food services, and finance/insurance. The press release notes that a “majority” of companies participating in the survey had reported a “slowing in the level of business.”

#3Consumers continued to take on additional debt in July, but the growth in credit card balances decelerated. Consumers had non-real estate backed outstanding credit balances of $3.661 trillion, up $17.7 billion for the month. The 6.0% increase in the Federal Reserve measure over the past year reflected a slightly smaller 12-month comparable in comparison to what we have seen over the past few years. Outstanding nonrevolving credit balances (e.g., auto and college loans) expanded by $14.9 billion during the month to $2.692 trillion (+6.0% vs. July 2015). Outstanding revolving credit balances (i.e., credit cards) edged up by only $2.8 billion (following gains of $9.2 billion and $4.6 billion during the 2 previous months) to $969.0 billion. This also was 6.0% ahead of July 2015 outstanding balances. 

#4Consistent with the report above, layoff activity remained relatively light during the final days of summer. The Department of Labor reports that were 259,000 1st time claims made for unemployment insurance benefits on a seasonally adjusted basis during the week ending September 3rd. Weekly 1st time claims have been under 300,000 every week for more than year and a half. This was down 4,000 from the prior week and 16,000 below the count from the same week a year earlier. The 4-week moving average slipped by 1,750 to 261,250 claims (-5.5% below year ago levels). 2.055 million people were receiving some form of unemployment insurance benefits during the week ending August 20, a 4.6% drop from the year ago count.

#5The latest Beige Book once again finds a moderate pace of economic expansion. The latest edition of the Federal Reserve’s compilation of anecdotal information and insights as collected by the 12 district banks characterizes economic activity as expanding “at a modest pace” during all of July and the first half of August. Further, most of the business contacts interviewed for the report “expect moderate economic growth” into the fall. Consumer spending was “little changed,” although spending on automobiles had slowed. Nonfinancial services “gained further momentum” while manufacturing “rose slightly.” Residential real estate “grew at a moderate pace,” although tight inventories were constraining sales activity in some markets. Labor market conditions were described as “tight” with “moderate” payrolls growth (although there were some “upward wage pressures.”) Nevertheless, price gains had “remained slight overall.” Read more