Americans’ Confidence Higher Now Than It Has Been in Over a Decade: What We Learned During the Week of December 26 – 30

The final holiday gift was a report that consumer sentiment surged during the last 2 months of 2016. Here are the 5 things we learned from U.S. economic data released during the week ending December 30.

#1Another measure of consumer sentiment jumped in December. The Conference Board’s Consumer Confidence Index added 4.3 points during the month to a seasonally adjusted reading of 113.7 (1985 = 100). This follows an 8.5 point bump in November and puts the measure at its highest reading in nearly 15 years. The expectations index surged by 11.1 points during the month to a reading of 105.5 (its highest point in 13 years) while the present conditions index shed 5.9 points to a reading of 126.1. The percentage of survey respondents who expect business conditions will improve over the short-term surged from 16.4% in November to 23.6% in December. Only 8.7% of survey respondents anticipate economic conditions will deteriorate in the coming months. The press release noted that older survey respondents were more likely to have had a “post-election surge in optimism for the economy, jobs and income prospects” while also pointing out that the high level of confidence will continue depending “on whether or not their expectations are realized.” Last week we learned that another confidence survey–the University of Michigan’s Index of Consumer Sentiment–also has surged in the time since the election. That measure hit a 13-year high in December.

#2One reason: the pace of layoffs remained slow for all of 2016. The Department of Labor reports that there were a seasonally adjusted 265,000 first-time claims made for unemployment insurance benefits during the week ending December 24. This was down 10,000 claims from the week before and 20,000 claims under the count from the same week a year earlier. First-time jobless claims have been below 300,000 for an impressive 95 consecutive weeks, a streak not seen for more than 45 years. The 4-week moving average for first-time jobless claims slipped by 750 to 263,000 claims, 5.1% below the moving average of a year ago. 2.140 million people were receiving some form of unemployment insurance benefits during the week ending December 10, 8.4% below the count from the same week in 2015.jobless-claims-123016

#3Increasing interest rates may have sapped home sales activity in November. The National Association of Realtors’ Pending Home Sales Index (PHSI) lost 2.7 points during the month to a seasonally adjusted reading of 107.3 (2001 = 100). This was only off 0.4% from its November 2015 reading. The index fell in 3 of 4 Census regions during the month: West (-6.7%), Midwest (-2.5%), and South (1.2%). The PHSI edged up 0.6% during the Northeast.  There was a similar pattern for the 12-month comparables. That is, the index was below its November 2015 readings in the Midwest (-2.4%), South (-1.3%), and the West (-1.0%). The index, which measures home purchase contract signings, was up 5.7% in the Northeast versus its November 2015 mark. The press release blamed the decline in sales to a “quick ascension of [interest] rates immediately after the election” and tight inventories of homes “in the affordable price range.”

#4Home prices continued to rise in October. The 20-city Case-Shiller Home Price Index jumped 0.6% on a seasonally adjusted basis during the month following a 0.5% gain during September. Prices increased in all 20 metro areas tracked, led by Atlanta (+1.4%), Cleveland (+1.3%), Tampa (+1.2%), Dallas (+1.0%), and San Francisco (+1.0%). The index has grown 5.1% over the past year but remained 7.1% under the measure’s peak value attained back in July 2006. The national Case-Shiller index gained 0.9% on a seasonally adjusted basis and was 5.6% above its October 2015 reading. This measure of home prices was 0.2% above its pre-recession peak value from June 2006. The press release noted higher interest rates and home prices that are expected to “outpace gains in wages and personal income” could end up cooling off the housing market.

#5Wholesalers tightened inventories during October. The Census Bureau reports that inventories of merchant wholesalers contracted 0.4% during the month to a seasonally adjusted $587.7 billion. This was also 0.4% smaller than that reported for October 2015. Durable goods inventories contracted 0.3% during the month to $352.9 billion (-2.2% vs. October 2015), led by declines in inventories for machinery (-1.0%), metals (-1.0%), and hardware (-0.8%). Inventories of furniture jumped 1.6% during the month. Inventories of nondurables shrank 0.4% during the month to $235.8 billion (+2.5% vs. October 2015). Falling were inventories of drugs (-3.2%) and chemicals (-1.1%) while growing were inventories of petroleum (+1.9%) and alcohol (+1.0%). The inventory-to-sales (I/S) ratio slipped by 2-basis points to 1.30. The I/S ratio for October 2015 was 1.33. The I/S ratios for both durable (1.63) and nondurable (1.00) goods fell by 2-basis points during the month.

Other U.S. economic data released over the past week:
Agricultural Prices (November 2016, Prices Received by Farmers (Index: 2011 = 100), seasonally adjusted): 83.6 (+3.5% vs. October 2016, -8.9% vs. November 2015).

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

‘Tis the season for another upward revision in Q3 GDP: What We Learned During the Week of December 19 – 23

July, August, and September were the best 3 months of U.S. economic growth in 2 years. But data also indicates the rate of economic growth slowed in November. Here are the 5 things we learned from U.S. economic data released during the week ending December 23.

#1Q3 GDP was even better than previously believed. The Bureau of Economic Analysis’ 3rd estimate of Q3 Gross Domestic Product (GDP) finds the U.S. economy grew at a seasonally adjusted rate of +3.5%, up from the +3.2% growth rate reported a month ago and the 2.9% gain reported 2 months ago. This was the fastest pace of economic expansion in 2 years. The most recent upward revision was the product of higher estimates for nonresidential fixed investment, personal consumption, and state & local government spending. Making positive contributions to Q3 GDP growth were consumption (adding 203-basis points to GDP), net exports (85-basis point contribution), the change in private inventories (49-basis point contribution), nonresidential fixed investment (18-basis point contribution), and government expenditures (14-basis point contribution). Dragging down GDP growth was residential fixed investment (costing 16-basis points in Q3 GDP growth). Corporate profits from current production jumped 5.8% during the quarter to a SAAR of $2.139 trillion. This was 2.1% above year-ago levels.gdp-q32016-122316

#2But 2 reports suggest economic growth slowed in November. The Chicago Fed National Activity Index, a weighted average of 85 economic indicators, shed 22-basis points during the month to a reading of -0.27. This was the measure’s lowest reading since August after being pulled down by production-related indicators (down 19-basis points to a negative -0.20 contribution to the CFNAI) and consumption/housing indicators (down 7-basis points to a negative -0.10 contribution). Showing small signs of improvement were indicators associated with employment (up a basis point to +0.02) and sales/orders (up 3-basis points to +0.01). Overall, only 31 of 85 of the indicators that make up the CFNAI made a positive contribution to the index. More positively, the 3-month moving average of the CFNAI improved by 6-basis points to -0.14. This reading, while an improvement from October, is indicative of below average economic growth.

The Conference Board’s Leading Economic Index held steady during November at a reading of 124.6 (2010 = 100). The stagnation occurred even as 7 of the 10 underlying index components improved during the month, including the interest rate spread, jobless claims, and the stock market. Dragging down the measure were indicators associated with building permits, average weekly manufacturing hours, and new manufacturing orders. The coincident index eked out a 1/10th of a point increase to a reading of 114.6, with 3 of 4 index components making a positive contribution to the index (led by nonfarm payrolls). The lagging index added 4/10ths of a point to 123.2 4 of the index’s 7 components made positive contributions, led by the duration of unemployment and the amount of outstanding commercial & industrial loans.

#3There was a 2nd straight month of only a modest increase in personal spending in November. The Bureau of Economic Analysis reports that real personal consumption expenditures (PCE) inched up 0.1% during the month, matching a similarly small gain during October. Spending on goods also grew 0.1%, with the 0.2% increase in spending on nondurables more than counterbalancing the 0.1% drop in spending for durable goods. Spending on services grew 0.2% during the month. Versus a year earlier, real personal spending has increased 2.9%. The small increase in spending occurred during November as both personal income and disposable income remained flat in nominal terms, with the latter slipping 0.1% after adjusting for price changes. Real disposable incomes have grown by only 2.3% over the past year. The savings rate slipped 2/10ths of a percentage point during the month to +5.5%.

#4Sales of previously owned and new homes both grew in November. The National Association of Realtors puts the seasonally adjusted annualized sales rate (SAAR) of previously owned homes at 5.61 million units, up 0.7% from October 2016 and 15.4% from a year earlier. Sales grew during the month in the Northeast (+8.0%) and the South (+1.4%) while the count of transactions fell in both the Midwest (-2.2%) and West (-1.6%). All 4 Census regions enjoyed double-digit percentage sales gains from their November 2015 marks. Housing inventories tightened further during the month—the 1.85 million homes on the market at the end of November were down 8.0% from October 2016, off 9.3% from November 2015, and represented just a 4.0 month supply. The median sales price of $276,800 was 4.9% above the November 2015 median sales price. The press release tied November’s sales gain to the “healthiest job market since the Great Recession” and buyers rushing in the housing market before interest rates rise.

Meanwhile, the Census Bureau estimates new home sales jumped 5.2% during November to a SAAR of 592,000 units (+16.5% vs. November 2015). Sales grew during the month in both the Midwest (+43.8%) and the West (+7.7%) and held steady in the Northeast while falling 3.1% in the South.  All 4 Census regions saw new home sales rise well above their November 2015 levels, with 12-month comparables spanning from a 10.8% gain in the West to a 39.4% surge in the Midwest. While the count of unsold new homes edged up 1.6% during November to 250,000 units (+8.7% vs. November 2015), this represented a still tight 5.1 month supply.

#5Consumer confidence hit a nearly 13-year high in December. The Index of Consumer Sentiment from the University of Michigan gained 4.4 points during the month to a seasonally adjusted reading of 98.2 (1966Q1 = 100). This was the measure’s highest reading since January 2004, although the index was up by only 2/10ths of a point from its preliminary December reading reported a few weeks ago. The current conditions index added 4.6 points during December to a seasonally adjusted reading of 111.9 while expected conditions index increased 4.3 points to 89.5. Over the past 2 months, the headline index has added 11.0 points. The press release tied the surge to “[a]n all-time record number of consumers spontaneously [that] mentioned the expected favorable impact of Trump’s policies on the economy.” This included expectations for “a stronger economy would create more jobs, ” but they were less sanguine on wage growth.

Other U.S. economic data released over the past week:
Jobless Claims (week ending December 17, 2016, First-Time Claims, seasonally adjusted): 275,000 (+21,000 vs. previous week; +6,000 vs. the same week a year earlier). 4-week moving average: 263,750 (-3.8% vs. the same week a year earlier).
Durable Goods (November 2016, New Orders, seasonally adjusted): $228.2 billion (-4.6% vs. October 2016).
FHFA House Price Index (October 2016, Purchase-Only Index, seasonally adjusted): +0.4% vs. September 2016, +6.2% vs. October 2015.

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

The Fed Bumps Up Short-Term Rates, Forecasts 3 Rate Hikes in 2017: What We Learned During the Week of December 12 – 16

For only the 2nd time in a decade, the Federal Reserve raised its short-term interest rate target. Meanwhile, both manufacturing output and retail sales were a bit soft during November. Here are the 5 things we learned from U.S. economic data released during the week ending December 16.

#1The Fed hikes its short-term interest rate target and forecasts 3 more rate hikes in 2017. The Federal Open Market Committee voted to raise its fed funds target rate by 25-basis points to a range between 0.50% and 0.75%. The policy statement released following the conclusion of the 2-day FOMC meeting noted that the U.S. economy was growing “at a moderate pace” and that labor market had “continued to strengthen.” It also noted that inflation remained below the Fed’s 2 percent target rate (largely from weakness in the prices for energy and imports). The unanimous decision to push up the fed funds target rate was because of “realized and expected labor market conditions and inflation.” Even with the move, the statement characterized the Fed’s monetary stance as “accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2 percent inflation.”

Accompanying the policy statement were updated economic forecasts from the FOMC meeting participants. The median forecast has GDP growth at +2.1% for the upcoming year and 2.0% growth during 2018, the unemployment rate at 4.5% during the next two year, and inflation moving close to the Fed’s 2% target over the period. FOMC participants expect a median of 3 fed fund target rate hikes during both 2017 and 2018 and place the fed funds target rate at between 2.75% and 3.00% by the end of 2019. (It is worth noting that a year ago, the FOMC participants had predicted 4 rate hikes during 2016. It turns out last week’s rate hike was the one and only move the FOMC made this year).

fomc-fed-funds-target-forecast-121616

#2Manufacturing production slipped during November. The Federal Reserve estimate manufacturing sector output slowed 0.1% during the month and was just 0.1% above November 2015 production levels. Output of durable manufactured goods declined 0.3%, reflecting a 2.3% decline in motor vehicle production. Manufacturing of nondurable goods grew 0.3%, as the production of petroleum and coal products surged 3.3%. Overall industrial production dropped 0.4% during November. During the same month, output at utilities plummeted 4.4%, but that in the mining sector gained 1.1%. Capacity utilization declined by 4/10ths of a percentage point to 75.0% (November 2015: 75.7%) while that in manufacturing edged down 1/10th of a percentage point to 74.8% (November 2015: 75.3%).

#3Retail sales sputtered in November following several months of strength. The Census Bureau estimates sales of retail and food services edged up 0.1% during the month to a seasonally adjusted $462.3 billion. This followed a 0.6% increase during October, helping put retail sales 3.8% above the year ago pace. Sales at auto dealers and parts stores dropped 0.5%—net of auto dealer transactions, retail sales grew 0.2% during the month and were 3.9% above the November 2015 rate. Sales increased at restaurants/bars (+0.8%), furniture stores (+0.7%), food/beverage stores (+0.4%), and building material retailers (+0.3%). Sales fell at sporting goods/hobby retailers (-1.0%) and department stores (-0.2%). Beyond brick and mortar stores, even though nonstore retailers (including web retailers) saw sales grow a modest 0.1% during the month, they still had a robust 12-month comparable of +11.9%.

#4Bureau of Labor Statistics’ data show prices continued to firm during November. The Consumer Price Index (CPI) grew 0.2% on a seasonally adjusted basis during the month and was 1.7% above November 2015 levels. Leading the increase was a 1.2% gain in energy CPI, which included a 2.7% bump in gasoline prices. The 12-month comparables for the energy and gas indices were +1.1% and +1.0%, respectively. Food CPI was unchanged for the 5th consecutive month, with the measure off 0.4% from a year earlier. Net of both energy and food goods, core CPI grew 0.2% during the month (its fastest growth rate since August) and was up 2.1% from a year earlier. Rising were prices for transportation services (+0.4%), shelter (+0.3%), used cars/trucks (+0.3%), and medical care services (+0.2%). Falling were prices for apparel (-0.5%), medical commodities (-0.5%), and new vehicles (-0.1%).

Meanwhile, the Producer Price Index (PPI) for final demand grew 0.4% during November, its fastest growth rate since June and leaving the measure of wholesale prices up 1.3% since November 2015. “Core” final demand PPI (net of energy, food, and trade services) was up 0.2% during November and up 1.8% from a year earlier. Wholesale prices for final demand goods also grew 0.2%, which included the impact of a 0.3% drop in energy prices and a 0.6% increase in food prices. PPI for final demand services gained 0.5% during the month as the trade index (tracking margins at retailers and wholesalers) jumped 1.3%.

#5Housing starts slowed in November, but homebuilder sentiment zoomed to an 11.5 year high in December. The Census Bureau estimates that housing starts slumped 18.7% during November to a seasonally adjusted annualized rate of 1.090 million units. This was also off 6.9% from a year earlier. Starts fell during the month in all 4 Census regions and across home types. In the case of the latter, starts of single-family homes dropped 4.1% during the month while starts of multi-family properties with at least 5 units plummeted 43.9%. Looking towards the future, the number of issued housing permits declined 4.7% during November to a SAAR of 1.260 million permits (-6.6% vs. November 2015). More hopeful was the small increase in issued permits for single-family units (778,000 units, +0.5% vs. October 2016, +5.9% vs. November 2015). Home completions surged 15.4% during the month to 1.216 million units (SAAR, +25.0% vs. November 2015).

The Housing Market Index (HMI) jumped 7 points to a seasonally adjusted reading of 70. This was the National Association of Home Builders measure’s best reading since July 2005 and was the 30th straight month in which the HMI was above a reading of 50 (indicative of a greater percentage of builders characterizing the housing market as “good” rather than seeing it as “poor”). The HMI grew in all 4 Census regions. Also improving during the month were indices for current sales of single-family homes (up 7 points to 76), expected sales of single-family homes (up 9 points to 78), and traffic of prospective buyers (up 6 points to 53). The press release suggests that the jump in “confidence could be considered an outlier,” (attributed to a post-election “bounce”). But the press release also noted that “the fact remains that the economic fundamentals continue to look good for housing.”

Other U.S. economic data released over the past week:
Jobless Claims (week ending December 10, 2016, First-Time Claims, seasonally adjusted): 254,000 (-4,000 vs. previous week; -21,000 vs. the same week a year earlier). 4-week moving average: 257,750 (-5.6% vs. the same week a year earlier).
Manpower Employment Outlook Survey (2017 Q1, Net Employment Outlook, seasonally adjusted): +16 (vs. +18 for 2016 Q4, vs. +17 for 2016 Q1).
Import Prices (November 2016, not seasonally adjusted): -0.3% vs. October 2016, -0.1% vs. November 2015.
Export Prices (November 2016, not seasonally adjusted): -0.1% vs. October 2016, -0.3% vs. November 2015.
Manufacturing & Trade Inventories (October 2016, seasonally adjusted): $1.813 trillion (-0.2% vs. September 2016, +0.4% vs. October 2015).
Small Business Optimism Index (November 2016, Index (1986=100), seasonally adjusted): 98.4 (October 2016: 94.9, November 2015: 94.5).
Regional/State Employment (November 2016, Change in Nonfarm Payrolls, seasonally adjusted): Vs. October 2016:  Up in 9 states, down 2 states, virtually unchanged in 39 states in the District of Columbia.  Vs. November 2015: Up in 31 states and the District of Columbia, down in 1 state, and essentially unchanged in 18 states.
Federal Treasury Budget (November 2016, Surplus/Deficit): -$136.7 billion (vs. -$44.2 billion in October 2016, vs. -$64.5 billion in November 2015). For 1st 2 months of FY2017: -$180.8 billion (vs. -$201.1 billion during the 1st 2 months of FY2016).
Treasury International Capital Flows (October 2016, Net Foreign Purchases of Domestic Securities): -$6.0 billion (vs. -$46.6 billion in September 2016, -$45.8 billion in October 2015).

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