Another Fed Rate Bump to End 2017: December 11 – 15

Just in time for the holidays, the Federal Reserve bumps up its short-term interest rate target. Meanwhile, retailers start the holiday season with signs of strength. Here are the five things we learned from U.S. economic data released during the week ending December 15.

#1One last hike in the short-term interest rate target for2017. As widely anticipated, the Federal Open Market Committee (FOMC) raised its fed funds target rate by a quarter percentage point to a range between 1.25 and 1.50 percent. Even though this was the target rate’s highest point in nine years, the Fed sees current rates as being “accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.” The FOMC policy statement noted that the U.S. economy “has been rising at a solid rate” and that “labor market continued to strengthen.” Nevertheless, concerns remained about low inflation as it remained below the Fed’s two-percent target. Two FOMC members opposed the rate hike: Charles Evans and Neel Kashkari. Looking towards the future, FOMC members forecast three more quarter-point rate hikes next year and either two or three more in 2019.FOMC Fed funds target projections 121517

#2Manufacturing output edged up in November. The Federal Reserve reports that manufacturing production increased 0.2 percent on a seasonally adjusted basis during the month following an upwardly revised estimate of a 1.2 percent gain in October. Durable goods production expanded 0.4 percent, with gains across most product sectors (including a 1.7 percent bump for primary metals and 0.7 percent increases for both fabricated metals and machinery). Nondurables output held steady for the month, with a 1.7 percent increase in plastics/rubber products being the largest gainer and a 1.0 percent drop in apparel production the biggest decliner. Overall industrial production inched up 0.2 percent during November following a 0.2 percent gain in October. Mining output jumped 2.0 percent as oil and gas extraction rebounded following hurricane caused slowdowns during the prior month. Utility output fell 1.9 percent in October. Manufacturing output has risen 2.4 percent over the past year while the 12-month comparable for all industrial production was +3.4 percent.

#3Retailers enjoyed a good start to the holiday shopping season in November. The Census Bureau estimates retail and food services sales gained 0.8 percent during the month to a seasonally adjusted $492.7 billion. This was an improvement from the upwardly revised 0.5 percent sales gain during October and left sales 5.8 percent ahead of the year-ago sales pace. Sales at auto dealers/parts stores cooled 0.2 percent while those at gas stations rose 2.8 percent (as gasoline prices increased). Net of both auto dealers and gas stations, retail sales gained 0.8 percent during November following a 0.4 percent increase in October. Sales swelled 2.1 percent at electronics/appliance stores, 1.2 percent at both furniture stores and building material retailers, 0.9 percent at sporting goods/hobby retailers, and 0.7 percent at both apparel retailers and restaurants/bars. The ongoing shift away from brick and mortar retailers continued as nonstore retailers enjoyed a 2.5 percent month-to-month gain in sales, with activity up a sharp 10.4 percent from a year earlier.

#4Higher gasoline prices pulled up consumer prices during November. The Consumer Price Index (CPI) rose a seasonally adjusted 0.4 percent during the month following a much more modest 0.1 percent increase during October, per the Bureau of Labor Statistics. Energy CPI gained 3.9 percent, resulting from a 7.1 percent bump in gasoline prices. Food CPI held steady. Net of energy and food, core CPI increased 0.1 percent during November following a 0.1 percent gain in October. Rising during the month were prices for used cars/trucks (+1.0 percent), medical care commodities (+0.6 percent), new vehicles (+0.3 percent), shelter (+0.2 percent), and transportation services (+0.1 percent). Prices for apparel (-1.3 percent) and medical care services (-0.1 percent) dropped during the month. CPI has risen 2.2 percent over the past year while core CPI has a 12-month comparable of +1.7 percent.

Meanwhile, wholesale prices continued to firm during the same month. The Producer Price Index (PPI) for final demand increased 0.4 percent on a seasonally adjusted basis for the third consecutive month and has risen 3.1 percent over the past 12 months. The core final demand wholesale price measure, which nets out the impacts of food, energy and trade services, also gained 0.4 percent for the month and has a 12-month comparable of +2.4 percent. Prices for final demand goods jumped 1.0 percent, led by increases for wholesale energy and food of +4.6 percent and +0.3 percent, respectively. The former included the impact of the 15.8 percent surge in gasoline prices. Net of energy and food, PPI for final demand goods grew 0.3 percent. PPI for final demand services increased 0.2 percent despite a 0.3 percent drop in the measure for trade services prices (reflecting tighter margins for wholesalers and retailers).   

#5Employers expect to add more workers in early 2018. Twenty-one percent of the more than 11,500 employers responding to a survey by Manpower anticipate increasing staff levels during Q1 2018 while five percent expect to contract payrolls. The difference of +16 translates into a Net Employment Outlook of +19 after seasonal adjustments, which was its best reading in more than a decade. The Net Employment Outlook was positive all 13-tracked industries, led by led by leisure/hospitality (+28), transportation/utilities (+26), professional/business services +23), and wholesale/retail trade (+23). Net Employment Outlook readings improved in the Northeast (+17) and South (+18) but softened in the Midwest (+20) and West (+19). The press release noted seeing “a renaissance in industries like construction and manufacturing,” but also employers are “struggling” to find “people with the right skills” to fill open positions.

Other U.S. economic data released over the past week:

Jobless Claims (week ending December 9, 2017, First-Time Claims, seasonally adjusted): 225,000 (-11,000 vs. previous week; -26,000 vs. the same week a year earlier). 4-week moving average: 234,750 (-7.2% vs. the same week a year earlier).
Job Openings and Labor Turnover (October 2017, Number of Job Openings, seasonally adjusted): 5.996 million (-204,000 vs. September 2017, +7.3% vs. October 2016). Hiring: 5.552 million (+232,000 vs. September 2017, +6.8% vs. October 2016).
Import Prices (November 2017, All Imports, not seasonally adjusted): +0.7% vs. October 2017, +3.1% vs. November 2016. Nonfuel Imports: Unchanged vs. October 2017, +1.4% vs. November 2016.
Export Prices (November 2017, All Exports, not seasonally adjusted): +0.5% vs. October 2017, +3.1% vs. November 2016. Nonagricultural Exports: +0.6% vs. October 2017, +3.1% vs. November 2016).
Small Business Optimism (November 2017, Index (1986=100), seasonally adjusted): 107.5 (34-year high, vs. October 2017=103.8, November 2016: 98.4).
Monthly Treasury Statement (November 2017, Federal Government Surplus/Deficit): -$138.6 billion (vs. November 2016: -$136.7 billion). First 2 months of FY2018: -$201.8 billion (vs. first 2 months of FY2017: -$182.5 billion).
Business Inventories (October 2017, Manufacturers’ and Trade Inventories, seasonally adjusted): $1.886 trillion (-0.1% vs. September 2017, +3.5% vs. October 2016).
Treasury International Flows (October 2017, Net Foreign Purchases of U.S. Securities, not seasonally adjusted): +$7.5 billion (vs. September 2017: +$60.8 Billion, vs. October 2016: -$10.0 billion).

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

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