The Fed Moves, Likely to Repeat Twice More in 2018: June 11 – 15

The Fed raises its target for short-term interest rates as inflation moves ever so closer to targeted levels. Here are the five things we learned from U.S. economic data released during the week ending June 15.  

#1The Fed boosts short-term interest rates and appears ready to do so twice more again this year. The policy statement released following this past week’s meeting of the Federal Open Market Committee (FOMC) characterized economic activity as “rising at a solid rate” and that the labor market “continued to strengthen” with core inflation moving closer to the Fed’s two-percent target rate. The statement also noted that risks to future economic activity as being ”roughly balanced.” As a result, the committee voted unanimously to boost the fed funds rate by 25-basis points to a range between 1.75 and 2.00 percent. This was the FOMC’s second rate hike of 2018 but keeps the short-term interest target in a range the committee views as “accommodative.”

Accompanying the policy statement were the updated economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, which highlight a more optimistic view of near-term conditions. For example, the median forecast for 2018 economic growth increased by 1/10th of a percentage point to +2.8 percent and the expected unemployed rate dropped by 2/10ths of a percentage point to 3.6 percent. The forecasters also see a greater firming of inflation with the core PCE deflator (the Fed’s preferred measure of inflation) at +2.1 percent, up from the prior forecast of +1.9 percent. As a result, the median forecast for the fed funds target rate suggests two more quarter-point rate hikes this year (up from a single additional rate bump previously anticipated). Further, the median forecast points to three quarter-point hikes in 2019 and one rate hike in 2020.FOMC Fed Funds Forecast--2018-2020

#2Inflation continued to build steadily in May. The Consumer Price Index (CPI) grew 0.2 percent on a seasonally adjusted basis for the third time in four months, per the Bureau of Labor Statistics. Energy prices jumped 0.9 percent, as gasoline prices gained 1.7 percent. Food CPI held steady during the month. Net of energy and food, core CPI increased 0.2 percent and has grown 2.2 percent over the past year. (The 12-month comparable for the headline index was +2.8 percent). Jumping during the month were prices for medical commodities (+1.3 percent), new vehicles (+0.3 percent), and shelter (+0.3 percent) while prices declined during the month for used cars/trucks (-0.9 percent) and medical care services (-0.1 percent).

Meanwhile, the Producer Price Index (PPI) for final demand soared 0.5 percent (seasonally adjusted), its fastest rate of growth since January. The core measure, which nets out energy, food, and trade services, grew at a more modest 0.1 percent for a second consecutive month. Wholesale prices for final demand goods swelled 1.0 percent, led by the 4.6 percent surge in wholesale energy prices (PPI for gasoline: +9.8 percent). Final demand food PPI eked out a 0.1 percent increase.  Net of energy and food, core final demand goods PPI gained 0.3 percent. PPI for final demand services increased 0.3 percent for the fourth time in five months, which included the impact of a 0.9 percent advance in prices for trade services (reflecting larger retailer and wholesaler margins). Over the past year, final demand PPI has jumped 3.1 percent during which the core wholesale price measure (net of energy, food, and trade services) has risen 2.6 percent.

#3Retail sales surged in May. The Census Bureau estimates retail and food sales were at a seasonally adjusted $502.0 billion, up 0.8 percent from April and 5.9 percent from a year earlier. Motor vehicle sales jumped 0.5 percent while higher prices at the pump resulted in a 2.0 percent rise in gas station sales. Net of sales at auto dealers/parts stores and gas stations, core retail sales rose 0.8 percent to $443.1 billion (+5.1 percent versus April 2017). May was a good month for building material/garden supplies stores (+2.4 percent), department stores (+1.5 percent), apparel retailers (+1.3 percent), restaurants/bars (+1.3 percent), and health/personal care retailers (+0.5 percent). Sales slowed during the month at furniture stores (-2.4 percent) and sporting goods/hobby retailers (-1.1 percent).

#4Manufacturing decelerated in May. Per the Federal Reserve’s Industrial Production report, manufacturing output slumped 0.7 percent on a seasonally adjusted basis, leaving it 1.7 percent ahead of its year-ago pace. The report links much of the decline to a “major fire at a parts supplier” that had disrupted truck assemblies. Net of vehicle production, manufacturing slowed by a more modest 0.2 percent. Output of durables fell 1.2 percent (motor vehicles production plummeted 6.5 percent) while that of nondurable slipped 0.1 percent. Overall industrial production decreased 0.1 percent during the month but was up 3.5 percent over the past 12 months. Mining output grew for the fourth straight month (+1.8 percent versus April 2018 and +12.6 percent versus May 2017), led by increased oil and gas extraction. Higher demand for electricity led to a 1.0 percent increase in output at utilities.

#5Small business owners’ optimism blossomed during the spring. The National Federation of Independent Business’ Index of Small Business Optimism jumped by 3.0 points to a seasonally adjusted reading of 107.8. Not only was this a post-recession high for the sentiment measure, it also was its second-best reading in the index’s second-best reading ever (a 45-year history). Eight of the index’s ten components improved from their April readings, led by expected real sales (+10 points), expectations for the economy (+7 points), on whether it is a good time to expand (+7 points), and earning trends (+4 points). While noting difficult in their ability to find qualified workers to hire, the press release stated employers “now have more resources to commit to attracting candidates.” 

Other U.S. economic data released over the past week:
Jobless Claims (week ending June 9, 2018, First-Time Claims, seasonally adjusted): 218,000 (-4,000 vs. previous week; -22,000 vs. the same week a year earlier). 4-week moving average: 224,250 (-8.1% vs. the same week a year earlier).
Import Prices (May 2018, All Imports, not seasonally adjusted): +0.6% vs. April 2018, +4.3% vs. May 2017. Nonfuel imports: +0.2% vs. April 2018, +1.9% vs. May 2017.
Export Prices (May 2018, All Exports, not seasonally adjusted): +0.6% vs. April 2018, +4.9% vs. April 2018, Nonagricultural Exports: +0.5% vs. April 2018, +4.9% vs. May 2017.
University of Michigan Consumer Sentiment (June 2018-preliminary, Index of Consumer Sentiment, seasonally adjusted): 99.3 (vs. May 2018: 98.0, June 2017: 95.0).
Business Inventories (April 2018, Manufacturing and Trade Inventories, seasonally adjusted): $1.930 trillion (+0.3% vs. March 2018, +4.4% vs. April 2017).
Monthly Budget Statement (May 2018, U.S. Budget Surplus/Deficit): -$146.8 billion (vs. May 2017: -$88.4 billion). Deficit over first 8 months of FY 2019: -$532.2 billion (vs. +23.0% vs. first 8 months of FY 2018).

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

The Trade Deficit Shrinks, Job Openings Expand: June 4 – 8

The trade deficit narrowed while employers sought even more workers. Here are the five things we learned from U.S. economic data released during the week ending June 8.

#1A small rise in exports leads to a smaller trade deficit in April. The Census Bureau and Bureau of Economic Analysis find exports grew by $0.6 billion during the month to $211.2 billion (+9.9 percent versus April 2016) while imports contracted by $0.4 billion to $257.4 billion (+8.0 percent versus April 2016). As a result, the trade deficit narrowed to its lowest level since last September at -$46.2 billion. The goods deficit shrank by $1.0 billion to -$66.3 billion while the services surplus essentially held steady at +$22.1 billion. The latter was pushed up by a $0.3 billion gain in exported goods (led by industrial supplies, food/beverages) and a $0.7 billion drop in imported goods (driven by a $2.8 billion decline for consumer goods and a $0.9 billion drop for automobiles). The U.S. had its largest goods deficits with China (-$30.8 billion), European Union (-$13.2 billion), Mexico (-$6.0 billion), Japan (-$5.9 billion), and Germany (-$5.6 billion).Trade Deficit 060818

#2There were more job openings in April than the number of people unemployed. The Bureau of Labor Statistics reports that there were a seasonally adjusted 6.698 million job openings at the end of April, up 65,000 for the month, 9.7 percent from a year earlier, and the most in the 17+ year history of the data series. Further, there were more job openings at the end of the more than that were people unemployed (6.346 million). The number of private sector job openings has grown 10.0 percent over the past year to 6.117 million, with large 12-month comparables for transportation/warehousing (+46.2 percent), professional/business services (+22.9 percent), retail (+22.5 percent), manufacturing (+20.9 percent), and leisure/hospitality (+11.0 percent). Employers hired 5.578 million workers during the month, up 92,000 from March and 6.8 percent from a year earlier, with private sector hiring also rising 6.8 percent from April 2017 levels. 5.408 million people left their jobs during April, up 86,000 for the month and 5.8 percent from a year earlier. This number includes 3.387 million people who had voluntarily quit their jobs (+1.4 percent versus April 2017).

#3The service sector grew even hotter in May. The Institute for Supply Management’s NMI jumped by 1.8 points during the month to a seasonally adjusted reading of 58.6. This was the 100th straight month in which the measure has been above a reading of 50.0, indicative of an expanding service sector. All four components of the NMI improved from their April readings: supplier deliveries (+4.0), business activity/production (+2.2), new orders (+0.5), and employment (+0.5). Fourteen of 18 tracked service sector industries expanded during May, led by wholesale trade, mining, and real estate. The press release expressed optimism among survey respondents, but also noted some “concerns about the uncertainty surrounding tariffs, trade agreements and the impact on cost of goods sold.”

#4Fewer aircraft orders slowed factory orders in April. New orders for manufactured goods dropped 0.8 percent during the month to a seasonally adjusted $494.5 billion. This represented a 7.4 percent year-to-year increase for the Bureau of Labor Statistics measure. As we saw with the durable goods report a few weeks ago, the headline number was dragged down by a 28.9 percent drop in orders for civilian aircraft. Net of all transportation goods, factory orders gained 0.4 percent during the month and has grown 7.4 percent over the past year. Increasing during the month were orders for furniture (+2.2 percent), fabricated metal products (+1.8 percent), electrical equipment/appliances (+1.8 percent), primary metals (+1.4 percent), computers/electronics (+1.1 percent), motor vehicles (+1.0 percent), and nondurable goods (+0.1 percent). Shipments eked out a less than $0.1 billion gain to $492.8 billion (+7.2 percent versus April 2018) with shipments net of transportation goods up 0.4 percent for the month. Unfilled orders grew for the fifth time in six months (+0.5 percent to $1.153 trillion) while inventories expanded for the 18th straight month (+0.3 percent to $666.9 billion).

#5Productivity was more feeble during Q1 than previously believed. The Bureau of Labor Statistics estimates nonfarm productivity grew 2.7 percent on a seasonally adjusted annualized basis (SAAR) while hours worked grew 2.3 percent during the first three months of 2018. As a result, nonfarm productivity 0.4 percent during the quarter, down from the 0.7 percent previously estimates and below the 1.3 percent productivity growth rate during the final three months of 2017. Nonfarm productivity has grown 1.3 percent over the past year. Manufacturing sector productivity contracted 1.2 percent during the quarter, sharply down from a 0.5 percent gain previously reported. Even with the pullback during Q1, manufacturing sector productivity has surged 4.3 percent over the past year.

Other U.S. economic data released over the past week:
Jobless Claims (week ending June 2, 2018, First-Time Claims, seasonally adjusted): 222,000 (-1,000 vs. previous week; -12,000 vs. the same week a year earlier). 4-week moving average: 225,500 (-7.4% vs. the same week a year earlier).
Consumer Credit (April 2018, Outstanding Consumer Credit Balances (net of mortgages and other real estate backed loans, seasonally adjusted): $3.883 trillion (+$9.2 billion vs. March 2018, +4.8% vs. April 2017).

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

Job Creation, Consumer Spending Rise: May 28 – June 1

The labor market continued to chug along this spring. Here are the five things we learned from U.S. economic data released during the week ending June 1.

#1Job creation accelerated while the unemployment rate fell to another post-recession low in May. The Bureau of Labor Statistics reports that nonfarm payrolls expanded by a seasonally adjusted 223,000 jobs during the month, its largest single-month increase in three months and its 92 consecutive monthly gain. Public sector employers added 218,000 workers to their payrolls during the month while public sector payrolls expanded by 5,000. Industries adding the most jobs during May were health care/social assistance (+31,700), retail (+31,100), construction (+25,000), leisure/hospitality (+21,000), transportation/warehousing (+18,700), and manufacturing (+18,000). The average workweek held steady at 34.5 hours (May 2017: 34.4 hours) while the average for weekly earnings of $928.74 represented a 3.0 percent increase from that of a year earlier.

Nonfarm Payrolls 2014-2018-060118

Based on a separate survey of households, the unemployment rate slipped by 1/10th of a percentage point to 3.8 percent. The unemployment rate has not been this low since April 2000. The size of the labor force grew by a mere 12,000 while the labor force participation rate dropped by 1/10th of a percentage point to 62.7 percent (near its lowest reading in 40+ years). The labor force participation rate of adults aged 25-54 also declined by 1/10th of a percentage point to 81.9 percent. The typical length of unemployment was 9.2 weeks, down from 9.8 weeks in April and 10.4 weeks a year earlier. The broadest measure of labor underutilization—the U-6 series—shrank by 2/10ths of a percentage point to 7.6 percent. The same measure was at 8.4 percent a year earlier.

#2GDP growth slightly less robust during Q1 than previously thought. The Bureau of Economic Analysis estimates the Gross Domestic Product (GDP) for the first three months of 2018 was at $19.957 trillion on a seasonally adjusted annualized rate (SAAR). After adjusted for inflation, real GDP grew 2.2 percent (SAAR) during Q1, just below the 2.3 percent increase reported a month earlier and under the 2.9 percent growth rate achieved during the final three months of 2017. The biggest positive contributors to Q1 GDP growth were (in descending order) nonresidential fixed investment (adding 105-basis points to GDP growth), personal spending (+71-basis points), government expenditures (+20-basis points), change in private inventories (+13-basis points), and net exports (+8-basis points). Residential fixed investment cost eight-basis point of GDP growth during the quarter. Corporate profits slipped 0.6 percent during Q1 but were 4.3 percent ahead of that from Q1 2017. The BEA will revise its Q1 GDP estimate again later this month.

#3Personal spending rose for a second straight month in April. Real personal consumption expenditures (PCE) grew 0.4 percent on a seasonally adjusted basis following a 0.5 percent bump in March. The Bureau of Economic Analysis reports that spending on goods and services each gained 0.4 percent, with the increases for the former split by +0.3 percent and +0.4 percent for durable and nondurable goods, respectively. The increase in spending outpaced the 0.2 percent gain in real disposable income. Funding the difference was a contraction in the savings rate (down 2/10ths of a percentage point +2.8 percent). Over the past year, real PCE has grown 2.7 percent while real disposable income has expanded 1.9 percent. The same report finds inflation—as measured by the PCE deflator—growing 0.2 percent during April and rising 2.0 percent over the past year. The same comparbles for the core deflator (which removes both energy and food) were +0.2 percent and +1.8 percent, respectively.

#4Purchasing and supply executives report manufacturing activity accelerated in May. The Institute for Supply Management’s Purchasing Managers Index (PMI) added 1.4 points during the month to a seasonally adjusted reading of 58.7. This was the 21st straight month in which the PMI was above a reading of 50.0, indicating an expanding manufacturing sector. Four of five components of the index improved from their April readings: production (up 4.3 points to 61.5), new orders (up 2.5 points to 61.2), employment (up 2.1 points to 56.3), and supplier deliveries (up 9/10ths of a point to 62.0). The inventories index lost 2.7 points to 50.2. Sixteen of 18 tracked manufacturing sectors expanded during the month, led by textiles, nonmetallic mineral productions, and electrical equipment. The press release noted that survey respondents indicated that demand was “robust” but that tightness in both the labor market and supply chain are weighing on activity.

#5The private sector drove April construction spending. The Census Bureau places the seasonally adjusted annualized rate (SAAR) of construction put in place at $1.310 trillion, up 1.8 percent for the month and 7.6 percent from a year earlier. Private sector construction spending rose 2.8 percent to an annualized $1.014 trillion (+7.6 percent versus April 2017). Private sector residential construction spending jumped 4.5 percent, even though single-family home construction was flat during the month. Nonresidential spending increased 0.8 percent during April. Public sector construction spending slowed 1.3 percent during the month to an annualized $296.1 billion. Even with the decline, public sector spending has grown 7.7 percent over the past year. 

Other U.S. economic data released over the past week:
Jobless Claims (week ending May 26, 2018, First-Time Claims, seasonally adjusted): 221,000 (-13,000 vs. previous week; -32,000 vs. the same week a year earlier). 4-week moving average: 222.250 (-7.9% vs. the same week a year earlier).
Vehicle Sales (May 2018, Light Vehicle Retail Sales, seasonally adjusted annualized rate): 16.91 million units (-1.5% vs. April 2018, +0.7% vs. May 2017).
Conference Board Consumer Confidence (May 2018, Index (1985=100), seasonally adjusted): 128.0 (vs. April 2018: 125.6).
Pending Home Sales (April 2018, Index (2001=100), seasonally adjusted): 106.4 (vs. March 2018 = 107.8, vs. April 2018 = 108.7).
Agricultural Prices (April 2018, Prices Received by Farmers, not seasonally adjusted): -2.2% vs. March 2018, -3.1% vs. April 2017).
Beige Book

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