The Fed Shares One Final Gift Before the Holidays: December 17 – 21

The Federal Reserve hiked its short-term interest rate target for a fourth and final time in 2018. Here are the five things we learned from U.S. economic data released during the week ending December 21.

#1The Fed bumps up short-term rates but forecasts fewer hikes in 2019. The statement released following last week’s meeting of the Federal Open Market Committee once again noted that “the labor market has continued to strengthen and that economic activity has been rising at a solid rate.” Also, it indicated that core inflation was near its two-percent target rate, but also pointed out that business investment had “moderated.” Unlike with previous statements, this one included a comment that the committee “will continue to monitor global economic and financial developments and assess their implications for the economic outlook.” This is a reference to (among other things) the potential impact of tariffs, Brexit and partial government shutdowns. With all of this in mind, the committee voted unanimously to bump up the fed funds target rate by a quarter point to range between 2.25 and 2.50 percent. The hike was widely expected, despite some external cajoling to the contrary.

Released in conjunction with the policy statement was economic projections of Federal Reserve Board members and Federal Reserve Bank presidents and one big takeaway was an expectation for slightly slower economic growth than previously predicted. The median forecast now has gross domestic product (GDP) growing 2.3 percent in 2019, whereas the previous prediction had growth at 2.5 percent. The median projection for the unemployment rate next year remained at 3.5 percent, but the core inflation rate now is expected to be 2.1 percent in 2019 (versus the previous 2.0 percent forecast). Most notable is the median prediction among FOMC members now has two hikes in the fed funds target rate in 2019—previously, FOMC members had anticipated three hikes next year.Fed Funds Target Rate Forecast.png

#2A revised Q3 GDP estimate continued to show robust economic growth. The Bureau of Economic Analysis’ third estimate of Q3 gross domestic product has the U.S. economy expanding at a healthy 3.4 percent seasonally adjusted annualized rate. This was just below the 3.5 percent rate of expansion reported in the first two previously published estimates. The downward revision was a product of lower than previously believed estimates of consumer spending and exports (only partially counterbalanced by an upward revision to private inventory accumulation). Corporate profits (with inventory valuation and capital consumption adjustments rose 3.5 percent to $2.321 trillion (+10.4 percent versus 2017 Q3).

#3Personal spending remained resilient in November. The Bureau of Economic Analysis estimates real (inflation-adjusted) personal consumption expenditures (PCE) increased 0.3 percent on a seasonally adjusted basis during the month. While this was half of October’s 0.6 percent bounce, it leaves real PCE up 2.8 percent over the past year. Real spending on goods rose 0.9 percent during November while services expenditures expanded at a more modest 0.2 percent. The 12-month comparables for both were a solid +3.4 percent and +2.8 percent, respectively. Funding the increased spending were 0.2 percent gains for nominal personal income and both real and nominal disposable income. Real disposable income has grown by 2.8 percent over the past year. The savings rate was +6.0 percent, down 1/10th of a percentage point from October.

#4Sales of previously owned homes grew for a second straight month after showing general weakness for much of 2018. The National Association of Realtors reports existing home sales increased 1.9 percent in November to a seasonally adjusted annualized rate of 5.32 million units. Despite the rise, home sales were 7.0 percent under its year-ago market, representing the largest negative 12-month comparable since November 2011. Sales grew during the month in three of four Census regions, with the West’s 6.3 percent decline being the outlier. All four Census regions experienced negative year-to-year sales trends: West (-15.4 percent), South (-5.6 percent), Midwest (-4.3 percent), and Northeast (-2.6 percent). Inventories contracted 5.9 percent during November to 1.74 million units (+4.2 percent versus November 2017 and the equivalent to a 3.9-month supply). The median sales price has risen 4.2 percent over the past year to $257,700.

#5Consumer sentiment ends the year on a high note. The University of Michigan’s Index of Consumer Sentiment added 8/10ths of a point in December to a seasonally adjusted 98.3. This places the sentiment measure 2.4 points ahead of its year-ago mark and keeps it within the same five-point range where it has been over the past two years. In December, the present conditions index added 3.8 points to 116.1 (December 2017: 113.8) while the expectations index shed 1.1 points to 87.0 (December 2017: 84.3). The press release notes that 2018 was the best year for the headline index’s 12-month average (98.4) since 2000.

Other U.S. economic data released over the past week:
Jobless Claims (week ending December 15, 2018, First-Time Claims, seasonally adjusted): 214,000 (-27,000 vs. previous week; +8,000 vs. the same week a year earlier). 4-week moving average: 222,000 (-6.0% vs. the same week a year earlier).
Leading Indicators (November 2018, Index (2016=100), seasonally adjusted): 111.8 (+0.2% vs. October 2018, +5.2% vs. November 2017).
Durable Goods (November 2018, New Orders for Manufactured Durable Goods, seasonally adjusted): $250.8 billion (+0.8% vs. October 2018). Nontransportation goods new orders: $163.8 billion (-0.3% vs. October 2018).
Housing Starts (November 2018, Housing Units Started, seasonally adjusted annualized rate): 1.256 million (+3.2% vs. October 2018, -3.6% vs. November 2017).
Housing Market Index (December, Index (>50 = “Good” housing market, seasonally adjusted): 56 (vs. November 2018: 60; December 2017: 74).
Treasury International Capital Flows (October 2018, Net Purchases of U.S. Securities, not seasonally adjusted): -$6.5 billion (vs. September 2018: +$7.5 billion; vs. October 2017: +$10.5 billion.
State Employment (November 2018, Nonfarm Payrolls, seasonally adjusted): Vs. October 2018: Payrolls grew in 4 states and were essentially unchanged in 46 states and the District of Columbia. Vs. November 2017: Payrolls grew in 37 states and were essentially unchanged in 13 states and the District of Columbia.

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

Retail Shines, Factory Activity Does Not: December 10 – 14

Consumers started the holiday season with gusto, while manufacturing took another break.  Here are the five things we learned from U.S. economic data released during the week ending December 14.  

#1Retail sales were solid in November. U.S. retail and food services sales totaled a seasonally adjusted $513.5 billion, according to the Census Bureau. This was up a modest 0.2 percent for the month, but one should note that the headline figures were pulled down by falling gasoline prices (sales at gas stations plummeted 2.3 percent). Net of sales at gas stations and car dealers/parts stores (where sales increased 0.2 percent), core retail sales gained 0.5 percent for the month and were up 4.6 percent over the past year. Rising during the month were sales at retailers focused on electronics/appliances (+1.2 percent), furniture (+1.2 percent), health/personal care (+0.9 percent), and groceries (+0.4 percent), and at department stores (+0.4 percent). Sales slowed at restaurants/bars (-0.5 percent), building material stores (-0.3 percent), and apparel retailers (-0.2 percent). Nonstore retailers (e.g., internet retailers) saw sales jump 2.3 percent during the month, with a year-to-year sales increase of 10.8 percent).Retail Sales 2012-2018 121418

#2Manufacturing output failed to grow for a second consecutive month. The Federal Reserve’s report on industrial production finds manufacturing output was unchanged (on a seasonally adjusted basis) in November, following a 0.1 percent drop during the prior month. Durable goods output inched up 0.2 percent, boosted by a 2.5 percent increase for primary metals. Nondurable output slowed 0.2 while that of “other manufacturing” (which includes publishing and logging) slumped 0.9 percent. Overall industrial production jumped 0.6 percent during November (its biggest gain since August) and has increased 2.5 percent over the past year. Rising during the month were output both in mining (+1.7 percent) and at utilities (+3.3 percent, boosted by cold weather driving demand for utility-delivered natural gas).

#3Job openings remained at near-record levels in October. The Bureau of Labor Statistics estimates there were 7.059 million (seasonally adjusted) available nonfarm jobs at the end of October, up 119,000 from September and 16.8 percent from the same month a year ago. Private sector job openings have risen 17.7 percent over the past 12 months to 6.489 million. The industries with the largest double-digit year-to-year percentage increases in job openings were wholesale trade (+52.0 percent), manufacturing (+27.3 percent), accommodation/food services (+26.0 percent), construction (+25.3 percent), and retail (+22.4 percent). Hiring picked up in October, rising by 196,000 to 5.892 million hires (+5.2 percent versus October 2017), with larger 12-month comparables in transportation/warehousing (+49.5 percent), retail (+14.0 percent), and manufacturing (+12.0 percent). Even though dropping by 85,000 during October, the number of people leaving their jobs was up 5.4 percent over the past year to 5.556 million. This included 3.514 million people who quit their jobs (+9.0 percent versus October 2017) and 1.691 million layoffs (-1.2 percent versus October 2017).

#4Consumer prices failed to rise in November. The Bureau of Labor Statistics reports that the Consumer Price Index (CPI) held steady during the month on a seasonally adjusted basis, the first month not to show a rise since March. Energy CPI slumped 2.2 percent as gasoline prices fell 4.1 percent. On the flip side, food CPI gained 0.2 percent, its largest single-month increase since June (boosted by higher prices for cereals/bakery and meat). Net of both energy and food, core CPI grew 0.2 percent, matching its October increase. Rising were prices for used cars/trucks (+2.4 percent), medical commodities and services (both +0.4 percent), and shelter (+0.3 percent). Prices fell for apparel (-0.9 percent) and transportation services (-0.3 percent). Both the headline and core CPI measures have risen 2.2 percent over the past year.

#5Wholesale prices also moderated in November. The Producer Price Index (PPI) for final demand grew by a seasonally adjusted 0.1 percent during the month following a 0.6 percent surge in October. At the same time, the Bureau of Labor Statistics’ core measure (netting out prices for energy, food and trade services) gained 0.3 percent, greater than October’s 0.2 percent increase. PPI for final demand goods dropped 0.4 percent, pulled down a 5.0 percent decline in energy PPI (final demand gasoline PPI: -14.0 percent). PPI for final demand food jumped 1.0 percent (pulled up by rising prices for fresh/dry vegetables). Net of energy and food, final demand goods PPI gained 0.3 percent. Final demand PPI for services also increased 0.3 percent, with rising margins at gas stations a significant factor. Final demand PPI has risen 2.5 percent over the past year (the smallest 12-month comparable since last December) while core final demand PPI has expanded 2.8 percent over the past year.

Other U.S. economic data released over the past week:
Jobless Claims (week ending December 8, 2018, First-Time Claims, seasonally adjusted): 206,000 (-27,000 vs. previous week; -23,000 vs. the same week a year earlier). 4-week moving average: 224,750 (-4.6% vs. the same week a year earlier).
Import prices (November 2018, All Imports, not seasonally adjusted): -1.6% vs. October 2018, +0.7% vs. November 2017. Nonfuel imports: -0.3% vs. October 218, +0.3% vs. November 2017.
Export prices (November 2017, All Exports, not seasonally adjusted): -0.9% vs. October 2018, +1.8% vs. November 2o17. Nonagricultural Exports: -1.0% vs. October 2018, +2.2% vs. November 2017.
Business Inventories (October 2018, Manufacturing and Trade Inventories, seasonally adjusted): $1.982 trillion (+0.6% vs. September 2018, +5.2% vs. October 2017).
NFIB Small Business Optimism (November 2018, Index (1986=100), seasonally adjusted): 104.8 (vs. October 2018: 107.4, vs. November 2017: 107.5.
Monthly Treasury Statement (November 2018, Federal Budget Surplus/Deficit): (first two months of FY2019) -$306.4 billion (vs. first two months of FY 2018: -$201.8 billion). 

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

Job Creation Solid, If Slower: December 3 – 7

Job creation mellowed a bit in November while the trade deficit widened again in October. Here are the five things we learned from U.S. economic data released during the week ending December 7.

#1Job creation slowed in November, but wage growth held firm. The Bureau of Labor Statistics estimates nonfarm employers added a seasonally adjusted 155,000 workers during the month, down from the 237,000 added in October and below the 211,000 average of the past 12 months. The private sector added 161,000 workers during the month while government employment contracted by 6,000. Industries expanding their payrolls the most include health care/social assistance (+40,100), professional/business services (+32,000), manufacturing (+27,000), transportation/warehousing (+25,400), retail (+18,200), and leisure/hospitality (+15,000). Average hourly wages have grown 3.1 percent over the past year to $27.35 with average weekly earnings increased a more modest 2.8 percent because the average workweek slipped by 1/10th of an hour to 34.4 hours.

Based on a separate survey of households, the unemployment rate held steady at its post-recession low of 3.7 percent. 133,000 people entered the labor force during the month, but the labor force participation rate remained at 62.9 percent. The labor force participation rate for adults aged 25 to 54 edged down by 1/10th of a percentage point to 82.4 percent. While just off its post-recession high, this measure remained its peak during the previous business cycle (October 2000: 83.4 percent). The median length of unemployment dropped by a half week to a post-recession low of 8.9 weeks while the count of part-time workers seeking a full-time job (“involuntary part-time workers”) grew by 181,000 to 4.802 million.  The broadest measure of labor underutilization by the BLS (the U-6 series) inched up 2/10ths of a percentage point to 7.6 percent.Unemployment Rate 2008-2018 120718

#2The U.S. trade deficit widened once again in October. The Census Bureau and Bureau of Economic Analysis report that exports slowed $0.3 billion during the month to a seasonally adjusted $211.0 billion (+6.3 percent versus a year earlier) while imports grew by $0.6 billion to $266.5 billion (+8.5 percent versus a year earlier). As a result, the U.S. goods and services deficit expanded by $0.9 billion to -$54.6 billion. The deficit was 18.1 percent larger than that of the year earlier and was its largest reading since October 2008. The goods deficit expanded by $0.9 billion to -$78.1 billion while the surplus on services shrank a modest $0.1 billion to +$22.6 billion. The former was hurt by a decline in exports of soybeans and civilian aircraft/engines and increased imports of pharmaceutical preparations and automotive vehicles/engines. The U.S. had its biggest trade deficits in goods with China (-$38.2 billion), the European Union (-$15.1 billion), and Mexico (-$6.4 billion).

#3October factory orders were soft. The Census Bureau indicates new orders for manufactured goods dropped by $10.5 billion during the month to a seasonally adjusted $502.7 billion. New orders for transportation goods fell 12.0 percent, pulled down by massive declines in orders for defense (-59.3 percent) and civilian (-22.2 percent) aircraft (both of which tend to be volatile month-to-month). Net of transportation goods, new orders increased 0.3 percent. Durable goods orders slumped 4.3 percent while nondurable orders gained 0.3 percent. Unchanged were orders for civilian capital goods net of aircraft (a proxy of business investment). Shipments slipped 0.1 percent to $508.4 billion, its first drop after 15 consecutive monthly increases, with unfilled orders also contracting by 0.1 percent to $1.184 trillion. Inventories expanded for the 24th straight month with a $0.9 billion gain to $681.7 billion.

#4Purchasing managers say business activity accelerated in November. The headline index from the Institute for Supply Management’s Manufacturing Report on Business, the PMI, added 1.6 points during the month to a seasonally adjusted 59.3. This was the PMI’s 27th consecutive month above a reading of 50.0, indicative of an expanding manufacturing sector. Four of five PMI components improved from their October readings: new orders (up 4.7 points), inventories (up 2.2 points), employment (1.6 points) and production (up 7/10ths of a point). The measure tracking supplier deliveries lost 1.3 points. Thirteen of 18 tracked manufacturing industries reported growth during the month, led by computers/electronics, plastics/rubber product, and paper products. Survey respondents’ comments stated that “[d]emand remains strong” but noted many detrimental impacts of tariffs (both current and pending).

The NMI, the headline index from ISM’s Non-Manufacturing Report on Business, has been above a reading of 50.0 for 106 straight months. In November, the NMI edged up by 4/10ths of a point to 60.7. Only two of the NMI’s four components improved during the month:  business activity/production (up 2.7 points) and new orders (up a full point). Slipping were components tracking employment (off 1.3 points) and supplier deliveries (down a full point). Seventeen of 18 tracked nonmanufacturing industries expanded during the month, led by education services, professional/scientific/technical services, and health care/social assistance. The press release stated that survey respondents “remain positive about current business conditions and the direction of the economy.”

#5Construction spending sputtered again in October. The Census Bureau estimates the value of construction put in place edged down 0.1 percent during the month to a seasonally adjusted annualized rate (SAAR) of $1.309 trillion, its third monthly decline. Construction spending has grown 4.9 percent over the past 12 months. Private sector spending decreased 0.4 percent to $998.7 billion (SAAR), up 3.9 percent from October 2017. Residential private sector spending dropped 0.5 percent while the nonresidential private sector measure shrank more slowly (-0.3 percent). Public sector construction gained 0.8 percent to an annualized $304.2 billion, up 8.8 percent from a year earlier.

Other U.S. economic data released over the past week:
Jobless Claims (week ending December 1, 2018, First-Time Claims, seasonally adjusted): 231,000 (-3,000 vs. previous week; -4,000 vs. the same week a year earlier). 4-week moving average: 228,000 (-5.3% vs. the same week a year earlier).
University of Michigan Surveys of Consumers (December 2018-preliminary, Index of Consumer Sentiment, seasonally adjusted): 97.5 (vs. November 2018: 97.5; vs. December 2017: 95.9).
Productivity (2018 Q3-revision, Nonfarm Labor Productivity, seasonally adjusted annual rate): +2.3% vs. 2018 Q2, +1.3% vs. 2017 Q3.
Beige Book

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