Perhaps (Slightly) Slower Growth: June 25 – 29

Last week featured a series of data pointing to a slight cooling of the economy. Here are the five things we learned from U.S. economic data released during the week ending June 29. #1Personal spending paused in May. The Bureau of Economic Analysis estimates real personal consumption expenditures (PCE) were unchanged on a seasonally adjusted basis during the month, following gains of 0.3 percent and 0.6 percent during April and March, respectively. Spending on goods increased 0.3 percent (with equal 0.3 percent gains for both durable and nondurable goods) while expenditures on services dropped 0.2 percent. On a nominal (not price adjusted) basis, personal spending expanded 0.2 percent in May, funded by a 0.4 percent gain in both personal income and disposable income. Adjusting for inflation, real disposable income increased 0.2 percent during the month. Over the past year, real personal consumption has grown 2.3 percent over the past year while real disposable income has risen 1.7 percent. The difference was funded by reduced savings—the savings rate has dropped from +3.8 percent to +3.2 percent over the past year.Savings Rate 2013-2018 062918#2Q1 GDP growth was less robust than previously believed. The Bureau of Economic Analysis released its third estimate of first quarter 2018 Gross Domestic Product (GDP), now reporting that the U.S. economy had expanded 2.0 percent on a seasonally adjusted annualized basis. This was down from the +2.2 percent and +2.3 percent growth rates reported over the two previous months and represented the slowest quarter for the U.S. economy in a year. The downward revision was the result of lower than previously reported levels of private inventory accumulation, consumption, and exports. Positive contributions to Q1 GDP growth came from (in descending order): nonresidential fixed investment (+128-basis points), consumption (+60-basis points), exports (+44-basis points), and government expenditures (+22-basis points). The same report finds that corporate profits grew 1.8 percent (seasonally adjusted) from Q4 2017 and 6.8 percent from the same quarter a year earlier.#3Economic growth appears to have slowed in May. The Chicago Fed National Activity Index (CFNAI), a weighted average of 85 economic indicators, plummeted by 57-basis points to -0.15. This was the CFNAI’s first negative reading since January. Thirty-nine of the 85 index components made positive contributions to the CFNAI with 43 indicators improving from their April readings. Virtually all the CFNAI’s decline came from the indicators tied to production—the contribution to the CFNAI from production-related indicators plummeted from +0.33 to -0.29 during the month. Smaller moves came from indicators linked to sales/orders/inventories (from a neutral reading to +0.05), employment (up from +0.12 to +0.13), and personal consumption/housing (from -0.03 to -0.04). The CFNAI’s three-month moving average lost 13-basis points to +0.10. As the CFNAI is designed such that a 0.00 reading is indicative of the U.S. economy expanding at its historical economic growth rate, the +0.10 moving average suggests that the economy was growing slightly more quickly than average.#4Weakness in transportation pulled down durable goods orders in May. The Census Bureau reports that new orders for manufactured durable goods fell 0.6 percent during the month to a seasonally adjusted $248.8 billion. Transportation goods orders dropped 1.0 percent, pulled down not only by a 7.0 percent decline in civilian aircraft orders but also by motor vehicles orders plunging 4.2 percent. Net of transportation goods, durable goods orders slowed 0.3 percent. Among major categories, only machinery (+0.3 percent) enjoyed an increase in orders. Falling were orders for electrical equipment/appliances (-1.5 percent), fabricated metals (-1.2 percent), primary metals (-0.4 percent), and computers/electronics (-0.1 percent). New orders for nondefense capital goods net of aircraft—a proxy for business investment—slowed 0.2 percent during May.#5Consumers remained confident but seem slightly more wary about the future. The Conference Board’s Consumer Confidence Index lost 2.4 points to a seasonally adjusted reading of 126.4 (1985=100). The current conditions slipped by a mere 1/10th of a point to a still very robust 161.1 while the expectations index shed four full points to 103.2. 36.0 percent of survey respondents viewed current economic conditions as “good” while only 11.7 percent see them as “bad.” Similarly, 40.0 percent of Americans believe that jobs are “plentiful” versus 14.9 percent see them as “hard to get.” The press release notes that the pullback in expectations as indicating consumers not expecting “the economy gaining much momentum in the months ahead.”The University of Michigan’s Index of Consumer Sentiment eked out a 2/10ths of a point gain in June to a seasonally adjusted 98.2. While this represented a 1.1 point pullback from the preliminary June reading reported a few weeks ago, the final June mark was 3.2 points ahead of that from a year earlier. The current conditions measure jumped 4.7 points to 116.5 (June 2017: 112.4) while the expectations index shed 2.8 points to 86.3 (June 2017: 83.8). The press release links the headline index’s decline from its preliminary June reading to the building trade war, with one in four consumers making a note of the recently announced trade tariffs with most seeing them as having “a negative impact on the domestic economy.” Other U.S. economic data released over the past week:
Jobless Claims (week ending June 23, 2018, First-Time Claims, seasonally adjusted): 227,000 (+9,000 vs. previous week; -16,000 vs. the same week a year earlier). 4-week moving average: 222,000 (-8.7% vs. the same week a year earlier).
New Home Sales (May 2018, New Residential Sales, seasonally adjusted annualized rate): 689,000 (+6.7% vs. April 2018, +14.1% vs. May 2017).
Case-Shiller Home Price Index (April 2018, 20-City Index, seasonally adjusted): +0.2% vs. March 2017, +6.6% vs. April 2017.
Agricultural Prices (May 2018, Prices Received by Farmers, seasonally adjusted): +1.7% vs. April 2018, -3.9% vs. May 2017.The opinions expressed here are not necessarily those of Kevin’s current employer. No endorsements are implied.

Tight Inventories, Rising Materials Prices Weigh on Housing: June 18 – 22

Tight inventories continued to hold back the housing market during the spring. Here are the five things we learned from U.S. economic data released during the week ending June 22.

#1Existing home sales stagnated during May. Sales of previously owned homes slipped 0.4 percent during the month to a seasonally adjusted annualized rate (SAAR) of 5.430 million homes. This left the National Association of Realtors’ home sales measure down 3.0 percent from May 2017 levels. Sales grew during the month on in the Northeast (+4.6 percent) while activity fell in three of four regions versus the previous year (Sales held steady versus May 2017 levels in the South). While still very tight, the number of homes on the market grew 2.8 percent during the month to 1.85 million units. This was nevertheless 6.1 percent below the year-ago level of inventories and the equivalent to a 4.1 month supply. As a result, the median sales price for existing homes has grown 4.9 percent over the past year to $264,800. The press release notes that “[i]ncredibly low supply continues to be the primary impediment to more sales.”Existing Home Sales June 2018-062218

#2Activity in the Midwest drives a rise in housing starts. The Census Bureau reports that housing starts grew 5.0 percent during May to a seasonally adjusted annualized rate (SAAR) of 1.350 million homes. This was 20.3 percent ahead of the year-ago pace of starts. Single-family home starts grew 3.9 percent during the month to an annualized 936,000 (+18.3 percent versus May 2017) while multifamily units starts jumped 11.3 percent to an annualized 404,000 units (+27.4 percent versus May 2017). Only one region—the Midwest—enjoyed a month-to-month increase in starts. Looking toward the future, the number of issued housing permits of 1.364 million (SAAR), which was off 4.6 percent for the month but still 8.0 percent ahead of the year-ago rate. The annualized rate of housing completions grew 1.9 percent during May to 1.291 million homes. This was up 10.4 percent from the same month a year earlier. 

#3Higher raw material prices weigh on homebuilder sentiment. The National Association of Home Builders’ Housing Market Index (HMI) lost two points in June to a seasonally adjusted reading of 68. Even with the modest drop, the HMI has been above a reading of 50—where a higher percentage of homebuilders see the housing market as “good” than view it as “poor”—for 48 straight months. During the month, the HMI improved in the Northeast and West but lost ground in the Midwest and South. Indicies for both current (75) and expected sales (76) each lost a point, as did the measure tracking prospective buyers traffic (50). The press release stressed that builders remained optimistic, but also they were “increasingly concerned that tariffs placed on Canadian lumber and other imported products are hurting housing affordability.”

#4Economic indicators suggest continued economic growth for the remainder of the year. The Conference Board’s Leading Economic Index added 2/10ths of a point in May to a seasonally adjusted reading of 109.5 (2016=100). The measure has grown 6.1 percent over the past year. Seven of the LEI’s ten components made positive contributions during the month, led by new manufacturing orders, the interest rate spread, and consumers’ expectations for business conditions. The coincident index also increased by 2/10ths of a point during May with the 103.7 reading representing a 2.2 percent gain from a year earlier. Three of four coincident index components made positive contributions: nonfarm payrolls, personal income net of transfer payments, and manufacturing & trade sales. The lagging index added a half point to a reading of 105.2 (+2.7 percent versus May 2017). The press release noted that while economic growth would remain “solid,” May’s smaller increase suggests that “economic activity is not likely to accelerate.”

#5Layoff activity remained slow in mid-June. There were a seasonally adjusted 218,000 first-time claims made for unemployment insurance benefits during the week ending June 16, down 3,000 from the prior week and 26,000 for the same week a year earlier. The Department of Labor’s jobless claims data can be volatile week-to-week, so analysts frequently look at four-week moving data to spots trends. But the story is much the same—the moving average was at 221,000, which was 10.0 percent below that of a year earlier. Further, the four-week moving average has been below 300,000 for an impressive 172 consecutive weeks.

Other U.S. economic data released over the past week:
FHFA House Price Index (April 2018, Purchase-Only Index, seasonally adjusted):  +0.1% vs. March 2018, +6.4% vs. April 2017. 

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

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.