Fed Cuts Again, Unclear on Next Steps: September 16 – 20

The Federal Reserve cuts its short-term interest rate target and sent a mixed message on what may be next. Here are the five things we learned from U.S. economic data released during the week ending September 20.

#1A divided Fed lowered its short-term interest rate target. In the statement released following this past week’s meeting of the Federal Open Market Committee (FOMC) noted that the U.S. economy was “rising at a moderate rate,” the “labor market remains strong,” and household spending was robust. But the statement also indicated that both business investment and exports “have weakened” and inflation remains below the Fed’s two-percent target. As a result, the FOMC voted to cut the fed funds target rate by a quarter-percent point to a range of 1.75 percent and 2.00 percent because “of the implications of global developments for the economic outlook as well as muted inflation pressures.” The decision was not unanimous: two voting members wanted to leave the fed funds target rate unchanged while one member sought a half-point rate cut.

Looking at economic forecasts by FOMC members released in conjunction with the policy statement, it is clear that there is even more disagreement on what is next. Seven voting members anticipate at least one more rate cut before the end of 2019, while five members expect this past week’s rate cut would be the final cut of the year and five had not expected even this rate cut. The same forecasts have the U.S. economy expanding at 2.0 percent next year with an unemployment rate of 3.7 percent and inflation just below the Fed’s target at 1.9 percent.FOMC Fed Funds Forecast 092019

#2Forward-looking economic measures suggest slowing growth. The Conference Board’s Leading Economic Index (LEI) held steady in August at a reading of 112.1, following a 4/10ths of a point increase during the prior month. The LEI has grown a modest 1.1 percent over the past year. Five of the ten LEI components made positive contributions, led by housing building permits. The coincident index added 3/10ths of a point to 106.4 (+1.6 percent versus August 2018). All four components of the coincident index made positive contributions, led by industrial production. The lagging index shed 3/10ths of a point to 108.2 (+3.0 percent versus August 2018) as only three of seven components made a positive contribution. The press release said that the leading index was “consistent with a slow but still expanding economy, which has been primarily driven by strong consumer spending and robust job growth.”

#3Manufacturing production rebounded in August. The Federal Reserve tells us that manufacturing output grew a seasonally adjusted 0.5 percent during the month following a 0.4 percent pullback in July. Output for durable and nondurable goods each rose 0.5 percent, with the former boosted by higher than one-percent gains for machinery, primary metals, and nonmetallic mineral goods. Plastics/rubber products and chemicals lifted the nondurables figure. Overall industrial production grew 0.6 percent in August after having had slipped 0.1 percent during the prior month. Mining output jumped 1.4 percent following a 1.5 percent decline in July (caused by a temporary slowdown in oil extraction resulting from Hurricane Barry). Production at utilities grew 0.6 percent in August. Even with its expansion in August, manufacturing output was 0.4 percent smaller than that of a year earlier while the 12-month comparable for overall industrial production was a modest +0.4 percent.

#4Existing home sales edged up in August. Sales of previously owned homes gained 1.3 percent in August to a seasonally adjusted annualized rate (SAAR) of 5.49 million units (up 2.6 percent from August 2018). The National Association of Realtors’ measure grew in three of four Census regions—Northeast (+7.6 percent), Midwest (+3.1 percent), and South (+0.9 percent)—but fell 3.4 percent in the West. Home sales in four Census regions had positive 12-month comparables. Inventories of unsold homes remained tight, falling 2.1 percent during the month to 1.86 million houses (-2.6 percent versus August 2018). This was the equivalent to a 4.1 month supply. The median sales price has grown 4.7 percent over the past year to $278,200. The press release credits the recent drop in mortgage interest rates for the rise in home sales.

#5Housing starts bloomed in August. The Census Bureau reports that housing starts rose 12.3 percent during the month to a seasonally adjusted annualized rate (SAAR) of 1.215 million units. This left the measure 6.6 percent ahead of its year-ago mark. Single-family home starts increased 4.4 percent while those of multi-family units surged 30.9 percent. Leading towards the future, the number of issued housing permits gained 7.7 percent in August to an annualized 1.419 million permits (+12.0 percent versus August 2018). The annualized count of permits for single-family homes grew 4.5 percent during the month while that for homes with five or more units jumped 14.9 percent. Housing completions gained 2.4 percent in August to an annualized 1.294 million homes, up 5.0 percent from a year earlier.

Other U.S. economic data released over the past week:
Jobless Claims (week ending September 14, 2019, First-Time Claims, seasonally adjusted): 208,000 (+6,000 vs. previous week; -4,000 vs. the same week a year earlier). 4-week moving average: 212,250 (+0.5% vs. the same week a year earlier).
Housing Market Index (September 2019, Index (>50 = ”Good” housing market), seasonally adjusted): 68 (vs. August 2019: 67, vs. September 2018: 67).
State Employment (August 2019, Nonfarm Payrolls, seasonally adjusted):  vs. July 2019: Grew in 5 states, Decreased in 1 state, and Unchanged in 44 states and the District of Columbia.  Vs. August 2018: Grew in 26 states and Unchanged in 34 states and the District of Columbia.
Treasury International Capital (July 2019, Net Foreign Purchases of Domestic Securities, not seasonally adjusted): +$72.3 billion (vs. June 2019: +$65.3 billion, vs. July 2018: +$34.5 billion).

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

Autos Fuel Retail Sales, Prices Firm: September 9 – 13

Consumers were buying vehicles in August. Here are the five things we learned from U.S. economic data released during the week ending September 13.

#1Auto sales outpaced an otherwise modest retail sales report for August. The Census Bureau reports that retail and food services sales totaled $526.1 billion, up 0.4 percent from July and 4.1 percent from a year earlier. Sales at auto dealers and parts stores jumped 1.8 percent while those at gas stations fell 0.9 percent (due to lower prices at the pump). Net of both, core retail sales grew a tepid 0.1 percent following a 0.9 percent surge in July (12-month comparable: +4.2 percent). Sales rose during the month at building material/garden stores (+1.4 percent), sporting goods/hobby retailers (+0.9 percent), and health/personal care stores (+0.7 percent). Sales slumped, however, at department stores (-1.1 percent), furniture retailers (-0.5 percent), and grocery stores (-0.3 percent).

#2Core consumer prices rose for a third straight month in August. The Consumer Price Index (CPI) grew 0.1 percent on a seasonally adjusted basis for the third time over the past four months, per the Bureau of Labor Statistics. Energy CPI fell 1.9 percent (pulled down by a 3.5 percent drop in gasoline prices) while food CPI held steady. Net of both, core CPI grew 0.3 percent for a third consecutive month. Rising were prices for used cars/trucks (+1.1 percent), medical care services (+0.9 percent), transportation services (+0.4 percent), medical care commodities (+0.3 percent), apparel (+2.2 percent), and shelter (+0.2 percent). Prices slipped 0.1 percent for new vehicles. While headline CPI has grown by “only” 1.7 percent over the past year, the core measure of consumer prices has climbed 2.4 percent over the same 12 months.

#3And wholesale prices firmed too. The Bureau of Labor Statistics indicates that the Producer Price Index (PPI) for final demand increased 0.1 percent on a seasonally adjusted basis in August after rising 0.2 percent in July. The core measure—PPI net of energy, food, and trade services—jumped 0.4 percent after slipping 0.1 percent during the prior month. PPI for final demand goods dropped 0.5 percent, pulled down by declines for both energy (-2.5 percent—gasoline prices plummeted 6.6 percent) and food (-0.6 percent). Core goods PPI was unchanged for the month. PPI for final demand services grew 0.3 percent—but more notable was the core measure (which nets out trade services and transportation/warehousing) growing 0.5 percent. Over the past year, headline PPI has risen 1.8 percent while the 12-month comparable for the core wholesale prices was +1.9 percent.

#4The number of job openings pulled back slightly, but workers continued to quit their jobs. The Bureau of Labor Statistics estimates that there were a seasonally adjusted 7.217 million open jobs on the final day of July. While still near the historical high for the data series, this was off 31,000 from June and 3.0 percent from a year earlier. While both construction (+18.8 percent) and manufacturing (+7.0 percent) had sizable year-to-year percentage increases in job openings, other industries reported negative 12-month comparables: financial activities (-15.3 percent), retail trade (-15.2 percent), and accommodation/food services (-10.2 percent). Hiring picked up during July, rising by 237,000 to 5.953 million (+2.1 percent versus July 2018). 5.759 million people departed their jobs during the same month, up 246,000 from June and 1.5 percent ahead of the year-ago pace. This included 3.592 million people who voluntarily quit their jobs (up 130,000 for the month and 4.3 percent from July 2018), a signal suggesting Americans remain confident about the labor market. 1.799 million left their jobs due to a layoff, up 88,000 for the month but down 3.2 percent from a year earlier.

#5The federal budget deficit crossed the trillion dollar threshold, and the fiscal year is not even over yet. The Department of the Treasury reports that the U.S. government has collected $3.088 trillion in receipts through the first 11 months of FY2019, up 3.5 percent from the same 11-month period last year. Expenditures, however, have grown 7.0 percent over the same period to $4.155 trillion. The resulting budget deficit of $1.067 trillion was 18.9 percent ahead of that from the first 11 months of FY2018. Year-to-date individual income tax revenues were 0.9 percent ahead of that a year earlier while corporate tax receipts have expanded 4.5 percent. Among the notable gainers in expenditures were defense (+9.0 percent), debt service (+9.0 percent), and health & human services (+8.4 percent)

Other U.S. economic data released over the past week:
Jobless Claims (week ending September 7, 2019, First-Time Claims, seasonally adjusted): 204,000 (-15,000 vs. previous week; -4,000 vs. the same week a year earlier). 4-week moving average: 212,500 (+0.3% vs. the same week a year earlier).
Import Prices (August 2019, All Imports, not seasonally adjusted): -0.5% vs. July 2019, -2.0% vs. August 2018; Nonfuel Imports: Unchanged vs. July 2019, -1.0% vs. August 2018.
– Export Prices (August 2019, All Exports, not seasonally adjusted): -0.6% vs. July 2019, -1.4% vs. August 2018; Nonagricultural Exports: -0.4% vs.
NFIB Small Business Optimism (August 2019, Index (1986=100), seasonally adjusted): 103.1 (vs. July 2019: 104.7, August 2018: 108.8).
University Surveys of Consumers (September 2019-preliminary, Index of Consumer Sentiment (1966Q1=100), seasonally adjusted): 92.0 (vs. August 2019: 89.8, vs. September 2018: 100.1).
Business Inventories (July 2019, Manufacturers’ and Trade Inventories, seasonally adjusted): $2.043 trillion (+0.4% vs. June 2019, +4.8% vs. July 2018).
Consumer Credit (July 2019, Outstanding Consumer (non-real estate-backed) Loan Balances, seasonally adjusted): $4.123 trillion (+$23.3 billion vs. June 2019, +5.2% vs. July 2018).

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

Job Creation Underwhelmed in August: September 2 – 6

Job creation slowed in August while one measure of manufacturing activity turned negative. Here are the five things we learned from U.S. economic data released during the week ending September 6.

#1Private-sector payrolls growth decelerated in August. The Bureau of Labor Statistics tells us that nonfarm payrolls grew by a seasonally adjusted 130,000 during the month, off from the downwardly revised gains in June and July of 178,000 and 159,000, respectively. The expansion in payrolls also is a bit misleading as 25,000 of net gain is the result of temporary federal government hires to support the 2020 Census. The private sector added 96,000 workers, down from July’s 131,000 net gain and the fewest since May. The industries adding the most jobs in August were professional/business services (+37,000), health care/social assistance (+36,800), financial activities (+15,000), construction (+14,000), and leisure/hospitality (+12,000). Average weekly earnings of $966.98 represented a 2.9 percent increase from a year earlier.private and government payrolls 2017-9 090619.png

A separate survey of households keeps the unemployment rate at 3.7 percent for a third consecutive month. The labor force expanded by a robust 590,000 people, translating into a labor force participation rate of 63.2 percent. The same measure for adults aged 25-54 jumped by 6/10ths of a percentage point to 82.6 percent (tying the post-recession high achieved back in January). The median length of unemployment held steady at 8.9 weeks (August 2018: 9.4 weeks) while the count of part-time workers seeking a full-time job grew by 397,000 to 4.381 million (August 2018: 4.368 million). Finally, the broadest measure of labor underutilization from the BLS (the “U-6” series) increased by 2/10ths of a point to 7.2 percent (August 2018: 7.4 percent).

#2The trade picture improved slightly in July. The Census Bureau and the Bureau of Economic Analysis estimate exports increased by $1.2 billion to a seasonally adjusted $207.5 billion (-0.6 percent versus July 2018) while imports slowed by $0.4 billion to $261.4 billion (virtually unchanged from a year earlier). The resulting deficit of -$54.0 billion was $1.5 billion smaller than that of June but also was 2.9 percent greater than that of a year earlier. Over the first seven months of 2019, the trade deficit has totaled -$373.8 billion, 8.2 percent greater than the gap from the first seven months of 2018. The goods deficit fell by $1.6 billion to -$73.6 billion while the services surplus shrank by $0.1 billion to +$19.7 billion. The U.S. had its largest goods deficits with China, the European Union, and Mexico.

#3Purchasing managers tell us manufacturing slowed in August. The PMI, the headline index from the Institute for Supply Management’s Manufacturing Report on Business, shed 2.1 points during the month to a reading of 49.1. This was the first time in nearly three years in which the PMI fell below a reading of 50.0, indicative of contracting manufacturing sector. Four of five PMI components fell during the month: employment (down 4.3 points), new orders (down 3.6 points), supplier deliveries (down 1.9 points), and production (down 1.3 points). The component for inventories eked out a small gain. Only nine of 18-tracked manufacturing industries reported growth, led by textiles, furniture, and food/beverage/tobacco. The press release noted survey respondents’ comments indicating that “trade remains the most significant issue,” reflected by declining export orders and negative supply chain impacts.

#4…But they also report that service sector activity picked up over the same time. The NMI, the headline index for the Non-Manufacturing Report on Business, ticked up 2.7 points to a reading of 56.4. This was the NMI’s 115th consecutive month with a reading above 50.0 and its best reading since May. Only two of four NMI components increased in August—business activity and new orders—while measures for employment and supplier deliveries each slumped. Sixteen of 18-tracked industries expanded during the month, led by real estate, accommodation/food services, and public administration. The press release noted continued concerns “about tariffs and geopolitical uncertainty,” but also that survey respondents were “mostly positive about business conditions.”

#5Even with the news from above, new factory orders grew in July. The Census Bureau reports that new orders for manufactured goods increased 1.4 percent to a seasonally adjusted $500.3 billion. Even though this was the second consecutive monthly increase, factory orders over the first seven months of the year were tracking only 0.4 percent ahead of that from the same months a year earlier. As we learned last week, transportation orders were a significant driver of the increased orders, jumping 7.0 percent thanks to surges for both civilian (+47.8 percent) and defense (+34.3 percent) aircraft. Durable goods orders jumped 2.0 percent while those of nondurables gained 0.8 percent. Orders of civilian non-aircraft capital goods—a proxy for business investment—increased 0.2 percent in July. Shipments fell for the first time in three months with a 0.2 percent decline to $504.0 billion while unfilled orders mostly held steady after three monthly declines at $1.162 trillion. Inventories expanded for the 11th time over the past 12 months by growing 0.2 percent to $696.5 billion.

Other U.S. economic data released over the past week:
Jobless Claims (week ending August 31, 2019, First-Time Claims, seasonally adjusted): 217,000 (+1,000 vs. previous week; +7,000 vs. the same week a year earlier). 4-week moving average: 216.250 (+1.3% vs. the same week a year earlier).
Productivity (2019Q2, Nonfarm Business Labor Productivity, seasonally adjusted annualized rate): +2.3% vs. 2019Q1, +1.8% vs. 2018Q2.
Construction Spending (July 2019, Value of Construction Put in Place, seasonally adjusted annualized rate): $1.289 trillion (+0.1% vs. June 2019, -2.7% vs. July 2018).
Beige Book

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