A Dovish Fed: March 18 – 22

The Fed signals that it will not hike short-term interest rates this year. Here are the five things we learned from U.S. economic data released during the week ending March 22.

#1The Fed’s campaign of raising short-term interest rates is over (for now). The policy statement published after the past week’s Federal Open Market Committee (FOMC) noted that economic activity growth had “slowed from its solid rate” but that the labor market “remains strong.” Also decelerating were growth rates of both household spending and business investment. Inflation fell below the Fed’s two-percent target rate—largely due to lower energy prices—with core inflation closer to the target. As a result, the FOMC voted unanimously to keep the fed funds target rate at a range between 2.25 and 2.50 percent and (perhaps more notably) stated that it would be “patient” as to if/when it would again raise rates. The Fed bases its patience on “global economic and financial developments and muted inflation pressures.” Written another way, the Fed no longer expects to raise its interest rate target in 2019—not long ago up to three rate increases had been the consensus expectation for this year.

#2Forward-looking measures suggest economic activity was picking back up in early 2019. The Conference Board’s Leading Economic Index (LEI) added 2/10ths of a point during February to a reading of 111.5 (2016=100), its best reading since last September. This measure had sputtered along since last October—trading within a 2/10ths of a point range—but has risen 3.0 percent over the past year. Six of ten LEI components grew in February, with the most significant positive contributor being rising stock prices. The coincident index also added 2/10ths of a point to 105.9 (+2.5 percent versus February 2018) as all four index components making positive contributions. The lagging index held firm at 107.0 during February, growing by a modest 0.8 percent over the past year. The press release notes that the results—particularly, the recent sluggishness in the leading index—suggest economic growth “could decelerate by year end.” 

#3Existing home sales bounced back big in February. The National Association of Realtors reports that sales of previously owned homes surged 11.8 percent during the month to a seasonally adjusted annualized rate (SAAR) of 5.51 million units. This was the best month for existing home sales since last March but still left sales 1.8 percent behind the year-ago sales pace. Sales expanded in three of four Census regions in February: West (+16.0 percent), South (+14.9 percent), and Midwest (+9.5 percent). Meanwhile, sales in Northeast matched January’s pace. There were 1.63 million homes available for purchase at the end of February, up 2.5 percent from January and 3.2 percent from a year earlier. Nonetheless, inventories represented a very tight 3.5 month supply. The median sales price of $249,500 was up 3.6 percent from a year earlier. NAR’s press release tie February’s strong housing report to “a powerful combination of lower mortgage rates, more inventory, rising income and higher consumer confidence.”

#4Homebuilders sentiment was stable in March. The National Association of Homebuilders’ Housing Market Index (HMI) remained at a seasonally adjusted reading of 62. This was the 57th consecutive month the HMI was above a reading of 50, indicative of a higher percentage of survey respondents viewing the housing market as “good” as opposed to being “poor.” The HMI improved in three of four Census regions, with only the Midwest seeing a decline in the sentiment measure. Improving during the month with indices measuring present sales of single-family homes (up two points to 68) and expected home sales (up three points to 71, while the measure tracking the traffic of prospective buyers lost four points to 44. The press release noted that homebuilders are challenged by a “skilled worker shortage, lack of buildable lots and stiff zoning restrictions in many major metro markets.”

#5Factory orders grew slightly in January. The Census Bureau reports that new orders for manufactured goods increased for a second straight month, albeit at a modest 0.1 percent to a seasonally adjusted $500.5 billion. Net of transportation goods, factory orders slowed 0.2 percent while core capital goods orders (which are nondefense capital goods net of aircraft) jumped 0.8 percent. Durable goods orders gained 0.3 percent those of nondurables pulled back 0.2 percent. Shipments dropped for the fourth straight month with a 0.4 percent decline to $503.1 billion while nontransportation goods shipments slowed by a more modest 0.2 percent. Unfilled orders swelled for the first time in four months with a 0.1 percent bump to $1.182 trillion while inventories grew 0.5 percent to $685.7 billion (its 26th gain in 27 months).

Other U.S. economic data released over the past week:
Jobless Claims (week ending March 16, 2019, First-Time Claims, seasonally adjusted): 221,000 (-9,000 vs. previous week; -6,000 vs. the same week a year earlier). 4-week moving average: 225,000 (Unchanged vs. the same week a year earlier).
State Employment (February 2019, Nonfarm Payrolls, seasonally adjusted): Vs. January 2019: Increased in 2 states and was essentially unchanged in 48 states and the District of Columbia. Vs. February 2018: Grew in 22 states and was essentially unchanged in 28 states and the District of Columbia.
Wholesale Trade (January 2019, Merchant Wholesalers’ Inventories, seasonally adjusted): $669.9 billion (+1.2% vs. December 2018, +7.7% vs. January 2018). 

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

Factories Slowed in January: February 11 – 15

Factories pumped out less output in January. Here are the five things we learned from U.S. economic data released during the week ending February 15.  

#1Manufacturing production fell in January. The Federal Reserve reports manufacturing fell a seasonally adjusted 0.9 percent during the month following a 0.8 percent gain in December. Durable goods production slumped 1.7 percent as motor vehicle output plummeted 8.8 percent. Nondurable goods output was unchanged for the month. Compared to a year earlier, manufacturing output has risen 2.9 percent. Overall industrial production fell 0.6 percent in January after having eked out a 0.1 percent increase in December. Industrial production has grown 3.6 percent over the past year. The rise in mining output slowed to a 0.1 percent gain in January after a 1.5 percent jump in December while output at utilities increased 0.4 percent. Factories were slightly less busy in January as capacity utilization dropped by 6/10ths of a percentage point to 78.2 percent. Manufacturing sector capacity utilization fell by 7/10ths of a point to 75.8 percent.Capacity Utilization 021519

#2Retail sales slumped in December (or at least the seasonally adjusted data had). The Census Bureau estimates retail and food services sales were at a seasonally adjusted $505.8 billion during the final month of 2018, down an unexpectedly sharp 1.2 percent from November. The drop appears, at least at first glance, to be a bit of an outlier to the negative side and may be the result of data issues tied to the recent partial federal government shutdown or other factors. A part of the drop was due to declining prices at the pump as sales at gas stations plummeted 5.1 percent. On the flip side, sales at auto dealers/parts stores grew 1.0 percent. Net of sales at both gas stations and auto dealers/parts stores, core retail sales fell 1.4 percent with sales off at most retail categories. Falling were sales at retailers focused on sporting goods/hobbies (-4.9 percent), health/personal care (-2.0 percent), furniture (-1.3 percent), apparel (-0.7 percent), groceries (-0.5 percent), and electronics/appliances (-0.1 percent), along with department stores (-3.3 percent) and restaurants/bars (-0.7 percent). One thing that also makes this report a bit suspect is the reported 3.9 percent slowdown at nonstore retailers (i.e., online retailers)

#32019 starts with little headline inflation, with core measures staying on target. The Consumer Price Index (CPI) was unchanged on a seasonally adjusted basis for a third consecutive month in January, per the Bureau of Labor Statistics. Energy CPI fell 3.1 percent, pulled down by gasoline prices slumping 5.5 percent. Food prices, however, gained 0.2 percent. Core CPI, which removes both energy and food, increased 0.2 percent for the fifth straight month. Rising were prices for apparel (+1.1 percent), shelter (+0.3 percent), medical care services (+0.3 percent), new vehicles (+0.2 percent), used cars/trucks (+0.1 percent), and medical care commodities (+0.1 percent). Transportation services prices slipped 0.2 percent. Over the past year, CPI has risen 1.6 percent while core inflation has grown 2.2 percent.

Meanwhile, wholesale prices slipped for a second straight month as final demand Producer Price Index (PPI) declined 0.1 percent on a seasonally adjusted basis. The core final demand measure of wholesale prices, which removes the impact of energy, food, and trade services, gained 0.2 percent. Falling were producer prices for both energy (-3.8 percent) and food (-1.7 percent). Rising was PPI for services, half of which resulted from wider margins at apparel/jewelry/footwear apparel retailers. Over the past year, headline PPI has risen 2.0 percent while the core wholesale price measure has a 12-month comparable of +2.5 percent

#4The number of job openings bloomed again to record levels as 2018 wrapped up. There were a seasonally adjusted 7.335 million job openings on the final day of 2018, up 166,000 for the month and a whopping 29.4 percent from a year earlier. The Bureau of Labor Statistics also indicates that private sector job openings totaled 6.707 million, up 30.4 percent from the end of 2017, with virtually every industry reporting double-digit percentage increases. Hiring also increased, although not at the same fast pace as employers continue to experience difficulty to find new employees. There were 5.907 million workers hired in December, up 95,000 for the month and 7.1 percent from December 2017. Private sector employers added 5.555 million workers, a 7.4 percent gain from a year earlier. 5.545 million people left their job during the month, off 18,000 from November but up 4.3 percent over the previous year. Voluntarily quits had risen 4.6 percent over the past year to 3.482 million while layoff activity was up 2.5 percent from December 2017 to 1.697 million.

#5Small business owner optimism fell for a fifth straight month in January. The Small Business Optimism Index from the National Federation of Independent Business shed 3.2 points during the month to a seasonally adjusted 101.2 (1986=100). This was the measure’s lowest mark since November 2016 when it was at 98.4. Seven of the index’s ten components declined in January, including sharp drops for indices tracking expected economic conditions, expected real sales, plans to increase inventories, plans to increase employment, and whether it is a good time to expand. The press release uses the word “shaky” to describe business owners expectations for business conditions, noting that “the political climate is affecting how they view the future.”

Other U.S. economic data released over the past week:
Jobless Claims (week ending February 9, 2019, First-Time Claims, seasonally adjusted): 239,000 (+4,000 vs. previous week; +5,000 vs. the same week a year earlier). 4-week moving average: 231,750 (+0.8% vs. the same week a year earlier).
Import Prices (January 2019, All Imports, not seasonally adjusted): -0.5% vs. December 2018, -1.7% vs. January 2018. Nonfuel Imports: -0.2% vs. December 2018, -0.2% vs. January 2018.
Export Prices (January 2019, All Exports, not seasonally adjusted): -0.6% vs. December 2018, -0.2% vs. January 2018, Nonagricultural Exports: -0.3% vs. December 2018, -0.2% vs. January 2018.
University of Michigan Consumer Sentiment (February 2019-preliminary, Index of Consumer Sentiment (1966Q1=100), seasonally adjusted): 95.5 (vs. January 2019: 91.2, vs. February 2018: 99.7).
Monthly Treasury Statement (December 2018, Deficit for first 3 months of FY19): -$318.9 billion (vs. first 3 months of FY18: -$225.0 billion).
Business Inventories (November 2018, Manufacturers’ and Trade Inventories, seasonally adjusted): $1.981 trillion (-0.1% vs. October 2018, +4.6% vs. November 2017).

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

The Trade Deficit Narrowed in November as Exports and Imports Both Fell: Week of February 4 – 8

The trade deficit shrank in November, as had factory orders. Here are the five things we learned from U.S. economic data released during the week ending February 8.  

#1The trade deficit narrowed in November. The Census Bureau and the Bureau of Economic Analysis estimates export activity slowed $1.3 billion to $209.9 billion (+3.7 percent versus November 2017) while imports fell by $7.7 billion to $259.2 billion (+3.2 percent). The resulting trade deficit of -$49.3 billion was down $6.4 billion from October but 0.7 percent larger than that of a year earlier. The goods deficit contracted by $6.7 billion to -$71.6 billion while the services surplus shrank by $0.3 billion to +$22.3 billion. The former was the result a $7.9 billion drop in imported goods, including steep declines for consumer goods (including cell phones) and industrial supplies/oil. The U.S. had its biggest goods deficits in November with China (-$35.4 billion, down $2.8 billion from October), the European Union (-$13.8 billion), Mexico (-$6.8 billion), and Japan (-$5.7 billion).

#2Factory orders slowed for a second consecutive month in November. The Census Bureau estimates new orders for manufactured goods declined by $3.1 billion during the month to a seasonally adjusted $499.2 billion. This was 4.1 percent greater than the value of November 2017 factory orders. Transportation goods orders grew 3.0 percent, boosted by strong gains for ships/boats (+72.6 percent), defense aircraft (+31.2 percent), and civilian aircraft (+6.9 percent). Net of transportation goods, core factory orders dropped 1.3 percent following a 0.2 percent gain in October. While orders grew for fabricated and primary metals (+0.9 percent and +0.8 percent, respectively), they slowed for nondurable goods (-1.9 percent), machinery (-1.7 percent), electrical equipment/appliances (-1.1 percent), and computers/electronics (-0.3 percent). New orders for civilian capital goods orders net of aircraft (a proxy for business investment) slumped 0 6 percent in November. 

#3Service sector activity remained strong, but softened, in January. The NMI, the headline index from the Institute for Supply Management’s Nonmanufacturing Report on Business slipped by 1.3 points during the month to a reading of 56.7. Even with the pullback, the NMI has been above a reading of 50.0 for 108 consecutive months, indicative of an expanding service sector. Only one of the NMI’s four components grew during the month, with employment adding 1.2 points to 57.8. Shedding points from December were components for new orders (down 5.0 points to 57.7) and business activity/production (down 1.5 points to 59.7. Holding firm was the measure for supplier deliveries at a reading of 51.5. Only 11 of 18 tracked nonmanufacturing industries expanded during the month, however, with the most robust expansion reported in transportation/warehousing, health care/social assistance, and mining. The press released noted continued optimism but also stated that “[r]espondents are concerned about the impacts of the government shutdown.

#4Manufacturing sector productivity edged up during Q4 2018. The Bureau of Labor Statistics tells us that manufacturing productivity grew 1.3 percent on a seasonally adjusted annualized basis during the final three months of 2018, an improvement from Q3’s 1.1 percent gain. Manufacturing output had expanded 2.3 percent, supported by a 1.0 percent advance in hours worked. The productivity gain for the past year was much softer, with a 0.7 percent increase. During Q4, durable manufacturing productivity increased 2.6 percent while the productivity improvement for nondurable manufactured goods was 1.2 percent. (The BLS was unable to report on overall productivity for the U.S. economy due to the partial government shutdown.)

#5Consumers took on credit at a marginally slower pace in December. American households had $4.010 trillion in outstanding consumer debt (not including mortgages and other real estate-backed loans) in December, according to the Federal Reserve. This was up $16.5 billion from November (smaller than the prior month’s $22.4 billion gain) and a 12-month increase of 4.7 percent. Consumers had $1.045 trillion in outstanding revolving credit balances at the end of December, up $1.7 billion for the month and 2.0 percent from a year earlier. Nonrevolving credit balances expanded $14.9 billion to $2.966 trillion (+5.6 percent versus December 2017).

Other U.S. economic data released over the past week:
Jobless Claims (week ending February 2, 2019, First-Time Claims, seasonally adjusted): 234,000 (-19,000 vs. previous week; +11,000 vs. the same week a year earlier). 4-week moving average: 224,750 (-1.4% vs. the same week a year earlier).
Senior Loan Officers Survey (January 2019)

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