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.

The Fed Is ‘Patient,’ Employers Speed Hiring: January 28 – February 1

The Fed hits the breaks while the job creation motors on. Here are the five things we learned from U.S. economic data released during the week ending February 2.

Note that the partial shutdown of the federal government delayed the release of certain economic data reports.

#1The FOMC leaves its short-term interest rate target unchanged and suggests that they may stay put for a while. The statement released following the past week’s meeting of the Federal Open Market Committee noted that “the labor market has continued to strengthen and that economic activity has been rising at a solid rate.” As a result, the committee decided to keep the fed funds target rate at a range between 2.25 and 2.50 percent. The statement also said that it is the “most likely” outcome that “sustained” economic growth will continue with inflation remaining near the Fed’s two-percent target. But at the same time, the FOMC “will be patient” as to if/when it decides to change the fed funds target rate, noting “global economic and financial developments.” Written another way, it appears the Fed’s campaign to hike its short-term interest rate target may be taking an extended hiatus.

#2U.S. payrolls expanded for a 100th consecutive month in January. Nonfarm payrolls expanded by 304,000 on a seasonally basis during the month, the largest single-month gain in employment since last February. The Bureau of Labor Statistics’ revisions to November and December knocked payrolls estimates for the two months by a net 70,000 jobs. Private sector employers added 296,000 workers in December, split between 72,000 on the goods-producing side of the economy and 224,000 in the service sector. Among the industries added the most jobs in January were leisure/hospitality (+74,000), construction (+52,000), health care/social assistance (+45,400), professional/business services (+30,000), and transportation/warehousing (+26,600). Average hourly earnings inched up by three cents during the month to $27.56 (+3.2 percent versus January 2018) while average weekly earnings grew by $1.03 to $950.82 (+3.5 percent versus Januar 2018).

Based on a separate survey of households, the unemployment rate inched up by 1/10th of a point to 4.0 percent (just under January 2018’s 4.1 percent unemployment rate). The labor force participation rate also added 1/10th of a point to 63.2 percent. The same measure for adults aged 25-54 added 1/10th of a point 82.4 percent. The median length of unemployment decreased by 2/10ths of a week to 8.9 weeks (January 2018: 9.4 weeks) while the count of part-time workers seeking a full-time opportunity blossomed by 490,000 to 5.147 million (the increase reflecting private sector contractors losing work from the partial federal government shutdown). Also reflecting the impact from the shutdown was the broadest measure of the labor underutilization (the U-6 series), which swelled by a half point to 8.1 percent. 

#3Economic activity picked up slightly in December. The Chicago Fed National Activity Index (CFNAI), a weighted index of 85 economic indicators, added six-basis points during the month to a reading of +0.27. This was the measure’s best reading since last August. Forty-six of the economic indicators made positive contributions to the CFNAI during the month while the other 35 made negative contributions. Of the four major categories of economic indicators, two made larger positive contributions during December: production-related contributions (a positive 22-basis point contribution, up from a two-basis point contribution in November) and employment (a basis point increase to a +0.11 contribution). Smaller contributions came from indicators tied to sales/orders/inventories (a neutral contribution versus a +0.12 contribution in November) and personal consumption/housing (a negative six-basis point contribution versus -0.03 in November). The CFNAI’s three-month moving average grew by four-basis points to +0.16, indicative of above-average economic growth.

#4January was a harsh month for consumer sentiment. The Conference Board’s Consumer Confidence Index shed 6.4 points during the month to a seasonally adjusted reading of 120.2 (1985=100), its lowest reading since July 2017. A weaker outlook for the future was the cause of most of the decline in the headline index—the expectations index fell 10.4 points to 87.3. The present conditions index had a far more modest decline as it decreased by 3/10ths of a point to 169.6. The press release linked the depressed headline and expectation indices on “financial market volatility and the government shutdown.” 37.4 percent of survey respondents described current business conditions as “good” versus 11.1 percent said that they were “bad.” Similarly, 46.6 percent of consumers reported that jobs were “plentiful” versus a mere 12.9 percent saying that were “hard to find.”

Also falling was the University of Michigan’s Index of Consumer Sentiment, which declined by 7.1 points to a seasonally adjusted 91.2 (1966Q1=100). The measure was 4.5 points below its January 2018 mark as it fell to its lowest reading since the 2016 election. The current conditions index lost 7.3 points to a reading of 108.8 (January 2018: 110.5) while the expectations index declined 7.1 points to 79.9 (January 2018: 86.3).  The press release warned that it the continuing budget “standoff” continues, it could result in sustained declines in consumer sentiment and spending that “could push the economy into a recessionary downturn.”

#5Manufacturing activity picked up in January. The PMI, the headline index from the Institute for Supply Management’s Manufacturing Report on Business—added 2.3 points during January to a reading of 56.6. “This represented a partial rebound from December’s 4.5 point drop and was the 29th straight month in which the PMI was above a reading of 50.0, indicative of an expanding manufacturing sector. Three of five PMI components improved from their December marks: new orders (up 6.9 points), production (up 6.4 points), and inventories (up 1.6 points). Components for supplier deliveries (-2.8 points) and employment (-0.5 points) dropped versus December. Fourteen of 18 tracked manufacturing industries expanded during December, led by textiles, computer/electronics, and plastic/rubber products. The press release noted while the sector “continues to expand, reversing December’s weak expansion, but inputs and prices indicate fundamental changes in supply chain constraints.”

Other U.S. economic data released over the past week:
Jobless Claims (week ending January 26, 2019, First-Time Claims, seasonally adjusted): 253,000 (+53,000 vs. previous week; +19,000 vs. the same week a year earlier). 4-week moving average: 220,250 (-5.9% vs. the same week a year earlier).
Pending Home Sales (December 2018, Index (2001=100), seasonally adjusted): 99.0 (-2.2% vs. November 2018, -9.8% vs. December 2017).
New Home Sales (November 2018, New Homes Sold, seasonally adjusted annualized rate): 657,000 (+16.9% vs. October 2018, -7.7% vs. November 2017).
Construction Spending (November 2018, Value of Construction Put in Place, seasonally adjusted annualized rate): $1.300 (+0.8% vs. October 2018, +3.4% vs. November 2017).
Bankruptcy Filings (12-month period ending December 31, 2018, Business and Nonbusiness Filings): 773,418 (-2.0% vs. 12-month period ending December 31, 2017).
Agricultural Prices (November 2018, Prices Received by Farmers): +3.5% vs. October 2018, -3.6% vs. November 2017. 

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

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.