The Fed Moves, Inflation Does Not: June 12 – 16

The Federal Reserve raised short-term interest rates even though inflation remains below where the Fed wants it to be. Here are the 5 things we learned from U.S. economic data released during the week ending June 16.

#1The Federal Reserve bumped up its short-term interest rate target for the second time in 2017. The policy statement released following the conclusion of last week’s meeting of the Federal Open Market Committee (FMOC) reaffirmed its view that the economy was “rising moderately,” the labor market had “continued to strengthen,” and that risks to economic growth were “balanced.” At the same time, it noted that inflation had “declined recently” and was tracking below the Fed’s two-percent target rate. Nevertheless, the FOMC voted (with one dissension) to raise the fed funds target rate by 25-basis points to a range of +1.00 percent and +1.25 percent, a level that the statement noted was still “accommodative” and would promote “further strengthening in the labor market.” The FOMC also agreed to gradually begin reducing the central bank’s holdings of Treasury securities and agency mortgage-back securities by slowing its reinvestment of the principal payments that it receives on these holdings.

The Fed also released updated economic forecasts from FOMC meeting participants. The group continues to expect modest economic growth over the coming years with median forecasts for annual GDP growth at +2.2 percent, +2.1 percent, and +1.9 percent for 2017, 2018, and 2019 respectively. At the same time, they now anticipate low unemployment rates of 4.3 percent this year and 4.2 percent in both 2018 and 2019. The group also expects the core personal consumption expenditures (PCE) deflator, a measure of inflation, to be at +1.7 percent for this year before creeping up to +2.0 percent during both 2018 and 2019. Finally, the FOMC meeting participants predict one more hike in the fed funds target rate this year and then three hikes per year in both 2018 and 2019.FOMC Fed Funds Target Forecasts--061617

 #2Inflation took the month of May off. The Bureau of Labor Statistics reports that the Consumer Price Index (CPI) slipped 0.1 percent on a seasonally adjusted basis during the month, leaving it 1.9 percent above its May 2016 reading. The decline was partially the result of a pullback in gasoline prices (-6.4 percent) that weighed on the energy price index -2.7 percent. Meanwhile, food CPI grew 0.2 percent during the month. Net of both energy and food, core CPI eked out a 0.1 percent increase, giving it a 12-month comparable of +1.7 percent. Rising during the month were prices for medical care commodities (+0.4 percent), transportation services (+0.3 percent), and shelter (+0.2 percent). Prices fell for apparel (-0.8 percent), both new and used vehicles (-0.2 percent), and medical care services (-0.1 percent).

Falling wholesale gasoline prices also kept wholesale prices in check during May. Final demand Producer Price Index (PPI) held steady during the month but was still up 2.4 percent from a year earlier. The core measure of final demand wholesale prices (net of energy, food, and trade services) declined 0.1 percent for the month and had a 12-month comparable of +2.1 percent. PPI of final demand goods dropped 0.2 percent as wholesale price declines for energy (-3.0 percent) and food (-0.2 percent) outweighed the 0.1 percent increase in prices for core goods. PPI for final demand services grew 0.3 percent during May as the price index for trade services (i.e., retailer and wholesaler margins) jumped 1.1 percent.

#3Manufacturing output fell in May. The Federal Reserve’s report on industrial production finds manufacturing output declining 0.4 percent on a seasonally adjusted basis during the month following a 1.1 percent gain in April. This left manufacturing output growing by an unexceptional 1.4 percent from a year earlier. Durable goods production slumped 0.8 percent during May, with declines across all major product categories, while nondurables output gained 0.3 percent, led by a “large gain” in the production of chemicals. Overall industrial production was unchanged for the month as a drop in manufacturing output was counterbalanced by production gains in mining (+1.6 percent) and at utilities (+0.4 percent)

#4Retail sales sputtered in May. Per the Census Bureau, retail sales declined 0.3 percent during the month to a seasonally adjusted $473.8 billion. Nevertheless, sales paced 3.8 percent ahead of their year-ago level. Sales net of those at auto dealers & parts stores (-0.2 percent vs. April 2017) shared the same comparbles of -0.3 percent vs. April 2017 and +3.8 percent vs. May 2016. Some of the decline in retail sales during May was the result of lower gasoline prices that had pushed down sales at gas stations 2.8 percent (this data series does not adjust for price changes). Sales also fell at electronic stores (-2.8 percent), department stores (-1.0 percent), sporting goods/hobby retailers (-0.6 percent), and restaurants/bars (-0.1 percent). Having a better month were furniture stores (+0.4 percent), apparel retailers (+0.3 percent), and grocery stores (+0.1 percent). Consumers continued to shift away from brick and mortar stores to online retailers as sales at nonstore retailers jumped 0.8 percent during the month and were 10.2 percent ahead of their May 2016 pace.

#5Employers expect to expand payrolls during Q3. Twenty-four percent of the more than 11,000 employers Manpower interviewed intend to expand payrolls during the three-month period of July, August, and September, while four percent expect to shed workers. Taking the difference of +20 and adjusting for seasonal variation gives you the Manpower Net Employment Outlook Index of +17, which was unchanged from the second quarter forecast and up two points from the same quarter a year earlier. The index was positive in all 13 industries tracked, with the highest outlook index reading coming in for leisure/hospitality (+25), transportation/utilities (+22), and wholesale/retail trade (+21). The press release said that “[e]mployers across the country are optimistic but don’t want to get ahead of themselves.”

Other U.S. economic data released over the past week:
Jobless Claims (week ending June 10, 2017, First-Time Claims, seasonally adjusted): 237,000 -8,000 vs. previous week; -36,000 vs. the same week a year earlier). 4-week moving average: 243,000 (-9.5% vs. the same week a year earlier).
Import Prices (May 2017, All Imports, not seasonally adjusted): -0.3% vs. April 2017, +2.1% vs. May 2016. Nonfuel imports: unchanged vs. April 2017, +0.8% vs. May 2016).
Export Prices (May 2017, All Exports, not seasonally adjusted: -0.7% vs. April 2017, +1.4% vs. May 2016.
Housing Starts (April 2017, Housing Starts, seasonally adjusted annualized rate): 1.172 million (-2.6% vs. March 2017, +5.7% vs. April 2016).
Housing Market Index (June 2017, Index (>50 = “Good” Housing Market, seasonally adjusted): 67 (vs. May 2017: 69, vs. June 2016: 60).
University of Michigan Consumer Sentiment (June 2017-preliminary, Index of Consumer Sentiment (1966Q1 = 100), seasonally adjusted): 94.5 (vs. May 2017: 97.1, June 2016: 93.5).
Regional & State Employment (May 2017, States with Significant Changes in Nonfarm Payrolls Vs. Previous Month, seasonally adjusted): Increased in 9 states and the District of Columbia and decreased in 4 states. Vs. May 2016: Increased in 28 states and no states suffered significant declines.
Business Inventories (April 2017, Manufacturing & Trade Inventories, seasonally adjusted): $1.854 trillion (-0.2% vs. March 2017, +2.3% vs. April 2016).

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

Hiring Rebounds in April, The Fed Stays Put for Now: May 1 – 5

After pausing in March, employers picked up the pace of hiring in April. Here are the 5 things we learned from U.S. economic data released during the week ending May 5.

#1The labor market regained its momentum in April. The Bureau of Labor Statistics estimates nonfarm payrolls expanded by a seasonally adjusted 211,000 during the month, sharply up from the 79,000 net hires in March and much closer to February’s 232,000 job gain. Private sector employers added 194,000 jobs during April, split between 173,000 net hires in the service sector and 21,000 in the goods-producing sector of the economy. Industries with the biggest payroll gains included leisure/hospitality (+55,000), professional/business services (+39,000), health care/social assistance (+36,800), and financial services (+19,000). Even the retail sector, which had been shedding workers in recent months, manage to add 6,300 jobs during March. The average number of hours worked edged up by 1/10th of an hour to 34.4 hours (April 2016: 34.4 hours) while average weekly earnings have grown 2.5 percent over the past year to $900.94.

A separate survey of household finds the unemployment rate dropping by 1/10th of a percentage point to 4.4 percent, off 6/10ths of a point from a year earlier and its lowest point in ten years. Only 12,000 people entered the labor force during the month while the labor force participation rate inched down by 1/10th of a percentage point to 62.9 percent. The typical length of unemployment slipped 1/10th of a week to 10.2 weeks (April 2016: 11.2 weeks). The count of part-time workers seeking a full-time job fell by 281,000 to another post-recession low of 5.272 million (April 2016: 5.970 million). Finally, the broadest measure of labor underutilization (the U-6 series) fell to post-recession low of 8.6 percent (down 3/10ths of a percentage point from March and 1.1 percentage points from a year earlier). The U-6 measure had peaked during the last recession at 17.1 recent back in April 2010.Unemployment Labor Underutilization 2000-2017-050517

#2The Federal Reserve holds its short-term interest target rate, as expected, but does not appear concerned about recent weak economic data. The policy statement released following the conclusion of this week’s Federal Open Market Committee notes that economic activity had “slowed,” but also highlights that the labor market “continued to strengthen” including a comment that job gains were “solid.” Further, while household spending increased “only modestly,” the statement noted that “the fundamentals underpinning the continued growth of consumption remained solid.” Also, inflation was closing in on the Fed’s two-percent target rate. Finally, the statement noted that near-term risks to economic growth were “roughly balanced.” As a result, the committee voted unanimously to keep the fed funds target at between 0.75 percent and 1.00 percent, a rate that statement characterizes as being “accommodative.” Despite some recent weak economic data (the employment data above notwithstanding), the statement was largely unchanged from that following the March FOMC meeting. This would seem to suggest that the committee members appear to be ready for another bump in short-term rates at its next meeting at June.

#3The trade deficit was virtually unchanged even as both exports and imports slowed during March. Per the Census Bureau and the Bureau of Economic Analysis, exports and imports each declined $1.7 billion during the month leaving the goods and services deficit at -$43.7 billion. The trade deficit for goods grew by $0.4 billion while the surplus in services grew by a matching $0.4 billion. Exports of goods contracted by $2.1 billion, pulled down by a $1.8 billion decline in exports of industrial supplies/materials and a $0.9 decrease in automotive vehicles. Imports of goods decreased by $1.7 billion resulting from falling imports of capital goods and industrial supplies/materials. The U.S. had its largest goods deficits with China (-$31.4 billion), the European Union (-$10.0 billion), Mexico (-$6.5 billion), Japan (-$6.5 billion), and Germany (-$5.0 billion).

#4Real personal spending grows for the first time in 2017 during March. The Bureau of Economic Analysis finds that “real” personal consumption expenditures (PCE) grew 0.3 percent during the month, following declines of 0.1 percent and 0.3 percent during February and January, respectively. Real spending on goods edged up 0.1 percent during the month as a 1.5 percent gain in spending of nondurable goods just outpaced the 2.5 percent drop in durables. Real spending on services grew 0.4 percent during March (although this partially reflects a weather-related increase in utility spending). Over the past year, real personal consumption expenditures have grown 1.8 percent, smaller than the +2.1 percent and +1.9 percent 12-month comparables reported for February and January, respectively. Without adjustments for inflation, nominal consumer spending was unchanged during March. Nominal personal income and disposable income both grew at a 0.2 percent rate during March (their smallest monthly gains since last November) while real disposable income jumped 0.5 percent. Real disposable income has grown 2.4 percent over the past year, its best 12-month comparable since last November. Meanwhile, the savings rate grew by 2/10ths of a percentage point to +5.9 percent, its highest point since last August.

#5Construction Spending, particularly that for nonresident structures and in the public sector, slowed during March. The Census Bureau reports that the seasonally adjusted annualized rate of construction put in place slipped 0.2 percent during the month to $1.218 trillion. This was up 3.6 percent from a year earlier. Private sector construction spending was unchanged from February at $940.2 billion (SAAR), which was nevertheless 7.0 percent above that of March 2016. Private sector residential construction spending jumped 1.2% during the month, with much of the gain coming from a 2.0 percent bump in spending of new multi-family properties. Private sector non-residential spending declined 1.3 percent during March, pulled down by lower construction spending for the commercial, office, educational, religious, amusement/recreation, transportation, and power properties. Public construction spending declined 0.9 percent to a SAAR of $278.1 billion. This was off 6.5 percent from the same point a year earlier. 

Other U.S. economic data released over the past week:
Jobless Claims (week ending April 29, 2017, First-Time Claims, seasonally adjusted): 238,000 (-19,000 vs. previous week; -38,000 vs. the same week a year earlier). 4-week moving average: 243,000 (-7.6% vs. the same week a year earlier).
Factory Orders (March 2017, New Orders for Manufactured Goods, seasonally adjusted): $478.2 billion (+0.2% vs. February 2017, +5.8% vs. March 2016).
Vehicle Sales (April 2017, Vehicle Retail Sales, seasonally adjusted annualized rate): 16.88 million units (+1.6% vs. March 2017, -3.0% vs. April 2016.
Productivity (1st Quarter 2017-preliminary, Nonfarm Business Labor Productivity, seasonally adjusted): -0.6% vs. Q4 2016, +1.1% vs. Q1 2016.
ISM Manufacturing Report on Business (April 2017, Purchasing Managers Index (>50=Growth in Manufacturing, seasonally adjusted): 54.8 (vs. March 2017: 54.8).
ISM Nonmanufacturing Report on Business (April 2017, NMI (>50=Growth in Nonmanufacturing, seasonally adjusted): 57.5 (vs. March 2017: 55.2).
Consumer Credit (March 2017, Outstanding Non-Real Estate Back Consumer Loan Balances, seasonally adjusted):  $3.806 trillion (+$16.4 billion vs. February 2017, +6.0% vs. March 2016).

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

The Fed Acted Last Week and Intends to Do So Twice More in 2017. What We Learned During the Week of March 13 – 17

The Federal Reserve raised its short-term interest rate target last week and not for the final time this year. Here are the 5 things we learned from U.S. economic data released during the week ending March 17.

#1The Fed bumped up its short-term interest rate target and indicates it will do so two more times in 2017. The policy statement released following last week’s two-day meeting of the Federal Open Market Committee (FOMC) noted that the U.S. economy was growing at a “moderate pace” and that the labor market had “continued to strengthen.” With job gains remaining “solid,” household spending rising “moderately,” and business investment having “firmed somewhat,” the statement noted that inflation was moving towards (but was still below) the Fed’s two-percent target. The policy statement also noted the committee’s view that the economy would continue to expand at a “moderate” pace and that inflation will continue to move towards the Fed’s target. As a result, the committee voted (with one dissenting vote) to bump up its fed funds target rate by 25-basis points to a range between 0.75 and 1.00 percent. The statement also reaffirmed previous statements that the FOMC expects to continue raising the fed funds target rate further, but that the target rate will remain “below levels that are expected to prevail in the longer run.”

The FOMC members also released updated economic forecasts that indicate continued moderate economic growth in 2017 and beyond.  The consensus forecast for the growth rate in the Gross Domestic Product (GDP) was now at +2.1% in both 2017 and 2018 and a slightly slower growth rate of +1.9% in 2019. The consensus forecast keeps the unemployment rate at 4.5% over the next three years while the anticipated inflation rate is at +1.9% in 2017 and at +2.0% for both 2018 and 2019.  As a result, the committee members’ median forecast for the fed funds target rate suggests two more rate hikes in 2017, with three rate hikes during both 2018 and 2019. Should this forecast hold, the fed funds target rate would be at 3.0% by the end of 2019.FOMC-Interest-Rate-Forecast-031717

#2Manufacturing output jumped for a second straight month in February. The Federal Reserve reports that the manufacturing output grew 0.5% during the month, matching January’s growth rate. Production of durable goods gained 0.6%, pulled up by higher output of nonmetallic mineral products, fabricated metal products, and machinery. Production slowed for electrical equipment/appliance/component industry and furniture. Nondurables production increased 0.4%, boosted by gains in the output of paper and plastics/rubber products. Manufacturing output was 1.2% above that of February 2016. Overall industrial production was unchanged during the month as the gain in manufacturing output and a 1.8% increase in mining output was counterbalanced by a sharp 5.7% decline in utility output (largely due to moderate winter weather lowering demand for heating). Capacity utilization edged down by 1/10th of a percentage point to 75.4% while factory utilization in manufacturing grew by 3/10ths of a percentage point to 75.6% (its highest reading since October 2015).

#3While cooling from their January pace, both consumer and producer prices move closer to the Fed’s targets. The Consumer Price Index (CPI) grew 0.1% on a seasonally adjusted basis during the month, its smallest monthly increase since last July. Pulling down the Bureau of Labor Statistics measure was the first monthly decline in gasoline prices (-3.0%) since last August. In all, energy CPI dropped 1.0% during the month as a result. Meanwhile, food CPI grew 0.2%, its biggest increase in more than 1.5 years, with 4 of 6 major grocery food groupings experiencing price increases. Net of energy and food, core CPI increased 0.2% during the month and has grown 2.2% over the past year. Rising during the month were prices for transportation services (+0.7%), apparel (+0.6%), shelter (+0.3%), and medical care services (+0.2%). Prices fell for used cars (-0.6%), new cars (-0.2%), and medical care commodities (-0.2%).

Meanwhile, the final demand Producer Price Index (PPI) grew 0.3% during February, half of the 0.6% gain in January.  Net of prices for food (+0.3%), energy (+0.6%), trade services (+0.4%), core final demand PPI also grew 0.3% during the month, up from a 0.2% increase in January. Final demand PPI was up 2.2% from a year earlier while the 12-month comparable for core final demand PPI +1.8%, its highest reading since last November. Prices for final demand goods increased 0.3% during February, with wholesale prices for core goods (net of energy and food) inched up 0.1%. Prices grew during the month for electric power, fresh and dry vegetables, jet fuel, liquefied petroleum gas, pharmaceutical preparations, and residual fuels. PPI for final demand services jumped 0.4% during the month.

#4The count of job openings and the pace of hiring both edged up in January. The Bureau of Labor Statistics tells us that there were a seasonally adjusted 5.626 million job openings at the end of January, up 87,000 from December but off 1.5% from a year earlier. Among the industries reporting year-to-year percentage gains in job openings were financial activities (+15.6%) and manufacturing (+4.6%). Job openings counts fell from January 2016 in wholesale trade (-12.6%), government (-9.4%), construction (-7.0%), accommodation and food services (-5.4%), retail (-3.3%), and health care/social assistance (-1.0%). The seasonally adjusted count of people hired grew by 137,000 during January to 5.440 million (+6.3% vs. January 2016). Among the industries with large year-to-year percentage increases in hiring were construction (+29.5%), transportation (+21.3%), health care/social assistance (+13.8%), accommodation/food services (+12.8%), financial activities (+10.8%), and manufacturing (+5.4%). Separations burst up by 174,000 during the month to a seasonally adjusted 5.258 million (+4.5% vs. January 2016). Voluntary quits continued to suggest job holders’ confidence in the labor market by surging to 3.220 million (+11.4% vs. January 2016). Layoffs were 3.5% below their year ago levels at 2.065 million.

#5Retail sales growth softened during February. According to the Census Bureau, retail sales inched up 0.1% on a seasonally adjusted basis to $446.8 billion. This was 5.7% higher than the February 2016 retail sales pace. Sales fell 0.2% at automobile dealers and parts stores. Net of auto and parts sales, retail sales grew 0.2% and were 5.7% above their February 2016 sales pace. Sales increased at retailers focused on building materials (+1.8%), furniture (+0.7%), and health & personal care (+0.7%). Sales fell at department stores (-1.1%), gas stations (-0.6%), apparel retailers (-0.5%), sporting goods/hobby stores (-0.4%), and restaurants/bars (-0.1%). Reflecting the continued shift in sales away from brick-and-mortar stores and towards internet retailers, nonstore sales grew 1.2% during the month and were 13.0% above their February 2016 pace.

Other U.S. economic data released over the past week:
Jobless Claims (week ending March 11, 2017, First-Time Claims, seasonally adjusted): 241,000 (-2,000 vs. previous week; -18,000 vs. the same week a year earlier). 4-week moving average: 237,250 (-8.6% vs. the same week a year earlier).
New Residential Construction (February 2017, Housing Starts, seasonally adjusted annualized rate): 1.213 million units (-6.2% vs. January 2017, +4.4% vs. February 2016).
Housing Market Index (March 2017, Index (>50 = “Good” Housing Market), seasonally adjusted): 71 (vs. February 2017: 65, vs. March 2016: 58).
University of Michigan Index of Consumer Sentiment (March 2017-preliminary, Index (1966Q1 = 100), seasonally adjusted): 97.6 (vs. February 2017: 96.3, vs. March 2016: 91.0%).
Small Business Optimism Index (February 2017, Index (1986 = 100), seasonally adjusted): 105.3 (vs. January 2017: 105.9, February 2016: 92.9).
Business Inventories (January 2017, Manufacturing and Trade Inventories, seasonally adjusted): $1.842 trillion (+0.3% vs. December 2016, +2.3% vs. January 2016).
Regional/State Employment (January 2017, Change in Nonfarm Payrolls, seasonally adjusted): Vs. December 2016: Increased in 13 states, decreased in 1 state, essentially unchanged in 36 states and the District of Columbia, vs. January 2016: increased in 28 states, declined in 2 states, and essentially unchanged in 20 states and the District of Columbia.

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