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.

The Fed Holds Still…For Now: November 5 – 9

The Federal Reserve finds the U.S. economy continuing to strengthen.  Here are the five things we learned from U.S. economic data released during the week ending November 9.

#1The Fed paused last week but appears primed to move again next month. The statement released following this week’s meeting of the Federal Open Market Committee (FOMC) followed that of prior statements in noting the “the labor market has continued to strengthen and that economic activity has been rising at a strong rate.” Also “strong” was consumer spending but the statement indicates that business fixed investment had “moderated.” The committee expects these vibrant business conditions will remain over the “medium term.” So, while the FOMC voted unanimously to keep the fed funds target rate in a range between 2.0 and 2.25 percent, the statement reaffirmed expectations for “further gradual” rate increases. In fact, the general expectation is for a quarter-point rate boost at the final 2018 FOMC meeting next month.

#2The number of available jobs slipped in September but remained near record levels. The Bureau of Labor Statistics estimates that there were 7.009 million job openings (seasonally adjusted) on the final day of September. Even though this represented a drop of 284,000 from the prior month, the count of job openings has grown 12.5 percent over the past year. By comparison, 5.964 million people were unemployed in September. Private sector job openings totaled 6.407 million, up 11.9 percent from September 2017. The biggest year-to-year percentage gains in job openings were seen in construction (+55.3 percent), accommodation/food services (+38.3 percent), health care/social assistance (+17.9 percent), and wholesale trade (+17.3 percent). Hiring also slowed in September, dropping by 162,000 to 5.744 million. Despite September’s decline, hiring remained 6.9 percent ahead of the year-ago pace. Private sector employers hired 5.393 million workers (+7.2 percent), with large 12-month comparables in health care/social assistance (+16.0 percent), retail (+15.1 percent), and financial activities (+14.7 percent). 5.667 million people left their jobs during September, up 6.0 percent from a year earlier. This included 3.648 million people leaving their jobs voluntarily (+10.6 percent versus September 2017) and 1.700 million layoffs (-3.6 percent versus September 2017).

#3Wholesale prices for energy, food, and services rose in October. Final demand Producer Price Index (PPI) jumped 0.6 percent on a seasonally adjusted basis during the month, its largest single-month gain for the Bureau of Labor Statistics measure since late 2012. More than 60 percent of the surge in wholesale prices can be linked to the 1.6 percent jump in PPI for trade services—i.e., retailer and wholesaler margins—that itself appears to be linked to retailers rising prices just prior to the holiday sales season. Also gaining were wholesale prices for energy (+2.7 percent) and food (+1.0 percent). Gasoline PPI rose 7.6 percent, with higher prices also seen for diesel fuel, vegetables, and beef. Net of energy, food, and trade services, core final demand PPI increased 0.2 percent during October, half of the previous month’s gain. Over the past year, final demand PPI has risen 2.9 percent, while the core measure has a 12-month comparable of +2.8 percent.

#4The service sector expanded at a slightly slower rate in October. The headline index from the Institute for Supply Management’s Non-Manufacturing Report on Business—the NMI—shed 1.3 points during the month to a reading of 60.3. Despite the decline, this was the NMI’s second best reading of 2018 and was the 105th time the measure was above a reading of 50.0 (indicative of an expanding service sector). Three of four NMI component declined during the month: business activity (down 2.7 points), employment (down 2.7 points), and new orders (off 1/10th of a point). The supplier deliveries measure added a half point. Seventeen of 18 tracked industries expanded during the month, led by real estate, information, and transportation/warehousing. While most survey respondents’ comments were “positive,” the press release noted “continued concerns about capacity, logistics, and tariffs.”

#5Wholesale inventories expanded again in September. The Census Bureau estimates inventories of merchant wholesalers widened 0.4 percent during the month to a seasonally adjusted $644.6 billion. This matched August’s 0.4 percent gain and left wholesale inventories up 5.2 percent from a year earlier. Wholesale durable goods inventories grew 0.8 percent during the month to a seasonally adjusted $393.4 billion (+6.8 percent versus September 2017) while inventories of nondurables contracted 0.4 percent to $251.2 billion (+2.8 percent versus September 2017). Inventories grew for every major category of durable goods while the nondurables figure was pulled down by shrinking inventories of farm goods, drugs, and paper. The inventory-to-sales ratio for wholesalers held firm during September at 1.26, although this represented a three-basis point decline from a year earlier. Rising a basis point was the I/S ratio for durable goods (1.59) while shedding a basis point was the I/S ratio for nondurables (0.95).

Other U.S. economic data released over the past week:
Jobless Claims (week ending November 3, 2018, First-Time Claims, seasonally adjusted): 214,000 (-1,000 vs. previous week; -23,000 vs. the same week a year earlier). 4-week moving average: 213,750 (-8.6% vs. the same week a year earlier).
University of Michigan Surveys of Consumers (November 2018-preliminary, Index of Consumer Sentiment (1966Q1=100, seasonally adjusted): 98.3 (vs. October 2018: 98.6; vs. November 2017: 98.5).
Consumer Credit (September 2018, Outstanding Consumer Credit Balances (net of real estate-backed loans), seasonally adjusted): $3.950 trillion (+$11.0 billion vs. August 2018, +4.8% vs. September 2017).

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

Not Longer Accommodative: September 24 – 28

The Fed made a move and suggests it will do so again before the year is out. Here are the five things we learned from U.S. economic data released during the week ending September 28.

#1The Fed raises its short-term interest rate target while no longer calling its policies “accommodative.” The policy statement released following this past week’s meeting of the Federal Open Market Committee (FOMC) noted that economic activity was “rising at a strong rate” and that the job market had “continued to strengthen.” The word “strong” also was used to describe job gains and growth in both household spending and business fixed investment. Further, the Fed sees core inflation being near its two-percent target. As a result, the FOMC voted without dissent to raise the fed funds target rate by a quarter point to a range between 2.00 and 2.25 percent. Unlike in recent years, the statement did not characterize its fed funds target rate as being “accommodative,” suggesting a shift in the thinking of the committee. Released in conjunction with the policy statement, the median forecast among FOMC members has one more quarter-point rate hike this year, three hikes in 2018, and one in 2019.

#2Personal spending mellowed a bit in August. Real personal consumption expenditures (PCE) grew a seasonally adjusted 0.2 percent, breaking a four-month streak of 0.3 percent increases for the Bureau of Economic Analysis measure. Real PCE has increased 2.8 percent over the past year. Real spending on services grew 0.2 percent during the month while that of goods increased 0.3 percent. Looking closer at the latter, spending on durable goods gained 0.2 percent while that for nondurables rose 0.4 percent. Matching their July gains were nominal personal income (+0.3 percent), nominal disposable income (+0.3 percent), and real disposable income (+0.2 percent). The latter has grown 2.9 percent over the past 12 months. The savings rate held firm at +6.6 percent. The PCE deflator—a measure of inflation—has risen 2.2 percent over the past year while the core measure (net of both energy and food) has a 12-month comparable of +2.0 percent.

#3The third estimate of Q2 GDP matches that of the second estimate. The Bureau of Economic Analysis reports that Gross Domestic Product (GDP) grew 4.2 percent on a seasonally adjusted annualized basis, matching the previous estimate reported in late August and up a smidge from the initial 4.1 percent annualized gain published in late July. Contributors to GDP growth during the quarter were (in decreasing order): personal consumption, net exports, nonresidential fixed investment, and government expenditures. Negative contributors to Q2 GDP growth were private inventory accumulation and residential fixed investment (housing). Downwardly revised were the estimate of corporate profits, with the estimate now indicating a 3.0 percent increase during Q2.

#4Consumer sentiment rose in September. The Conference Board’s Consumer Confidence Index grew by 3.7 points during the month to a seasonally adjusted 138.4 (1985=100), its best reading since September 2000. The current conditions index grew by a small 3/10ths of a point to 173.1—it was the expectations index that had a big increase, adding a full six points to 115.3. 41.1 percent of survey respondents described current business conditions as “good” while only 9.1 percent see them as “poor.” Similarly, 45.7 percent of Americans see jobs as being “plentiful” while 13.2 percent describe jobs as “hard to get.” The press release said that current confidence levels “should continue to support healthy consumer spending.”

The Index of Consumers Sentiment from the University of Michigan came in at a seasonally adjusted reading of 100.1 (1966Q1 = 100). While this was off 7/10ths of a point from the preliminary September reading a few weeks ago, it represented increases from August 2018 and September 2017 of 3.9 points and 5.0 points, respectively. The current conditions grew by 4.9 points during the month to 115.2 (September 2017: 111.7) while the expectations index added 3.4 points to 90.5 (September 2017: 84.4). The press release noted that most of the improved sentiment was reported by lower income survey respondents—the headline index for households in the bottom third of incomes hit its highest reading in nearly 18 years.

#5Rising aircraft sales fueled durable goods orders in August, but business investment lagged. The Census Bureau estimates new orders for durable goods jumped 4.5 percent during the month to a seasonally adjusted $259.6 billion, the second increase in three months. Transportation goods orders surged 13.0 percent, supported by large gains for orders of both civilian (+69.1 percent) and defense aircraft (+17.0 percent). New orders for motor vehicles dropped 1.0 percent. Net of transportation goods, new orders for durable goods managed a mere 0.1 percent gain. Rising during the month were orders for primary metals (+0.9 percent), electrical equipment/appliances (+0.6 percent), and machinery (+0.1 percent). New orders for civilian capital orders net of aircraft (a proxy for business investment) dropped 0.5 percent.

Other U.S. economic data released over the past week:
Jobless Claims (week ending September 22, 2018, First-Time Claims, seasonally adjusted): 214,000 (+12,000 vs. previous week; -44,000 vs. the same week a year earlier). 4-week moving average: 206,250 (-23.1% vs. the same week a year earlier).
New Home Sales (August 2018, New Home Sales, seasonally adjusted annualized rate): 629,000 (+3.5% vs. July 2018, +12.7% vs. August 2017).
Pending Home Sales (August 2018, Index (2001=100), seasonally adjusted): 104.2 (-1.8% vs. July 2018, -2.3% vs. August 2017).
Chicago Fed National Activity Index (August 2018, Index (0.00 = U.S. economic growth at historical average): +0.18 (vs. July 2018: +0.18, vs. August 2017: -0.08). 3-month moving average: +0.24 (vs. July 2018: +0.02, vs. August 2017: -0.05).
Case-Shiller Home Price Index (July 2018, 20-City Index, seasonally adjusted): +0.1% vs. June 2018, +5.9% vs. July 2017.
FHFA House Price Index (July 2018, Purchase-Only Index, seasonally adjusted): +0.2% vs. June 2018, +6.4% vs. July 2017.
Agricultural Prices (August 2018, Prices Received by Farmers): -2.2% vs. July 2018, -4.9% vs. August 2018).

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