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.

Payrolls Expand, Unemployment Falls: July 30 – August 3

The frantic pace of hiring cooled a bit while the Fed takes a break. Here are the five things we learned from U.S. economic data released during the week ending August 3.  

#1Employers added fewer jobs while the unemployment rate fell during July. The Bureau of Labor Statistics reports nonfarm employers added a seasonally adjusted 157,000 workers during the month. This was down from the sharply upward estimates of May and June job creation of 268,000 and 248,000, respectively, but also represented the 94th straight month of payroll expansion. The private sector added 170,000 jobs during July while the public sector shed 13,000 workers. The former was split between 52,000 new jobs in the goods-producing sector and 118,000 added workers in the service sector. Industries adding the most workers were professional/business services (+51,000), leisure/hospitality (+40,000), manufacturing (+37,000), and health care/social assistance (+33,500). The average hour week slowed by 1/10th of an hour to 34.5 hours (July 2017: 34.4 hours) while mean hourly wages grew by seven cents to 27.05 (July 2017: 26.34). The resulting average weekly earnings of $933.23 was up 3.0 percent from a year earlier.

The unemployment rate slipped by 1/10th of a percentage point to 3.9 percent, just above the 3.8 percent post-recession low achieved in May (July 2017: 4.3 percent). 105,000 people entered the labor market during the July, which kept the labor force participation rate at 62.9 percent. The labor participation rate for adults aged 25-54 eked out a 1/10th of a point increase to 82.1 percent. The median length of unemployment jumped to 9.5 weeks (up 6/10ths of a week from June but still under July 2017’s median of 10.4 weeks). The count of “involuntary” part-time workers—part-time workers who seek a full-time opportunity—dropped by 172,000 to 4.567 million people (July 2017: 3.233 million). Finally, the broadest measure of labor underutilization by the BLS (the “U-6” series) fell to a post-recession low of 7.5 percent, down 3/10ths of a point from June and a full percentage point of July 2017.labor underutilization 080318

#2The Fed does not surprise (i.e., does nothing). The policy statement released following last week’s meeting of the Federal Open Market Committee (FOMC) continued to characterize economic growth as being “at a strong rate” and the labor market as having “continued to strengthen.” Further, it sees core inflation being near its two-percent target rate while consumer and business investment spending having “grown strongly.” Looking towards the future, the Fed sees risks to be “roughly balanced” between those on the upside and downside. As a result, the FOMC voted unanimously to maintain the fed funds target rate at a range between 1.75 and 2.00 percent, a policy that the statement called “accommodative.” The general consensus has the FOMC going for a quarter-point rate hike at its next meeting in September. 

#3The trade deficit grew for the first time in four months during June. The Census Bureau and Bureau of Economic Analysis estimates exports slowed by $1.5 billion to $213.8 billion (+9.8 percent versus June 2017) while imports increased by $1.6 billion to $260.2 billion (+8.6 percent versus June 2017). The resulting trade deficit of -$46.3 billion was up $3.6 billion from May and 3.4 percent larger than June 2017’s deficit. The trade deficit for the first six months of 2018 totaled -$291.2 billion, up 7.2 percent from the same six months in 2017 and 17.7 percent from the first six months in 2016. The goods deficit grew by $3.1 billion during June to -$68.8 billion while the services surplus was virtually unchanged at +$22.5 billion. In the case of the former, exports of goods dropped by $1.7 billion (including declines in exports of pharmaceutical preparations, jewelry, automobiles, and civilian aircraft (and engines)). Imports of goods grew by $1.4 billion, led by increases for pharmaceutical preparations and crude oil. The U.S. had its largest goods deficits with China (-32.5 billion), the European Union (-$12.8 billion), and Mexico (-$6.7 billion).

#4Consumer spending held firm during the last days of spring. Real personal consumption expenditures (PCE) grew 0.3 percent on a seasonally adjusted basis during June, according to the Bureau of Economic Analysis. Spending on durable goods and services each increased 0.4 percent while that on nondurable goods slipped 0.1 percent. Without adjustments for inflation, nominal PCE grew 0.4 percent, matching the change in nominal personal income and nominal disposable income. After adjusting for price variation, real disposable personal income gained 0.3 percent during June. The savings rate remained steady at +6.8 percent (note that both the savings rate and income data series were revised upward with the publication of this report). Over the past year, real spending has grown 2.8 percent (its best 12-month comparable since last November) while real disposable has increased 3.1 percent (its best 12-month comparable since October 2015).

#5Businesses appear concerned about the possible effects of tariffs. The Institute for Supply Management’s Purchasing Managers Index (PMI) shed 2.1 points during the month to a reading of 58.1. This was the 23rd straight month in which the PMI was above a reading of 50.0, indicative of an expanding manufacturing sector. Three of the five PMI components declined during July: supplier deliveries (-6.1 points to 62.1), production (-3.8 points to 62.3), and new orders (-3.3 points to 60.2). Rising were measures for inventories (+2.5 points to 53.3) and employment (up a half point to 56.5). Seventeen of 18 tracked manufacturing industries expanded during the month, led by textile mills, electrical equipment/appliances, and apparel. The press release notes that survey respondents were “overwhelmingly concerned about how tariff-related activity” will impact their business.

The ISM’s measure for business activity in the service sector also slumped as the NMI dropped by 3.4 points to 55.7. Even if this is the lowest reading for the NMI since last August, it represented the 102nd consecutive month with the index indicating an expansion of the service sector. Three of four NMI components fell from the June readings: business activity/production (down 7.4 points to 56.5), new orders (down 6.2 points to 57.0), and supplier deliveries (off 2.5 points to 53.0).  Improving was the measure tracking employment (up 2.5 points to 56.1). Sixteen of 18 tracked nonmanufacturing industries grew during July, led by mining, public administration, and agriculture/forestry/fishing/hunting. The press release blames the “cooling off” of the service sector on concerns about “tariffs and deliveries.” 

Other U.S. economic data released over the past week:
Jobless Claims (week ending July 28, 2018, First-Time Claims, seasonally adjusted): 218,000 (+1,000 vs. previous week; -25,000 vs. the same week a year earlier). 4-week moving average: 214,500 (-11.4% vs. the same week a year earlier).
Factory Orders (June 2018, New Orders for Manufactured Goods, seasonally adjusted): $501.7 billion (+0.7% vs. May 2018, +6.1% vs. June 2017).
Pending Home Sales (June 2018, Index (2001=100), seasonally adjusted): 106.9 (+0.9% vs. May 2018, -2.5%
Vehicle Sales (July 2018, Light Vehicle Retail Sales, seasonally adjusted annualized rate): 16.77 million vehicles (-2.7% vs. June 2018, -0.1% vs. July 2017).
Construction Spending (June 2018, Value of Construction Put in Place): $1.317 trillion (-1.1% vs. May 2018, +6.1% vs. June 2017).
Conference Board Consumer Confidence (July 2018, Index (1985=100), seasonally adjusted): 127.4 (May 2018: 127.1).
Case-Shiller Home Price Index (May 2018, 20-City Index, seasonally adjusted): +0.2% vs. April 2018, +6.5% vs. May 2017). 

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