The Fed Moves, Likely to Repeat Twice More in 2018: June 11 – 15

The Fed raises its target for short-term interest rates as inflation moves ever so closer to targeted levels. Here are the five things we learned from U.S. economic data released during the week ending June 15.  

#1The Fed boosts short-term interest rates and appears ready to do so twice more again this year. The policy statement released following this past week’s meeting of the Federal Open Market Committee (FOMC) characterized economic activity as “rising at a solid rate” and that the labor market “continued to strengthen” with core inflation moving closer to the Fed’s two-percent target rate. The statement also noted that risks to future economic activity as being ”roughly balanced.” As a result, the committee voted unanimously to boost the fed funds rate by 25-basis points to a range between 1.75 and 2.00 percent. This was the FOMC’s second rate hike of 2018 but keeps the short-term interest target in a range the committee views as “accommodative.”

Accompanying the policy statement were the updated economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, which highlight a more optimistic view of near-term conditions. For example, the median forecast for 2018 economic growth increased by 1/10th of a percentage point to +2.8 percent and the expected unemployed rate dropped by 2/10ths of a percentage point to 3.6 percent. The forecasters also see a greater firming of inflation with the core PCE deflator (the Fed’s preferred measure of inflation) at +2.1 percent, up from the prior forecast of +1.9 percent. As a result, the median forecast for the fed funds target rate suggests two more quarter-point rate hikes this year (up from a single additional rate bump previously anticipated). Further, the median forecast points to three quarter-point hikes in 2019 and one rate hike in 2020.FOMC Fed Funds Forecast--2018-2020

#2Inflation continued to build steadily in May. The Consumer Price Index (CPI) grew 0.2 percent on a seasonally adjusted basis for the third time in four months, per the Bureau of Labor Statistics. Energy prices jumped 0.9 percent, as gasoline prices gained 1.7 percent. Food CPI held steady during the month. Net of energy and food, core CPI increased 0.2 percent and has grown 2.2 percent over the past year. (The 12-month comparable for the headline index was +2.8 percent). Jumping during the month were prices for medical commodities (+1.3 percent), new vehicles (+0.3 percent), and shelter (+0.3 percent) while prices declined during the month for used cars/trucks (-0.9 percent) and medical care services (-0.1 percent).

Meanwhile, the Producer Price Index (PPI) for final demand soared 0.5 percent (seasonally adjusted), its fastest rate of growth since January. The core measure, which nets out energy, food, and trade services, grew at a more modest 0.1 percent for a second consecutive month. Wholesale prices for final demand goods swelled 1.0 percent, led by the 4.6 percent surge in wholesale energy prices (PPI for gasoline: +9.8 percent). Final demand food PPI eked out a 0.1 percent increase.  Net of energy and food, core final demand goods PPI gained 0.3 percent. PPI for final demand services increased 0.3 percent for the fourth time in five months, which included the impact of a 0.9 percent advance in prices for trade services (reflecting larger retailer and wholesaler margins). Over the past year, final demand PPI has jumped 3.1 percent during which the core wholesale price measure (net of energy, food, and trade services) has risen 2.6 percent.

#3Retail sales surged in May. The Census Bureau estimates retail and food sales were at a seasonally adjusted $502.0 billion, up 0.8 percent from April and 5.9 percent from a year earlier. Motor vehicle sales jumped 0.5 percent while higher prices at the pump resulted in a 2.0 percent rise in gas station sales. Net of sales at auto dealers/parts stores and gas stations, core retail sales rose 0.8 percent to $443.1 billion (+5.1 percent versus April 2017). May was a good month for building material/garden supplies stores (+2.4 percent), department stores (+1.5 percent), apparel retailers (+1.3 percent), restaurants/bars (+1.3 percent), and health/personal care retailers (+0.5 percent). Sales slowed during the month at furniture stores (-2.4 percent) and sporting goods/hobby retailers (-1.1 percent).

#4Manufacturing decelerated in May. Per the Federal Reserve’s Industrial Production report, manufacturing output slumped 0.7 percent on a seasonally adjusted basis, leaving it 1.7 percent ahead of its year-ago pace. The report links much of the decline to a “major fire at a parts supplier” that had disrupted truck assemblies. Net of vehicle production, manufacturing slowed by a more modest 0.2 percent. Output of durables fell 1.2 percent (motor vehicles production plummeted 6.5 percent) while that of nondurable slipped 0.1 percent. Overall industrial production decreased 0.1 percent during the month but was up 3.5 percent over the past 12 months. Mining output grew for the fourth straight month (+1.8 percent versus April 2018 and +12.6 percent versus May 2017), led by increased oil and gas extraction. Higher demand for electricity led to a 1.0 percent increase in output at utilities.

#5Small business owners’ optimism blossomed during the spring. The National Federation of Independent Business’ Index of Small Business Optimism jumped by 3.0 points to a seasonally adjusted reading of 107.8. Not only was this a post-recession high for the sentiment measure, it also was its second-best reading in the index’s second-best reading ever (a 45-year history). Eight of the index’s ten components improved from their April readings, led by expected real sales (+10 points), expectations for the economy (+7 points), on whether it is a good time to expand (+7 points), and earning trends (+4 points). While noting difficult in their ability to find qualified workers to hire, the press release stated employers “now have more resources to commit to attracting candidates.” 

Other U.S. economic data released over the past week:
Jobless Claims (week ending June 9, 2018, First-Time Claims, seasonally adjusted): 218,000 (-4,000 vs. previous week; -22,000 vs. the same week a year earlier). 4-week moving average: 224,250 (-8.1% vs. the same week a year earlier).
Import Prices (May 2018, All Imports, not seasonally adjusted): +0.6% vs. April 2018, +4.3% vs. May 2017. Nonfuel imports: +0.2% vs. April 2018, +1.9% vs. May 2017.
Export Prices (May 2018, All Exports, not seasonally adjusted): +0.6% vs. April 2018, +4.9% vs. April 2018, Nonagricultural Exports: +0.5% vs. April 2018, +4.9% vs. May 2017.
University of Michigan Consumer Sentiment (June 2018-preliminary, Index of Consumer Sentiment, seasonally adjusted): 99.3 (vs. May 2018: 98.0, June 2017: 95.0).
Business Inventories (April 2018, Manufacturing and Trade Inventories, seasonally adjusted): $1.930 trillion (+0.3% vs. March 2018, +4.4% vs. April 2017).
Monthly Budget Statement (May 2018, U.S. Budget Surplus/Deficit): -$146.8 billion (vs. May 2017: -$88.4 billion). Deficit over first 8 months of FY 2019: -$532.2 billion (vs. +23.0% vs. first 8 months of FY 2018).

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

The Unemployment Rate Drops Below 4%: April 30 – May 4

Employers continued to add workers while the unemployment rate fell to its lowest point since 2000. Here are the five things we learned from U.S. economic data released during the week ending May 4.  

#1The unemployment rate dropped to a 17.5 year low, but job creation lags a bit. The Bureau of Labor Statistics has nonfarm payrolls growing by a good, but not great 164,000 during April (seasonally adjusted), following increases of 135,000 and 324,000 in March and February. Private sector employers added 168,000 workers during the month, split by 49,000 jobs in the goods-producing side of the economy and 119,000 in the service sector. Industries adding the most workers to their payrolls during April were professionals/business services (+54,000), health care/social assistance (+29,300), manufacturing (+24,000), leisure/hospitality (+18,000), and construction (+17,000). The average workweek remained at 34.5 hours while average hourly earnings added four cents to $26.84. As a result, average weekly earnings grew by $1.38 to $925.98 (+2.8 percent versus April 2018).

Based on a separate household survey, the unemployment slipped by 2/10ths of a percentage point to 3.9 percent, its lowest point since December 2000. Taking some of the steam from this news was that 239,000 people left the labor force during the month, resulting in the labor force participation rate slipping by 1/10th of a percentage point to 62.8 percent. Falling by the same amount was the labor force participation rate for adults aged 25-54 (to 82.0 percent). The median length of unemployment jumped by 7/10ths of a week to 9.8 weeks (April 2017: 10.3 weeks). The BLS’s broadest measure of labor underutilization (the U-6 series) hit another post-recession low with a 2/10ths of a percentage point decline to 7.8 percent.Unemployment Rate 1998-2018 050418

#2The Fed stays put in May, likely to act in June. The policy statement released following this past week’s meeting of the Federal Open Market Committee (FOMC) continued to characterize economic growth as “moderate” and job gains as “strong.” Further, while household spending had “moderated,” business investment continued to grow “strongly.” Finally, core inflation measures continued to approach the Fed’s two-percent target. The FOMC voting members voted unanimously to keep the fed funds target rate between 1.5 and 1.75 percent, a rate the committee considers to be “accommodative.” The statement notes that conditions likely will “warrant further gradual increases” in its short-term interest rate target. The general consensus has the next rate hike at its June 12-13 meeting.

#3Personal spending rebounds in March. The Bureau of Economic Analysis reports that real personal consumption expenditures (PCE) rose 0.4 percent on a seasonally adjusted basis during the month following declines in both January and February. Real spending on durable goods jumped 1.1 percent while expenditures for nondurables and services each gained 0.3 percent. As prices were flat during the month, nominal PCE also grew 0.4 percent during the month. The increased spending was prompted a 0.3 percent gain in both nominal personal income and disposable income. After adjusting for inflation, real disposable income grew by 0.2 percent. Funding the difference was the 2/10ths of a percentage point drop in the savings rate to +3.1 percent. Over the past year, real PCE has increased 2.4 percent while disposable income has gained 1.7 percent.

#4Aircraft exports prompt a sharp narrowing of the trade deficit in March. Per the Census Bureau and Bureau of Economic Analysis, exports increased by $4.2 billion during the month to $208.5 billion (+8.8 percent versus March 2017) while imports slowed by $4.6 billion to $257.5 billion (+8.9 percent versus March 2017). As a result, the trade deficit contracted by 15.2 percent during the month to -$49.0 billion, which was still 9.5 percent larger than that of a year earlier. The goods deficit shrank by $7.5 billion to -$69.5 billion while the services surplus expanded by $1.3 billion to +$20.5 billion. The former was boosted by increased exports of civilian aircraft (+1.9 billion), foods/feeds (+$1.0 billion), and industrial supplies/materials (+$0.9 billion) and decreased imports of capital goods (-$3.6 billion), consumer goods (-$0.9 billion), and crude oil (-$0.5 billion). The U.S. had its biggest goods deficits with China (-$35.4 billion), the European Union (-$12.4 billion), and Mexico (-$7.0 billion).

#5Factory orders grew for the seventh time in eight months during March. The Census Bureau estimates new orders for manufactured goods increased 1.6 percent during the month to a seasonally adjusted $507.7 billion (+8.1 percent versus March 2017). Transportation goods—and, in particular, civilian aircraft—were a major reason for the increase. Net of transportation goods, factory orders increased 0.3 percent during the month and was 6.6 percent ahead of its year-ago pace. Durable goods orders jumped 2.5 percent during March while those for nondurables gained 0.5 percent. Shipments increased for the 15th time in 16 months with 0.4 percent growth to $502.8 billion. Non-transportation goods shipments gained 0.2 percent. The value of manufacturers’ unfilled orders gained 0.8 percent to $1.154 trillion (its sixth increase in seven months) while inventories expanded 0.3 percent to $677.3 billion (its 16th increase over the past 17 months). 

Other U.S. economic data released over the past week:
Jobless Claims (week ending April 28, 2018, First-Time Claims, seasonally adjusted): 211,000 (+2,000 vs. previous week; -31,000 vs. the same week a year earlier). 4-week moving average: 221,500 (-9.3% vs. the same week a year earlier).
Productivity (Q1 2018-preliminary, Nonfarm Labor Productivity, seasonally adjusted): +0.7% vs. Q3 2017, +1.3% vs. Q1 2017).
ISM Report on Business-Manufacturing (April 2018, PMI (Index (>50=expanding manufacturing sector)), seasonally adjusted): 57.3 (-2.0 points vs. March 2018).
ISM Report on Business-Nonmanufacturing (April 2018, NMI (Index (>50=expanding service sector)), seasonally adjusted): 56.8 (-2.0 points vs. March 2018).
Construction Spending (March 2018, Value of Construction Put in Place, seasonally adjusted annualized rate): $1.285 trillion (-1.7% vs. February 2018, +3.6% vs. March 2017).
Vehicle Sales (April 2018, Light Vehicle Retail Sales, seasonally adjusted annualized rate): 17.17 million units (-1.8% vs. March 2018, +0.8% vs. April 2017).
Pending Home Sales (March 2018, Index (2001=100), seasonally adjusted): 107.6 (+0.4% vs. February 2018, -3.0% vs. March 2017).

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

The FOMC Makes Another Move, Will (Likely) Do So Twice More This Year: March 19 – 23

The Federal Reserve raised its short-term interest rate target and signals its intention to do so several more times this year. Here are the five things we learned from U.S. economic data released during the week ending March 23.

#1The Fed bumps up its short-term interest rate target…and its economic forecast. The policy statement released after this past week’s meeting of the Federal Open Market Committee (FOMC) noted that the economy was growing “at a moderate rate” and the labor market had “continued to strengthen,” featuring “strong” job gains. Nonetheless, core inflation remained under its two-percent target. As a result, the committee voted without dissent to raise the fed funds target rate by 25-basis points to a range between 1.50 and 1.75 percent. The statement continued to note that economic conditions are likely to “warrant” further hikes, but that interest rates would likely remain accommodative “for some time.”

The expectation of what “some time” may mean is presented with the updated economic forecasts of the FOMC meeting participants published in conjunction with the above policy statement. The median fed funds target rate forecast remains at 2.1 percent at the end of 2018, suggesting two more 25-basis points hikes this year. The consensus forecast places the expected fed funds target at 2.9 percent (i.e., three rate hikes) for 2019 and 3.4 percent (i.e., two rate hikes) for 2020. The same forecast has the U.S. economy growing 2.7 percent for all of 2018 (up from the prior forecast of a 2.5 percent gain) and 2.4 percent in 2019 (up from the previous forecast of 2.1 percent).Fed Funds Target Rate Forecasts 032318

#2Existing homes sales grew for the first time in three months in February. The National Association of Realtors reports that sales of previously owned homes grew 3.0 percent during the month to a seasonally adjusted annualized rate of 5.540 million units. This was 1.1 percent ahead of the year-ago sales pace. During the month, existing home sales surged 11.4 percent in the West and 6.6 percent in the South but slowed 12.3 percent in the Northeast and 2.4 percent in the Midwest. Only two regions—the South (+3.4 percent) and West (+2.4 percent)—reported positive 12-month sales comparables. While inventories of unsold homes grew 4.6 percent during February to 1.590 million units, this was the equivalent to a very tight 3.4 month supply. As a result, the median sales price of existing homes has grown 5.9 percent over the past year to $241,700. The press release noted that “the very healthy U.S. economy and labor market are creating a sizeable interest in buying a home in early 2018,” but also that “affordability continues to be a pressing issue” because of a lack of homes available on the market.

#3…But new home sales slipped again. Sales of new single-family homes inched down 0.6 percent in February to a seasonally adjusted annualized rate (SAAR) of 618,000 units. Even with the decline, the annualized rate of the Census Bureau data series was 0.5 percent above that of a year earlier. Sales during the month in the Northeast (+19.4 percent) and South (+9.0 percent) but dropped in the West (-17.6 percent) and Midwest (-3.7 percent). In comparison to February 2017, sales grew in three regions—Northeast (+8.8 percent), West (+3.1 percent), and South (+0.6 percent)—but declined 8.1 percent in the Midwest. Inventories of new homes continued their gradual expansion—the 305,000 new homes available for sale at the end of February was up 2.0 percent for the month, a 16.0 percent advance from February 2017, and represented a still relatively tight 5.9 month supply. The median sales price of new homes of $326,800 was a 9.7 percent increase from a year earlier.

#4Durable goods orders surged during February. The Census Bureau estimates the value of new durable goods orders was at a seasonally adjusted $247.7 billion. This was the third increase over the past four months and a healthy rebound from January’s 3.5 percent drop. Transportation goods orders surged 7.1 percent, in part due to a jump in increased orders for both civilian (+25.5 percent) and defense aircraft (+37.7 percent) in addition to a 1.8 percent bounce in orders for motor vehicles. Net of transportation orders, new durable goods gained 1.2 percent after pulling backing 0.2 percent in January. New orders grew for primary metals (+2.7 percent), electrical equipment/appliances (+2.6 percent), machinery (+1.6 percent), and fabricated metal products (+0.8 percent). New orders for nondefense capital goods minus aircraft (a proxy for business investment) grew 1.8 percent during February after having pulled back 0.4 percent during the prior month.

#5Forward-looking economic indicators continue to suggest solid growth in 2018. The Conference Board’s Leading Economic Index (LEI) grew by 7/10ths of a point during February to a seasonally adjusted 108.8 (2016=100). The LEI has increased for five straight months, rising 6.5 percent over the past year. Eight of the ten components to the LEI made positive contributions to the index, led by average weekly manufacturing hours, new orders for manufactured goods (per ISM), and jobless claims. The coincident economic index added 3/10ths of a point during the month to a reading of 103.3 (+2.3 percent versus February 2017), with all four components on that index making positive contributions (led by industrial production and nonfarm payrolls). The lagging economic index picked up 4/10ths of a point to 104.3 (+2.6 percent versus February 2017) as four of seven index components making positive contributions (led by the average length of unemployment). The press release notes that the six-month growth rate for the leading index had not been this high since the first quarter of 2011.

Other U.S. economic data released over the past week:
Jobless Claims (week ending March 17, 2018, First-Time Claims, seasonally adjusted): 229,000 (+3,000 vs. previous week; -32,000 vs. the same week a year earlier). 4-week moving average: 223,750 (-9.2% vs. the same week a year earlier).
State Employment (February 2018, Nonfarm Employment, seasonally adjusted): Vs. January 2018: 11 states had significant payroll increases. Vs. February 2017: 24 states had significant payroll increases.
FHFA House Price Index (January 2018, Purchase-Only Index, seasonally adjusted): +0.8% vs. December 2017, +7.3% vs. January 2017. 

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