Fed Cuts Again, Unclear on Next Steps: September 16 – 20

The Federal Reserve cuts its short-term interest rate target and sent a mixed message on what may be next. Here are the five things we learned from U.S. economic data released during the week ending September 20.

#1A divided Fed lowered its short-term interest rate target. In the statement released following this past week’s meeting of the Federal Open Market Committee (FOMC) noted that the U.S. economy was “rising at a moderate rate,” the “labor market remains strong,” and household spending was robust. But the statement also indicated that both business investment and exports “have weakened” and inflation remains below the Fed’s two-percent target. As a result, the FOMC voted to cut the fed funds target rate by a quarter-percent point to a range of 1.75 percent and 2.00 percent because “of the implications of global developments for the economic outlook as well as muted inflation pressures.” The decision was not unanimous: two voting members wanted to leave the fed funds target rate unchanged while one member sought a half-point rate cut.

Looking at economic forecasts by FOMC members released in conjunction with the policy statement, it is clear that there is even more disagreement on what is next. Seven voting members anticipate at least one more rate cut before the end of 2019, while five members expect this past week’s rate cut would be the final cut of the year and five had not expected even this rate cut. The same forecasts have the U.S. economy expanding at 2.0 percent next year with an unemployment rate of 3.7 percent and inflation just below the Fed’s target at 1.9 percent.FOMC Fed Funds Forecast 092019

#2Forward-looking economic measures suggest slowing growth. The Conference Board’s Leading Economic Index (LEI) held steady in August at a reading of 112.1, following a 4/10ths of a point increase during the prior month. The LEI has grown a modest 1.1 percent over the past year. Five of the ten LEI components made positive contributions, led by housing building permits. The coincident index added 3/10ths of a point to 106.4 (+1.6 percent versus August 2018). All four components of the coincident index made positive contributions, led by industrial production. The lagging index shed 3/10ths of a point to 108.2 (+3.0 percent versus August 2018) as only three of seven components made a positive contribution. The press release said that the leading index was “consistent with a slow but still expanding economy, which has been primarily driven by strong consumer spending and robust job growth.”

#3Manufacturing production rebounded in August. The Federal Reserve tells us that manufacturing output grew a seasonally adjusted 0.5 percent during the month following a 0.4 percent pullback in July. Output for durable and nondurable goods each rose 0.5 percent, with the former boosted by higher than one-percent gains for machinery, primary metals, and nonmetallic mineral goods. Plastics/rubber products and chemicals lifted the nondurables figure. Overall industrial production grew 0.6 percent in August after having had slipped 0.1 percent during the prior month. Mining output jumped 1.4 percent following a 1.5 percent decline in July (caused by a temporary slowdown in oil extraction resulting from Hurricane Barry). Production at utilities grew 0.6 percent in August. Even with its expansion in August, manufacturing output was 0.4 percent smaller than that of a year earlier while the 12-month comparable for overall industrial production was a modest +0.4 percent.

#4Existing home sales edged up in August. Sales of previously owned homes gained 1.3 percent in August to a seasonally adjusted annualized rate (SAAR) of 5.49 million units (up 2.6 percent from August 2018). The National Association of Realtors’ measure grew in three of four Census regions—Northeast (+7.6 percent), Midwest (+3.1 percent), and South (+0.9 percent)—but fell 3.4 percent in the West. Home sales in four Census regions had positive 12-month comparables. Inventories of unsold homes remained tight, falling 2.1 percent during the month to 1.86 million houses (-2.6 percent versus August 2018). This was the equivalent to a 4.1 month supply. The median sales price has grown 4.7 percent over the past year to $278,200. The press release credits the recent drop in mortgage interest rates for the rise in home sales.

#5Housing starts bloomed in August. The Census Bureau reports that housing starts rose 12.3 percent during the month to a seasonally adjusted annualized rate (SAAR) of 1.215 million units. This left the measure 6.6 percent ahead of its year-ago mark. Single-family home starts increased 4.4 percent while those of multi-family units surged 30.9 percent. Leading towards the future, the number of issued housing permits gained 7.7 percent in August to an annualized 1.419 million permits (+12.0 percent versus August 2018). The annualized count of permits for single-family homes grew 4.5 percent during the month while that for homes with five or more units jumped 14.9 percent. Housing completions gained 2.4 percent in August to an annualized 1.294 million homes, up 5.0 percent from a year earlier.

Other U.S. economic data released over the past week:
Jobless Claims (week ending September 14, 2019, First-Time Claims, seasonally adjusted): 208,000 (+6,000 vs. previous week; -4,000 vs. the same week a year earlier). 4-week moving average: 212,250 (+0.5% vs. the same week a year earlier).
Housing Market Index (September 2019, Index (>50 = ”Good” housing market), seasonally adjusted): 68 (vs. August 2019: 67, vs. September 2018: 67).
State Employment (August 2019, Nonfarm Payrolls, seasonally adjusted):  vs. July 2019: Grew in 5 states, Decreased in 1 state, and Unchanged in 44 states and the District of Columbia.  Vs. August 2018: Grew in 26 states and Unchanged in 34 states and the District of Columbia.
Treasury International Capital (July 2019, Net Foreign Purchases of Domestic Securities, not seasonally adjusted): +$72.3 billion (vs. June 2019: +$65.3 billion, vs. July 2018: +$34.5 billion).

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

Mixed Data as a Curve Inverts: August 12 – 16

In a week where the yield curve momentarily inverted, economic data pointed in different directions. Here are the five things we learned from U.S. economic data released during the week ending August 16.

#1On the good news side, retail sales flourished in July. The Census Bureau estimates U.S. retail and food services sales increased 0.7 percent during the month to a seasonally adjusted $523.5 billion, up 3.4 percent from a year earlier. Sales at car dealers/parts stores slumped 0.6 percent but rose 1.8 percent at gas stations (thanks to higher prices at the pump). Net of both, core retail sales jumped 0.9 percent in July and 4.2 percent over the past year. Rising were sales at department stores (+1.2 percent) and restaurants/bars (+1.1 percent) and at retailers focused on electronics/appliances (+0.9 percent), apparel (+0.8 percent), groceries (+0.7 percent), furniture (+0.3 percent), and building materials (+0.2 percent).

#2But manufacturing production fell in July. The Federal Reserve estimates manufacturing output dropped 0.4 percent on a seasonally adjusted basis, its first decline in three months. Durable goods production slowed 0.2 percent, with output declines of greater than one percent for wood products, nonmetallic products, and machinery. Nondurable goods production plummeted 0.5 percent, hurt by greater than one percent drops for plastic/rubber, textiles, and printing. Manufacturing has slumped 0.5 percent over the past year. Overall industrial production slipped 0.2 percent during July but remained a half percentage ahead of the year-ago pace. During the month, mining output slowed 1.8 percent (oil and gas well drilling: -3.3 percent) while production at utilities surged 3.1 percent (think hot summer weather).

#3Consumer inflation bloomed in July. The Bureau of Labor Statistics reports that the consumer price index (CPI) grew 0.3 percent on a seasonally adjusted basis during the month, its fastest increase since April. Prices for energy jumped 1.3 percent, pulled up by a 2.5 percent surge in gasoline prices. Food CPI, however, held steady in July. Net of both energy and food, core CPI grew 0.3 percent for a second consecutive month. Rising were prices for used cars/trucks (+0.9 percent), medical care services (+0.5 percent), apparel (+0.4 percent), shelter (+0.3 percent), transportation services (+0.3 percent), and medical care commodities (+0.2 percent). Over the past year, CPI has risen 1.8 percent while core CPI had a 12-month comparable of +2.2 percent.

#4Housing starts slowed in July, or at least they did for condos. The Census Bureau indicates starts of privately-owned homes slid 4.0 percent during the month to a seasonally adjusted annualized rate of 1.241 million units. Despite the decline, housing starts were 0.6 percent ahead of their year-ago pace. July’s drop in starts was on the multi-unit side, which saw a 17.2 percent slump compared to a 1.3 percent increase for single-family home starts. Looking towards the future, the annualized count of issued building permits rose 8.4 percent in July to 1.336 million (+1.5 percent versus July 2018), with monthly gains for both single-family homes (+1.8 percent) and multi-family units (+24.8 percent). The annualized count of completed homes jumped 7.2 percent to 1.250 million, up 6.3 percent from the same month a year earlier.

#5And despite it all, small business owners remained confident in July. The Small Business Optimism Index from the National Federation of Independent Business added 1.4 points during the month to a seasonally adjusted reading of 104.7 (1986=100). This followed a 1.7 point drop during June. Seven of the index’s ten components improved during the month, led by higher readings for expected real sales, expectations for the economy to improve, plans to increase employment, and earnings trends. Only two components—current inventories and expected credit conditions—declined in July. The press release noted the dichotomy of “many are talking about a slowing economy” and the general optimism among its survey respondents and stated that “the small business sector remains exceptional.”

Other U.S. economic data released over the past week:
Jobless Claims (week ending August 10, 2019, First-Time Claims, seasonally adjusted): 220,000 (+9,000 vs. previous week; +5,000 vs. the same week a year earlier). 4-week moving average: 213,750 (-1.4% vs. the same week a year earlier).
Import Prices (July 2019, All Imports): +0.2% vs. June 2019, -1.8% vs. July 2018. Nonfuel Imports: -0.1% vs. June 2019, -1.3% vs. July 2018.
Export Prices (July 2019, All Exports): +0.2% vs. June 2019, -0.9% vs. July 2018. Nonagricultural Exports: +0.2% vs. June 2019, -1.5% vs. July 2018.
Housing Market Index (August 2019, Index (>50 = More Homebuilders See the Housing Market as “Good” versus “Poor,” seasonally adjusted):  66 (vs. July 2019: 65, vs. August 2018: 68.
Monthly Treasury Statement (July 2019, Federal Budget Surplus/Deficit Over First 10 Months of FY2019): -$866.8 billion (+26.9% vs. First 10 Months of FY2018)
Productivity (2019 Q2, Nonfarm Business Labor Productivity, seasonally adjusted): 2.3% vs. 2019 Q1, +1.8% vs. 2018 Q2).
University of Michigan Surveys of Consumers (August 2019-preliminary, Index of Consumer Sentiment (1966Q1=100), seasonally adjusted):  92.1 (vs. July 2019: 98.4, vs. August 2018: 96.2).
State Employment (July 2019, Nonfarm Payrolls, seasonally adjusted): Vs. June 2019: Increased in 5 states and essentially unchanged in 45 states and the District of Columbia. Vs. July 2018: Increased in 25 states and essentially unchanged in 25 states and the District of Columbia.
Treasury International Capital Flows (June 2019, Net Foreign Purchases of Domestic Securities, not seasonally adjusted): +$63.8 billion (vs. May 2019: -$4.6 billion, vs. June 2018: -$45.6 billion).
Business Inventories (June 2019, Manufacturers’ and Trade Inventories, seasonally adjusted): $2.036 trillion (Unchanged vs. May 2019, +5.2% vs. June 2018).

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

Consumers Went Shopping in June: July 15 – 19

Retail sales accelerated, but overall economic activity slowed in June. Here are the five things we learned from U.S. economic data released during the week ending July 19.  

#1Retail sales shined in June. U.S. retail and food services sales grew 0.4 percent during the month to a seasonally adjusted $519.9 billion, per the Census Bureau. This matched May’s 0.4 percent sales gain and left the measure up 3.4 percent over the past 12 months. Sales at auto dealers & parts stores jumped 0.7 percent but fell 2.8 percent at gas stations (due to lower prices at the pump). Net of sales at auto dealers & parts stores and gas stations, core retail sales expanded 0.7 percent in June and 3.8 percent over the past year. Virtually every retail sector enjoyed sales gains during the month, led by restaurants/bars (+0.9 percent) and matching 0.5 percent jumps at furniture retailers, building materials/garden stores, grocery stores, apparel retailers, and health/personal care stores. Sales fell at department stores (-1.1 percent) and electronics/appliance retailers (-0.3 percent).

#2Forward-looking economic indicators suggest the U.S. economy may have hit the brakes in June. The Conference Board’s Leading Economic Index (LEI) shed 3/10ths of a point to a reading of 111.5 (up 1.6 percent from a year earlier), the measure’s first drop since last December. Even with the slide, six of ten LEI components improved during the month. The coincident index increased 1/10th of a point to 105.9 (+1.6 percent versus June 2018) as three of four index components made a positive contribution. The lagging index jumped 6/10ths of a point to 107.7 (+2.6 percent versus June 2018) with four of seven components making a positive contribution. The press release noted that the “LEI suggests [economic] growth is likely to remain slow in the second half of the year.”

#3Manufacturing output grew in June. The Federal Reserve reports that manufacturing output rose 0.4 percent on a seasonally adjusted basis, up from the 0.2 percent bump in May and April’s 0.7 percent drop. Durable goods production advanced 0.4 percent while that for nondurables increased 0.5 percent. Boosting the former were sizable output gains of motor vehicles, nonmetallic mineral products, and computers/electronics while the latter expanded thanks to a jump for petroleum and coal products. Overall industrial production was flat during June. Mining output eked out a 0.2 percent gain while utilities saw output fall 3.6 percent (thanks to moderate summer weather during June). Overall industrial production has grown a modest 1.3 percent over the past year while 12-month comparable for manufacturing output was a tepid +0.4 percent.

#4Housing starts slowed in June, thanks to multifamily units. The Census Bureau places its seasonally adjusted annualized estimate of housing starts at 1.253 million units, a 0.9 percent decline from May but up 6.2 percent from a year earlier. Even if the headline figure declined, starts of single-family homes grew 3.5 percent—those of multifamily units fell 9.4 percent. Looking towards the future, the annualized count of issued housing permits slumped 6.1 percent to 1.220 million (-6.6 percent versus June 2018). Issued permits for future single-family homes edged up 0.4 percent but plummeted 20.7 percent for properties of five or more units. Housing completions dropped 4.8 percent during June to an annualized 1.161 million units.

#5Homebuilder sentiment solidified in July. The National Association of Home Builders’ Housing Market Index (HMI) added one point during the month to a seasonally adjusted 65. This was a rebound from the two-point drop in June and the 61st straight month of the HMI staying above a reading of 50, indicative of more builders seeing the housing market as “good” versus being “poor.” The HMI grew in the West and South but lost ground in the Midwest and Northeast. Adding a point each were indices that track single-family home sales (72), expected home sales (71), and traffic of prospective buyers (48). The press release noted builders were reporting “solid demand for single-family homes.”

Other U.S. economic data released over the past week:
Jobless Claims (week ending July 13, 2019, First-Time Claims, seasonally adjusted): 216,000 (+8,000 vs. previous week; +4,000 vs. the same week a year earlier). 4-week moving average: 218,750 (-0.1% vs. the same week a year earlier).
Import Prices (June 2019, All Imports, not seasonally adjusted): -0.9% vs. May 2019, -2.0% vs. June 2018. Nonfuel Imports: -0.3% vs. May 2019, -1.4% vs. June 2018.
Export Prices (June 2019, All Exports, not seasonally adjusted): -0.7% vs. May 2019, -1.6% vs. June 2018. Nonagricultural Exports: -1.1% vs. May 2019, -1.6% vs. June 2018.
University of Michigan Surveys of Consumers (July 2019-preliminary, Index of Consumer Sentiment, seasonally adjusted): 98.4 (June 2019: 98.2, July 2018: 97.9).
Treasury International Capital Flows (May 2019, Net Foreign Purchases of U.S. Securities, not seasonally adjusted): -$5.7 billion (vs. April 2019: +$36.4 billion, vs. May 2018: +$20.2 billion.
State Employment (June 2019, Nonfarm Payrolls, seasonally adjusted): Vs. May 2019: Increased in 4 states, essentially unchanged in 46 states and the District of Columbia.  Vs. June 2018: Increased in 28 states, essentially unchanged in 22 states and the District of Columbia.
Business Inventories (May 2019, Manufacturers’ and Trade Inventories, seasonally adjusted): $2.036 trillion (+0.3% vs. April 2019, +5.3% vs. May 2018.
Beige Book

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