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.

Retail Gains (for Some), Inflation Rebounds: May 8 – 12

Retail sales increased during April, although not all retailers benefited from increased consumer spending. Meanwhile, inflation rebounded during April after having taken March off. Here are the 5 things we learned from U.S. economic data released during the week ending May 12.

#1On the whole, retail sales grew during April, but not all sectors shared in the gain. The Census Bureau places its estimate of April sales for retail and food services at a seasonally adjusted $474.9 billion, up 0.4 percent from March and 4.8 percent from a year earlier. (The Census Bureau also raised its previously released estimate of March retail sales from a 0.2 percent decrease to a 0.1 percent gain.) Some of the gains came from a rebound in sales at auto dealers (and parts retailers) with a 0.7 percent sales increase. Net of activity at auto dealers, retail sales increased 0.3 percent during April and were up 4.5 percent over the past year. Sales grew at retailers focused on electronics/appliances (+1.3 percent), building materials/garden (+1.2 percent), personal care (+0.8 percent), and sporting goods/hobbies (+0.6 percent). Sales also improved at restaurants/bars (+0.4%). And, reflecting the continuing shift of sales away from traditional brick and mortar stores, sales at nonstore retailers (e.g., web retailers) jumped 1.4 percent during April and were 11.9 percent above their April 2016 rate. Sales weakened 0.5 percent at furniture retailers, 0.5 percent at apparel retailers, and 0.4 percent at grocery stores. Reflecting the shift above in consumer preferences, sales also fell 0.5 percent at general merchandise retailers, although sales did gain 0.2 percent at non-luxury department stores. Sales were 0.7 percent below those a year earlier at general merchandisers with the 12-month comparable at non-luxury department stores at -3.7 percent. Other retail segments with weak year-to-year sales comparables included sporting goods/hobbies (-2.4 percent), apparel (+0.5 percent), and electronics/appliances (+0.7 percent).Change in Retail Sales-April 2017-051217

#2Energy and food price pulled up consumer prices during April. The Bureau of Labor Statistics reports that the Consumer Price Index (CPI) gained 0.2 percent on a seasonally adjusted basis during the month and was 2.2 percent above its year-ago mark. Energy prices rose 1.1 percent during April as gasoline prices jumped 1.2 percent (also rise were the price indices for utility delivered natural gas (+2.2 percent), energy services (+0.9 percent), and electricity (+0.6 percent). Energy CPI has risen 9.3 percent over the past year. Food CPI gained 0.2 percent during the month but only by 0.5 percent since April 2016. Core CPI, which removes both energy and food goods from the analysis, inched up 0.1 percent during the month and was 1.9 percent above where it was a year ago. While shelter prices grew 0.3 percent during April, falling were prices for medical care commodities (-0.8 percent), used vehicles (-0.5 percent), apparel (-0.3 percent), new vehicles (-0.2 percent), and transportation services (-0.2 percent).

#3Wholesale prices rebounded in April after slipping in March. The Producer Price Index (PPI) for final demand jumped 0.5 percent on a seasonally adjusted during April after having declined 0.1 percent during the previous month. The Bureau of Labor Statistics’ measure has increased 2.5 percent over the past year, its largest 12-month comparable since February 2012. The rise in PPI was widespread. The core measure for wholesale prices—final demand PPI net of energy, food, and trade services—jumped 0.7 percent during April and was has grown 2.1 percent over the past year. PPI for final demand goods grew a robust 0.5 percent, which included strong gains in wholesale energy and food prices of 0.8 percent, and 0.9 percent, respectively. Net of energy and food, core goods producer prices increased 0.3 percent, the fifth time over the past six months in which that measure had grown by at least that amount. PPI for final demand services grew 0.4 percent during the month, pulled up by higher prices for financial services, guestroom rentals, and transportation and warehousing services.

#4The number of job openings grew during March, but the pace of hiring held firm. The Bureau of Labor Statistics estimates nonfarm employers hired 5.260 million people on a seasonally adjusted basis during the month, up 11,000 from February but off 37,000 from a year earlier. Private sector employers hired 4.928 million workers during March, up 23,000 from February and 8,000 from March 2016. Industries with the largest year-to-year percentage increases in hiring were manufacturing (+22.9 percent), transportation (+10.2 percent), and health care/social assistance (+8.9 percent). Meanwhile, the count of people hired by retailers was off 3.2 percent from the same month a year earlier. The slow growth in hiring happened even as the count of job openings grew by 61,000 during March to a seasonally adjusted 5.743 million. (-1.9 percent versus March 2016). Private sector job openings totaled 5.207 million, 2.5 percent below March 2016 levels. Industries with the largest year-to-year percentage increases in job openings include manufacturing (+15.2 percent), health care/social assistance (+10.4 percent), financial activities (+7.7 percent), and wholesale trade (+3.4 percent). 5.088 million people left their job during March, up 80,000 from February and 1.0 percent from a year earlier. While layoffs edge up by 21,000 during the month to 1.615 million, this remained 6.4% below that of a year earlier. The voluntary quits figure of 3.036 million people was down 150,000 from February but still 3.5 percent above that of a year earlier.

#5A change in business tax payment deadlines leads to a larger budget surplus in April. Per the Bureau of the Fiscal Service, the U.S. government ran a budget surplus of $182.4 billion. This compares to a deficit of $172.2 billion during the previous month and a $33.4 billion surplus during the same month a year earlier. The significantly larger deficit is largely the result of a change in rules that shifted the due date for corporate tax payments from March to April. Receipts totaled $455.6 billion (up 16.3 percent from April 2016) while expenditures dropped 18.0 percent. The U.S. government ran a budget deficit of $344.4 billion during the first seven months of FY2017, 2.4 percent smaler than the deficit incurred during the same seven months of FY2016.

Other U.S. economic data released over the past week:
Jobless Claims (week ending May 6, 2017, First-Time Claims, seasonally adjusted): 236,000 (-2,000 vs. previous week; -50,000 vs. the same week a year earlier). 4-week moving average: 243,500 (-9.8% vs. the same week a year earlier).
University of Michigan Index of Consumer Sentiment (May 2017-preliminary, Index (1966Q1=100), seasonally adjusted): 97.7 (vs. April 2017: 97.0, vs. May 2017: 94.7).
Import Prices (April 2017, not seasonally adjusted): +0.5% vs. March 2017, +4.1% vs. April 2016. Nonfuel imports: +0.3% vs. March 2017, +1.1% vs. April 2016.
Export Prices (April 2017, not seasonally adjusted): +0.2% vs. March 2017, +3.0% vs. April 2016. Nonagricultural exports: +0.1% vs. March 2017, +2.9% vs. April 2016.
Small Business Optimism Survey (April 2017, Index (1986=100), seasonally adjusted): 104.5 (vs. March 2017: 104.7, April 2016: 93.6).
Manufacturing and Trade Inventories (March 2016, Business Inventories, seasonally adjusted): $1.841 trillion (+0.2% vs. February 2017, +2.6% 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.