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.

Fed Raises Interest Rates, Earth Continues to Rotate Normally: What We Learned During the Week of December 14-18

The Fed finally made a move, manufacturing remained stuck in neutral and new home starts rebounded. Here are the 5 things we learned from U.S. economic data released during the week ending December 18.

#1The Fed bumps up short-term rates for the 1st time since 2006…but rates are expected to rise only at a leisurely pace going forward. There was no dissent among the voting members of the Federal Open Market Committee to increased the fed funds target from near 0-percent (where it had been since December 2008) to a range between 0.25% and 0.50%. The key point is that interest rates remain (and will remain) very low by historic measures. In fact, the Federal Reserve’s policy statement following last week’s FOMC meeting states that “the stance of monetary policy remains accommodative after this increase.” Further, the committee anticipates we will see “only gradual increases in the federal funds rate” over the intermediate term with rates remaining below normal long-term levels for some time. The policy statement noted 121815that the U.S. economy has been expanding at a “moderate pace” characterized by household spending and business investment spending each “increasing at solid rates,” a housing market that has “improved further” and a strengthening labor market. Still, net exports “have been soft” and inflation remains below the Fed’s 2 percent target rate.

So what will happen in the future with interest rates? Well, economic projections from FOMC members suggest rates will grow at a moderate pace. Forecasts for the fed funds target range for the end of 2016 from 1.1% to 2.2%, for the end of 2017 from 1.9% to 3.0% and for the end of 2018 from 2.9% to 3.5%. Each of these interest rate forecast are modest by historic standards. One reason is that FOMC members see moderate (but not spectacular) economic growth in the coming years, with forecasted GDP growth ranging from +2.3% to +2.5% in 2016 and ranging from +2.0% to +2.3% for 2017.

#2Manufacturing stuttered again as overall industrial production contracted for a 3rd straight month. The Federal Reserve estimates manufacturing output was unchanged during November and was up by only 1.0% from a year earlier. A 1.0% drop in automobile production pulled down durable goods output 0.2%, the 4th straight monthly decline (the durable goods metric was up a feeble 0.5% from November 2014 levels). Production of nondurables grew for the 1st time in 3 months with a 0.5% increase (+1.6% vs. November 2014), with most major nondurables categories experiencing gains during the month. Mining output fell by another 1.1% (its 3rd straight monthly decline), with oil & gas well drilling and servicing at levels less than half of that from a year ago. Meanwhile, utilities’ output fell 4.3% during November, thanks to relatively moderate weather conditions. Overall industrial production dropped 0.6% during November and was 1.2% below year ago levels.

#3Falling gasoline prices and the 1st drop in food prices since late winter resulted in flat consumer prices during November. The Consumer Price Index (CPI) from the Bureau of Labor Statistics was unchanged on a seasonally adjusted basis during the month and was up a mere 0.4% from a year earlier. Energy CPI dropped for the 3rd time in 4 months with a 1.3% decline as prices for gasoline (-2.4 %), fuel oil (-1.3%) and utility delivered natural gas (-1.9%) all fell. Food CPI dipped 0.1%, as prices declined for all major food groups except for the fruits/vegetables index. Net of energy and food, core CPI increased by 0.2% for the 3rd straight month and was up 2.0% from a year earlier. Core goods prices declined 0.2% (pulled down by prices for apparel and used cars/trucks) while core services prices picked up 0.3% (pushed up by higher prices for transportation services, medical care services and shelter.

#4Housing starts rebounded in November. The Census Bureau places the seasonally adjusted annualized rate of housing starts at 1.173 million units, which was up 10.5% from October and 16.5% from November 2014. Starts of single-family units gained 7.6% during the month while that for multi-family units zoomed up 16.4% (the latter data series tends to be particularly volatile month-to-month). Looking towards the future, the number of issued housing permits hit a post-recession high with a 11.0% gain to 1.289 million units (SAAR, +19.5% vs. November 2014). Month-to-month gains for single-family units and multi-family unit permits were +1.1% and 26.9%, respectively. Housing completions slipped 3.2% during November to 947,000 (SAAR), up 9.2% from the November 2014 rate.

#5A forward looking measure of economic activity finds a 2nd consecutive month of solid growth in November. The Conference Board’s Leading Economic Index added 5/10ths of a point to 124.6 (2010 = 100). This follows a 7/10ths of point gain in October that reversed 3 months of stagnation between July and September. Even with November’s gain, only 5 of the index’s 10 components improved during the month, led by building permits, the interest rate spread and stock prices. The coincident index inched up by 1/10th of a point to 113.3 with 3 of 4 index component increasing during the month (nonagricultural payrolls, personal income net of transfer payments and manufacturing/trade sales). The lagging index gained 4/10ths of a point to 119.6, with 3 of 7 components gaining during the month (outstanding commercial/industrial loans, change in consumer prices of services and the ratio consumer installment loans-to-personal income). Through its press release, the Conference Board said that “the economic outlook for the final quarter of the year and into the new year remains positive.”

Other data released over the past week that you might find of interest:
Jobless Claims (week ending December 12, 2015, seasonally adjusted): 271,000 (-11,000 vs. previous week; -18,000 vs. same week a year earlier). 4-week moving average: 270,500 (-8.1% vs. same week a year earlier).
Housing Market Index (December 2015, Diffusion Index, Seasonally Adjusted): 61 (vs 62 in November 2015, 58 in December 2014).
Regional & State Employment (November 2015, Seasonally Adjusted): Nonfarm payments expanded in 35 states and in the District of Columbia, contracted in 14 states and was unchanged in 1 other versus October 2015 levels.
Treasury International Capital Flows (October 2015, Net Domestic Purchases by Foreigners): -$50.2 billion (vs. +$9.4 billion in September 2015, $15.0 billion in October 2014).

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