A Dovish Fed: March 18 – 22

The Fed signals that it will not hike short-term interest rates this year. Here are the five things we learned from U.S. economic data released during the week ending March 22.

#1The Fed’s campaign of raising short-term interest rates is over (for now). The policy statement published after the past week’s Federal Open Market Committee (FOMC) noted that economic activity growth had “slowed from its solid rate” but that the labor market “remains strong.” Also decelerating were growth rates of both household spending and business investment. Inflation fell below the Fed’s two-percent target rate—largely due to lower energy prices—with core inflation closer to the target. As a result, the FOMC voted unanimously to keep the fed funds target rate at a range between 2.25 and 2.50 percent and (perhaps more notably) stated that it would be “patient” as to if/when it would again raise rates. The Fed bases its patience on “global economic and financial developments and muted inflation pressures.” Written another way, the Fed no longer expects to raise its interest rate target in 2019—not long ago up to three rate increases had been the consensus expectation for this year.

#2Forward-looking measures suggest economic activity was picking back up in early 2019. The Conference Board’s Leading Economic Index (LEI) added 2/10ths of a point during February to a reading of 111.5 (2016=100), its best reading since last September. This measure had sputtered along since last October—trading within a 2/10ths of a point range—but has risen 3.0 percent over the past year. Six of ten LEI components grew in February, with the most significant positive contributor being rising stock prices. The coincident index also added 2/10ths of a point to 105.9 (+2.5 percent versus February 2018) as all four index components making positive contributions. The lagging index held firm at 107.0 during February, growing by a modest 0.8 percent over the past year. The press release notes that the results—particularly, the recent sluggishness in the leading index—suggest economic growth “could decelerate by year end.” 

#3Existing home sales bounced back big in February. The National Association of Realtors reports that sales of previously owned homes surged 11.8 percent during the month to a seasonally adjusted annualized rate (SAAR) of 5.51 million units. This was the best month for existing home sales since last March but still left sales 1.8 percent behind the year-ago sales pace. Sales expanded in three of four Census regions in February: West (+16.0 percent), South (+14.9 percent), and Midwest (+9.5 percent). Meanwhile, sales in Northeast matched January’s pace. There were 1.63 million homes available for purchase at the end of February, up 2.5 percent from January and 3.2 percent from a year earlier. Nonetheless, inventories represented a very tight 3.5 month supply. The median sales price of $249,500 was up 3.6 percent from a year earlier. NAR’s press release tie February’s strong housing report to “a powerful combination of lower mortgage rates, more inventory, rising income and higher consumer confidence.”

#4Homebuilders sentiment was stable in March. The National Association of Homebuilders’ Housing Market Index (HMI) remained at a seasonally adjusted reading of 62. This was the 57th consecutive month the HMI was above a reading of 50, indicative of a higher percentage of survey respondents viewing the housing market as “good” as opposed to being “poor.” The HMI improved in three of four Census regions, with only the Midwest seeing a decline in the sentiment measure. Improving during the month with indices measuring present sales of single-family homes (up two points to 68) and expected home sales (up three points to 71, while the measure tracking the traffic of prospective buyers lost four points to 44. The press release noted that homebuilders are challenged by a “skilled worker shortage, lack of buildable lots and stiff zoning restrictions in many major metro markets.”

#5Factory orders grew slightly in January. The Census Bureau reports that new orders for manufactured goods increased for a second straight month, albeit at a modest 0.1 percent to a seasonally adjusted $500.5 billion. Net of transportation goods, factory orders slowed 0.2 percent while core capital goods orders (which are nondefense capital goods net of aircraft) jumped 0.8 percent. Durable goods orders gained 0.3 percent those of nondurables pulled back 0.2 percent. Shipments dropped for the fourth straight month with a 0.4 percent decline to $503.1 billion while nontransportation goods shipments slowed by a more modest 0.2 percent. Unfilled orders swelled for the first time in four months with a 0.1 percent bump to $1.182 trillion while inventories grew 0.5 percent to $685.7 billion (its 26th gain in 27 months).

Other U.S. economic data released over the past week:
Jobless Claims (week ending March 16, 2019, First-Time Claims, seasonally adjusted): 221,000 (-9,000 vs. previous week; -6,000 vs. the same week a year earlier). 4-week moving average: 225,000 (Unchanged vs. the same week a year earlier).
State Employment (February 2019, Nonfarm Payrolls, seasonally adjusted): Vs. January 2019: Increased in 2 states and was essentially unchanged in 48 states and the District of Columbia. Vs. February 2018: Grew in 22 states and was essentially unchanged in 28 states and the District of Columbia.
Wholesale Trade (January 2019, Merchant Wholesalers’ Inventories, seasonally adjusted): $669.9 billion (+1.2% vs. December 2018, +7.7% vs. January 2018). 

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

Consumers Spend, Prices Hit a Target: August 27 – 31

Consumers focused their spending on nondurable goods and services during July. Here are the five things we learned from U.S. economic data released during the week ending August 31.  

#1Consumers continued spending in July while inflation hits the Fed’s target. Real personal consumption expenditures (PCE) increased at a seasonally adjusted 0.2 percent rate during the month. This was down from the 0.3 percent gains reported by the Bureau of Economic Analysis for the three prior months. Spending on goods and services each grew by 0.2 percent during July, with the latter split by a 0.6 percent bump in nondurable goods spending and a 0.5 percent drop in durable goods spending. Nominal (non-price adjusted) PCE grew 0.4 percent for a second consecutive month. Nominal personal and disposable income gained 0.3 percent, with real disposable income rising 0.2 percent. The savings rate slipped by 1/10th of a percentage point to +6.7 percent. Over the past year, real disposable income has increased 2.9 percent while real PCE has expanded 2.8 percent. The same report includes data on inflation—the PCE deflator growing 0.1 percent during July with the core PCE deflator (removing energy and food) gained 0.2 percent. Over the past year, the two price measures have grown by 2.3 percent and 2.0 percent, respectively, with the latter matching the Federal Reserve’s two-percent inflation target.Consumer Spending April - July 2018 083118

#2GDP expanded a smidge faster than previously believed during Q2. The Bureau of Economic Analysis’ second estimate of gross domestic product (GDP) for the months of April, May, and June has the U.S. economy expanding 4.2 percent on a seasonally adjusted annualized basis. This was up from the 4.1 percent gain reported a month earlier and was the best quarter for GDP growth since the third quarter of 2014. The small upward revision was the result of higher than previously believed levels of business investment and private inventory accumulation partially offset by lower than the previously thought level of consumer spending. The sectors of the economy making positive contributions to GDP growth were (in declining order of contribution) were: personal spending (+255-basis points), fixed nonresidential investment (+107-basis points), exports (+110-basis points), government expenditures (+41-basis points), and imports (+7-basis points). Negative contributions came from private inventory accumulation (-97-basis points) and fixed residential investment (-6-basis points).

#3Economic growth “moderated” in July. The Chicago Fed National Activity Index (CFNAI) lost 35-basis points to +0.13 (June 2017: -0.18). Since the CFNAI is a weighted averaged 85 economic measure indexed such that a reading of 0.00 is indicative of the U.S. economy growing at its historical rate, July reading suggests the economy continued to expand during the month but at a slower pace than it had in June. Thirty-four of the 85 indicators improved during the month while 51 had weakened. The components related to production made a total contribution to CFNAI of +0.05 (versus a +0.45 contribution in June). Also making positive contributions were measures related to employment (+0.12 versus a +0.03 contribution in June) and sales/orders/inventories (+0.03 versus a +0.06 contribution in June). The measures linked to personal consumption/housing had a negative contribution of -0.07 (versus -0.06 in June). The CFNAI’s three-month moving average remained positive at +0.05 despite losing 15-basis points from June (June 2017: -0.07).

#4One measure of consumer sentiment surged to an 18-year high while another pulled back. The Conference Board’s Consumer Confidence Index jumped 5.5 points in August to a seasonally adjusted 133.4 (1985=100). The index has not been this high since October 2000. Measures tracking both current and expected business conditions improved—the current conditions index increased from 166.1 to 172.2 while the expectations index added 5.4 points to 107.6. 40.3 percent of survey respondents described current business conditions as “good” while only 9.3 percent see them as “bad.” Similarly, 42.7 percent of respondents saw the availability of jobs as “plentiful” with only 12.7 percent described jobs as being “hard to get.” The press release states that the strong sentiment among consumers “should continue to support healthy consumer spending in the near-term.

Meanwhile, the Index of Consumer Sentiment from the University of Michigan lost 1.7 points during August to a seasonally adjusted 96.2 (1966Q1=100), its worst reading since January. While down 6/10ths of a point from a year earlier, this was a 9/10ths of a point improvement from the preliminary August reading reported several weeks ago. The measure tracking current business conditions shed 4.1 points to its lowest points since November 2016 at 110.3 (August 2017=110.9) while the expectations index slipped by only 2/10ths of a point to 87.1 (August 2017=87.7).

#5Contract signings to purchase a home slipped in July. The National Association of Realtors’ Pending Home Sales Index lost 8/10ths of a point to a seasonally adjusted reading of 106.2 (2001=100), leaving the measure 2.3 percent below its July 2017 reading. The index, which tracks contracts signed to purchase a previously owned home but have not yet closed, improved during the month in the Northeast (+1.0 percent) and Midwest (+0.3 percent), but lost ground in the South (-1.7 percent) and West (-0.9 percent). The index has negative 12-month comparables in all four Census regions: West (-5.8 percent), Northeast (-2.3 percent), Midwest (-1.5 percent), and South (-0.9 percent). NAR’s press release continued to express concern about “inadequate supply” leading to many homebuyers being “unable to afford” homes in some markets.

Other U.S. economic data released over the past week:
Jobless Claims (week ending August 25, 2018, First-Time Claims, seasonally adjusted): 213,000 (+3,000 vs. previous week; -25,000 vs. the same week a year earlier). 4-week moving average: 212,250 (-10.9% vs. the same week a year earlier).
Agricultural Prices (July 2018, Prices Received by Farmers): -3.8% vs. June 2018, -4.3% vs. July 2017).
Case-Shiller Home Price Index (June 2018, 20-City Index, seasonally adjusted): +0.1% vs. May 2018, +6.3% vs. July 2017). 

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

Perhaps (Slightly) Slower Growth: June 25 – 29

Last week featured a series of data pointing to a slight cooling of the economy. Here are the five things we learned from U.S. economic data released during the week ending June 29. #1Personal spending paused in May. The Bureau of Economic Analysis estimates real personal consumption expenditures (PCE) were unchanged on a seasonally adjusted basis during the month, following gains of 0.3 percent and 0.6 percent during April and March, respectively. Spending on goods increased 0.3 percent (with equal 0.3 percent gains for both durable and nondurable goods) while expenditures on services dropped 0.2 percent. On a nominal (not price adjusted) basis, personal spending expanded 0.2 percent in May, funded by a 0.4 percent gain in both personal income and disposable income. Adjusting for inflation, real disposable income increased 0.2 percent during the month. Over the past year, real personal consumption has grown 2.3 percent over the past year while real disposable income has risen 1.7 percent. The difference was funded by reduced savings—the savings rate has dropped from +3.8 percent to +3.2 percent over the past year.Savings Rate 2013-2018 062918#2Q1 GDP growth was less robust than previously believed. The Bureau of Economic Analysis released its third estimate of first quarter 2018 Gross Domestic Product (GDP), now reporting that the U.S. economy had expanded 2.0 percent on a seasonally adjusted annualized basis. This was down from the +2.2 percent and +2.3 percent growth rates reported over the two previous months and represented the slowest quarter for the U.S. economy in a year. The downward revision was the result of lower than previously reported levels of private inventory accumulation, consumption, and exports. Positive contributions to Q1 GDP growth came from (in descending order): nonresidential fixed investment (+128-basis points), consumption (+60-basis points), exports (+44-basis points), and government expenditures (+22-basis points). The same report finds that corporate profits grew 1.8 percent (seasonally adjusted) from Q4 2017 and 6.8 percent from the same quarter a year earlier.#3Economic growth appears to have slowed in May. The Chicago Fed National Activity Index (CFNAI), a weighted average of 85 economic indicators, plummeted by 57-basis points to -0.15. This was the CFNAI’s first negative reading since January. Thirty-nine of the 85 index components made positive contributions to the CFNAI with 43 indicators improving from their April readings. Virtually all the CFNAI’s decline came from the indicators tied to production—the contribution to the CFNAI from production-related indicators plummeted from +0.33 to -0.29 during the month. Smaller moves came from indicators linked to sales/orders/inventories (from a neutral reading to +0.05), employment (up from +0.12 to +0.13), and personal consumption/housing (from -0.03 to -0.04). The CFNAI’s three-month moving average lost 13-basis points to +0.10. As the CFNAI is designed such that a 0.00 reading is indicative of the U.S. economy expanding at its historical economic growth rate, the +0.10 moving average suggests that the economy was growing slightly more quickly than average.#4Weakness in transportation pulled down durable goods orders in May. The Census Bureau reports that new orders for manufactured durable goods fell 0.6 percent during the month to a seasonally adjusted $248.8 billion. Transportation goods orders dropped 1.0 percent, pulled down not only by a 7.0 percent decline in civilian aircraft orders but also by motor vehicles orders plunging 4.2 percent. Net of transportation goods, durable goods orders slowed 0.3 percent. Among major categories, only machinery (+0.3 percent) enjoyed an increase in orders. Falling were orders for electrical equipment/appliances (-1.5 percent), fabricated metals (-1.2 percent), primary metals (-0.4 percent), and computers/electronics (-0.1 percent). New orders for nondefense capital goods net of aircraft—a proxy for business investment—slowed 0.2 percent during May.#5Consumers remained confident but seem slightly more wary about the future. The Conference Board’s Consumer Confidence Index lost 2.4 points to a seasonally adjusted reading of 126.4 (1985=100). The current conditions slipped by a mere 1/10th of a point to a still very robust 161.1 while the expectations index shed four full points to 103.2. 36.0 percent of survey respondents viewed current economic conditions as “good” while only 11.7 percent see them as “bad.” Similarly, 40.0 percent of Americans believe that jobs are “plentiful” versus 14.9 percent see them as “hard to get.” The press release notes that the pullback in expectations as indicating consumers not expecting “the economy gaining much momentum in the months ahead.”The University of Michigan’s Index of Consumer Sentiment eked out a 2/10ths of a point gain in June to a seasonally adjusted 98.2. While this represented a 1.1 point pullback from the preliminary June reading reported a few weeks ago, the final June mark was 3.2 points ahead of that from a year earlier. The current conditions measure jumped 4.7 points to 116.5 (June 2017: 112.4) while the expectations index shed 2.8 points to 86.3 (June 2017: 83.8). The press release links the headline index’s decline from its preliminary June reading to the building trade war, with one in four consumers making a note of the recently announced trade tariffs with most seeing them as having “a negative impact on the domestic economy.” Other U.S. economic data released over the past week:
Jobless Claims (week ending June 23, 2018, First-Time Claims, seasonally adjusted): 227,000 (+9,000 vs. previous week; -16,000 vs. the same week a year earlier). 4-week moving average: 222,000 (-8.7% vs. the same week a year earlier).
New Home Sales (May 2018, New Residential Sales, seasonally adjusted annualized rate): 689,000 (+6.7% vs. April 2018, +14.1% vs. May 2017).
Case-Shiller Home Price Index (April 2018, 20-City Index, seasonally adjusted): +0.2% vs. March 2017, +6.6% vs. April 2017.
Agricultural Prices (May 2018, Prices Received by Farmers, seasonally adjusted): +1.7% vs. April 2018, -3.9% vs. May 2017.The opinions expressed here are not necessarily those of Kevin’s current employer. No endorsements are implied.