The Fed Shares One Final Gift Before the Holidays: December 17 – 21

The Federal Reserve hiked its short-term interest rate target for a fourth and final time in 2018. Here are the five things we learned from U.S. economic data released during the week ending December 21.

#1The Fed bumps up short-term rates but forecasts fewer hikes in 2019. The statement released following last week’s meeting of the Federal Open Market Committee once again noted that “the labor market has continued to strengthen and that economic activity has been rising at a solid rate.” Also, it indicated that core inflation was near its two-percent target rate, but also pointed out that business investment had “moderated.” Unlike with previous statements, this one included a comment that the committee “will continue to monitor global economic and financial developments and assess their implications for the economic outlook.” This is a reference to (among other things) the potential impact of tariffs, Brexit and partial government shutdowns. With all of this in mind, the committee voted unanimously to bump up the fed funds target rate by a quarter point to range between 2.25 and 2.50 percent. The hike was widely expected, despite some external cajoling to the contrary.

Released in conjunction with the policy statement was economic projections of Federal Reserve Board members and Federal Reserve Bank presidents and one big takeaway was an expectation for slightly slower economic growth than previously predicted. The median forecast now has gross domestic product (GDP) growing 2.3 percent in 2019, whereas the previous prediction had growth at 2.5 percent. The median projection for the unemployment rate next year remained at 3.5 percent, but the core inflation rate now is expected to be 2.1 percent in 2019 (versus the previous 2.0 percent forecast). Most notable is the median prediction among FOMC members now has two hikes in the fed funds target rate in 2019—previously, FOMC members had anticipated three hikes next year.Fed Funds Target Rate Forecast.png

#2A revised Q3 GDP estimate continued to show robust economic growth. The Bureau of Economic Analysis’ third estimate of Q3 gross domestic product has the U.S. economy expanding at a healthy 3.4 percent seasonally adjusted annualized rate. This was just below the 3.5 percent rate of expansion reported in the first two previously published estimates. The downward revision was a product of lower than previously believed estimates of consumer spending and exports (only partially counterbalanced by an upward revision to private inventory accumulation). Corporate profits (with inventory valuation and capital consumption adjustments rose 3.5 percent to $2.321 trillion (+10.4 percent versus 2017 Q3).

#3Personal spending remained resilient in November. The Bureau of Economic Analysis estimates real (inflation-adjusted) personal consumption expenditures (PCE) increased 0.3 percent on a seasonally adjusted basis during the month. While this was half of October’s 0.6 percent bounce, it leaves real PCE up 2.8 percent over the past year. Real spending on goods rose 0.9 percent during November while services expenditures expanded at a more modest 0.2 percent. The 12-month comparables for both were a solid +3.4 percent and +2.8 percent, respectively. Funding the increased spending were 0.2 percent gains for nominal personal income and both real and nominal disposable income. Real disposable income has grown by 2.8 percent over the past year. The savings rate was +6.0 percent, down 1/10th of a percentage point from October.

#4Sales of previously owned homes grew for a second straight month after showing general weakness for much of 2018. The National Association of Realtors reports existing home sales increased 1.9 percent in November to a seasonally adjusted annualized rate of 5.32 million units. Despite the rise, home sales were 7.0 percent under its year-ago market, representing the largest negative 12-month comparable since November 2011. Sales grew during the month in three of four Census regions, with the West’s 6.3 percent decline being the outlier. All four Census regions experienced negative year-to-year sales trends: West (-15.4 percent), South (-5.6 percent), Midwest (-4.3 percent), and Northeast (-2.6 percent). Inventories contracted 5.9 percent during November to 1.74 million units (+4.2 percent versus November 2017 and the equivalent to a 3.9-month supply). The median sales price has risen 4.2 percent over the past year to $257,700.

#5Consumer sentiment ends the year on a high note. The University of Michigan’s Index of Consumer Sentiment added 8/10ths of a point in December to a seasonally adjusted 98.3. This places the sentiment measure 2.4 points ahead of its year-ago mark and keeps it within the same five-point range where it has been over the past two years. In December, the present conditions index added 3.8 points to 116.1 (December 2017: 113.8) while the expectations index shed 1.1 points to 87.0 (December 2017: 84.3). The press release notes that 2018 was the best year for the headline index’s 12-month average (98.4) since 2000.

Other U.S. economic data released over the past week:
Jobless Claims (week ending December 15, 2018, First-Time Claims, seasonally adjusted): 214,000 (-27,000 vs. previous week; +8,000 vs. the same week a year earlier). 4-week moving average: 222,000 (-6.0% vs. the same week a year earlier).
Leading Indicators (November 2018, Index (2016=100), seasonally adjusted): 111.8 (+0.2% vs. October 2018, +5.2% vs. November 2017).
Durable Goods (November 2018, New Orders for Manufactured Durable Goods, seasonally adjusted): $250.8 billion (+0.8% vs. October 2018). Nontransportation goods new orders: $163.8 billion (-0.3% vs. October 2018).
Housing Starts (November 2018, Housing Units Started, seasonally adjusted annualized rate): 1.256 million (+3.2% vs. October 2018, -3.6% vs. November 2017).
Housing Market Index (December, Index (>50 = “Good” housing market, seasonally adjusted): 56 (vs. November 2018: 60; December 2017: 74).
Treasury International Capital Flows (October 2018, Net Purchases of U.S. Securities, not seasonally adjusted): -$6.5 billion (vs. September 2018: +$7.5 billion; vs. October 2017: +$10.5 billion.
State Employment (November 2018, Nonfarm Payrolls, seasonally adjusted): Vs. October 2018: Payrolls grew in 4 states and were essentially unchanged in 46 states and the District of Columbia. Vs. November 2017: Payrolls grew in 37 states and were essentially unchanged in 13 states and the District of Columbia.

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

Consumer Spending Bounced Back: November 26 – 30

Personal spending and overall economic activity were resilient in October.  Here are the five things we learned from U.S. economic data released during the week ending November 30.

#1Consumers continued spending in October. The Census Bureau reports that real personal consumption expenditures (PCE) grew 0.4 percent on a seasonally adjusted basis during the month, up from a 0.1 percent gain in September. Spending on goods advanced 0.3 percent, with gains for durable and nondurable goods of 0.4 percent and 0.3 percent, respectively. Spending on services expanded 0.5 percent during October. Without adjustments for inflation, PCE rose 0.6 percent, funded by 0.5 percent growth in both nominal personal income and nominal disposable income. With inflation adjustments, real disposable income increased 0.3 percent. Over the past year, real PCE has grown 2.9 percent, funded by a 2.8 percent rise in real disposable income. October’s savings rate of +6.2 percent was 1/10th of a percentage point below that of the prior month.Income and Spending 113018

#2The second estimate of Q3 GDP growth matched that of the first. The Bureau of Economic Analysis estimates Gross Domestic Product (GDP) increased at a seasonally adjusted annualized rate of 3.5 percent, matching the prior month’s published estimate of economic growth. This report reflects larger than previously believed levels of nonresidential fixed investment and private inventory accumulation counterbalanced by lower levels of consumer spending and exports. The contributors to Q3 GDP growth were, in declining order, consumption, private inventory accumulation, government expenditures, and nonresidential fixed investment. Drags on Q3 economic growth were imports, exports, and residential fixed investment. This report also features the first estimate of Q3 corporate profits, which increased 3.4 percent to a seasonally adjusted annualized rate of $2.318 trillion (+10.3 percent from a year earlier).

#3Economic growth picked up slightly in October. The Chicago Fed National Activity Index (CFNAI), a weighted average of 85 economic indicators indexed such that a reading of 0.00 indicates economic growth at the historical average, grew by ten-basis points during the month to a seasonally adjusted +0.24. Fifty of the 85 indicators made positive contributions to the CFNAI, with 51 indicators gaining from their September readings. Among the four major categories of indicators, only those tied to employment made a larger positive contribution to the headline index (rising from a +0.05 to +0.19 contribution). Slumping slightly during the month were indicators linked to production (from a +0.09 to +0.05 ) and personal consumption/housing (from -0.04 to -0.05). Indicators tied to sales/orders/inventories made the same +0.04 contribution that they had made in September.

#4New home sales sank in October. The Census Bureau places new home sales at a seasonally adjusted annualized rate of 544,000 units, down 8.9 percent for the month, 12.0 percent under the year-ago pace, and its worst month since March 2016. Sales fell in all four Census regions, with drops of 22.1 percent in the Midwest, 18.5 percent in the Northeast, 7.7 percent in the South, and 3.2 percent in the West. Further, only the West did not have a negative double-digit percentage 12-month comparable, albeit with a modest 1.3 percent gain. Inventories of unsold new homes grew 4.3 percent to 336,000 units (+17.5 percent versus October 2017), the equivalent to a 7.4 month supply (the most since February 2011).

#5Contract signing activity for home purchases fell in October. The Pending Home Sales Index (PHSI) from the National Association of Realtors lost 2.7 points during the month to a seasonally adjusted 102.1 (2001=100). The measure fell in three of four Census regions: West (-8.9 percent), Midwest (-1.8 percent), and South (-1.1 percent). Contract signing activity edged up 0.7 percent in the Northeast. The PHSI has fallen 6.7 percent over the past year (this was the 10th consecutive month with a negative 12-month comparable), with declines in all four Census regions: West (-15.3 percent), Midwest (-4.9 percent), South (-4.6 percent), and Northeast (-2.9 percent).

Other U.S. economic data released over the past week:
Jobless Claims (week ending November 24, 2018, First-Time Claims, seasonally adjusted): 234,000 (+10,000 vs. previous week; -4,000 vs. the same week a year earlier). 4-week moving average: 223,250 (-7.5% vs. the same week a year earlier).
Agricultural Prices (October 2018, Prices Received by Farmers): -3.5% vs. September 2018, -3.0% vs. October 2017.
FHFA House Price Index (September 2018, Purchase-Only Index, seasonally adjusted): +0.2% vs. August 2018, +6.0% vs. September 2017.
Case Shiller Home Price Index (September 2018, 20-City Index, seasonally adjusted): +0.3% vs. August 2018, +5.1% vs. September 2017.
FOMC Minutes

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

Hiring and Wages Both Rise in October: October 29 – November 2

Hiring resumed in October while consumer spending remained solid. Here are the five things we learned from U.S. economic data released during the week ending November 2.

#1Job creation rebounded in October. The Bureau of Labor Statistics reports nonfarm payrolls grew by a seasonally adjusted 250,000 during the month, up from the 118,000 job gain in September (which appeared to have been suppressed by the landfall of Hurricane Florence). Private sector employers added 246,000 workers during the month, split between 67,000 among goods-producing employers and 179,000 in the service sector. Industries adding the most workers during the month were health care/social assistance (+46,700), leisure/hospitality (+42,000), professional/business services (+35,000), manufacturing (+32,000), and construction (+30,000). The average workweek grew by 1/10th of an hour to 34.5 hours (October 2017: 34.4 hours) while average weekly earnings expanded by $4.45 to $941.85 (+3.4 percent versus a year earlier).

A separate household survey kept the unemployment rate at its post-recession low of 3.7 percent. 711,000 people entered the labor force during the month, putting the labor force participation rate of 62.9 percent. The labor force participation rate for adults aged 25 to 54 rose to 82.3, its highest point since the May 2010. The median length of unemployment inched up 2/10ths of a week to 9.4 weeks (October 2017: 9.8 weeks) while the number of part-time workers seeking a full-time opportunity held relatively stable during the month at 4.621 million (October 2017: 4.880 million). The broadest measure of labor underutilization (the “U-6” series) tied that from August with its lowest mark since before the recession at 7.4 percent.

#2Consumers continued spending in September. Real personal spending (adjusted for inflation) grew 0.3 percent during the month, slower than August’s 0.4 percent increase but matching the gains for every preceding month since April. The Census Bureau finds that spending on goods rose 0.7 percent, split between gains for durable and nondurable goods of 1.8 percent and 0.2 percent, respectively. Spending on services was flat during the month. Nominal consumer spending grew at a faster pace than had personal income (+0.3 percent versus +0.2 percent). Nominal personal income gained 0.2 percent while real personal income inched up 0.1 percent. As a result, the real savings rate shed 2/10ths of a percentage point to +6.2 percent. Over the past year, real personal consumption expenditures have grown 3.0 percent, just ahead of the 12-month comparable for real disposable personal income (+2.9 percent).

#3The trade deficit expanded further in September. The Census Bureau and Bureau of Economic Analysis estimates exports grew 1.5 percent during the month to a seasonally adjusted $212.6 billion (+7.2 percent versus September 2017) while imports also increased 1.5 percent to $266.6 billion (+9.8 percent versus September 2017). As a result, the U.S. trade deficit widened by 1.5 percent during the month to -$54.0 billion, 21.6 percent larger than the deficit during the same month a year earlier. The trade deficit for the first nine months of 2018 (-$445.2 billion) was 10.1 percent larger than that of the first nine months of 2017. The goods deficit expanded by $0.6 billion during September to -$77.2 billion while the services surplus shrank by $0.1 billion to +$23.2 billion. The U.S. had its largest goods deficit with China (-$37.4 billion), the European Union (-$14.2 billion), and Mexico (-$7.5 billion).

#4Manufacturing grew in October at its slowest pace since the spring. The headline index from the Institute for Supply Management’s Manufacturing Report on Business (PMI) shed 2.1 points during the month to a reading of 57.7, its lowest reading since April. Four of the PMI’s five components pulled back from their September marks: new orders, production, employment, and inventories. The measure of supplier deliveries was the sole PMI component to improve during the month. Thirteen of 18 manufacturing industries expanded during the month, led by textiles, electrical equipment/appliances, and apparel. The press release noted that comments received from survey respondents “reflect continued expanding business strength” but also that the “expansion of new exports orders softened.”

#5Factory orders grew in September, pulled up by the defense sector. The Census Bureau reports new orders for manufactured goods totaled a seasonally adjusted $515.3 billion, up 0.7 percent for the month (its fourth gain over the past five months). Driving the increase was defense aircraft orders more than doubling (+118.7 percent). Net of all defense goods, new factory orders were flat. Durable goods orders rose 0.7 percent while orders of nondurables gained 0.6 percent. Factory orders over the first nine months of 2018 have totaled $4.495 trillion, up 8.4 percent over the same nine months in 2017. Shipments increased for the 16th time in 17 months, growing 0.9 percent to $509.8 billion. Unfilled orders gained 0.8 percent to $1.187 trillion (its tenth increase in 11 months) while inventories expanded for the 23rd consecutive month with a 0.5 percent bounce.

Other U.S. economic data released over the past week:
Jobless Claims (week ending October 27, 2018, First-Time Claims, seasonally adjusted): 214,000 (-2,000 vs. previous week; -20,000 vs. the same week a year earlier). 4-week moving average: 213,750 (-8.9% vs. the same week a year earlier).
Productivity (2018Q3, Nonfarm Labor Productivity, seasonally adjusted annualized rate): +2.2% vs. 2018Q2, +1.3% vs. 2017Q3.
Conference Board Consumer Sentiment (October 2018, Index (1985=100), seasonally adjusted): 137.9 (vs. September 2018: 135.3, vs. October 2017: 126.2).
Case-Shiller Home Price Index (August 2018, 20-City Index, seasonally adjusted): +0.1% vs. July 2018, +5.5% vs. August 2017).
Construction Spending (September 2018, Value of Construction Put in Place, seasonally adjusted annualized rate): $1.329 trillion (Unchanged vs. August 2018, +7.2% vs. September 2017).
Bankruptcy Filings (12-month period ending September 30, 2018, Business and Non-Business Filings): 773,375 (-2.2% vs. 12-month period ending September 30, 2017).
Agricultural Prices (September 2018, Prices Received by Farmers): -1.5% vs. August 2018, -4.6% vs. September 2017.

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