All posts by joel

July Retail Sales, Import/Export Prices and August HomeBuilders Index

KEY DATA: Sales: +0.6%; Non-Vehicle: +0.5%/ Imports: +0.1%; Nonfuel: -0.1%; Exports: +0.4%; Nonfarm: +0.3%/ NAHB: 68 (Up 4 points)

IN A NUTSHELL: “The economy seems to be picking up steam, finally.”

WHAT IT MEANS: Economists have been saying, thinking and basically hoping that growth would improve during the second half of the year and that might be happening. Retail sales, which had been sluggish for much of the first half of 2017, rose solidly in July. Better vehicle sales were just one of the reasons. Online retailers as well as furniture, supermarkets, home improvement, sporting goods and health care stores reported strong gains. People even ate out more, though they didn’t stuff themselves. Amazingly, department stores showed a robust increase and these were supposed to be ghost towns. There was some weakness, as sales of gasoline and electronics and appliances were off. Still, the breadth of the increases was impressive. When you ad that to upward revisions to previous months, it is clear that households are emptying their wallets at an expanding pace.

On the inflation front, there still is very little. Import prices ticked up a touch in July, but largely because energy costs jumped. Excluding fuel, the cost of foreign products was off a little. Food prices are on a steady upward climb and that does not bode well for supermarket prices going forward. Vehicle prices were down again and nonvehicle consumer goods costs were flat. In other words, there is minimal price pressure coming from imports. On the export side, we did see a nice rise in not only farm sales but for many other products sold to the rest of the world.

The housing market looks like it is rebounding. The National Association of Home Builders’ index jumped in August. Sales are rising and that has improved builders’ confidence. That said, the index seemed to be artificially low in June and July and the gap up didn’t even get us back to the May level.

MARKETS AND FED POLICY IMPLICATIONS: The economy is on the rise. Even the New York Fed’s manufacturing index pointed to stronger summer growth, though one would hardly point to this region as a key player in the nation’s industrial revitalization (if there really is one). Also, as I have pointed out several times before, wage gains just aren’t keeping up with spending and that is forcing households to cut back on their savings. So how long the economy can grow at a faster pace without better income increases is unclear. Still, investors should really like the data. As for the Fed, that is a different story. Yes, import prices did rise, but not for most goods. The dollar has weakened and we could see some pick up in import costs, but it is unlikely to be enough, by themselves, to drive inflation much higher. The Fed members would love to see inflation above 2% for an extended period so they can go about their business of normalizing rates and the balance sheet. But for now, they will have to be content with saying that inflation will reach the target in the medium term, however long that may be.  

July Consumer Prices and Real Earnings

KEY DATA: CPI: +0.1%; Less Food and Energy: +0.1%/ Real Earnings: +0.2%; Over Year: +0.7%

IN A NUTSHELL: “The only thing saving consumers is low inflation as spending power is going largely nowhere.”

WHAT IT MEANS: Inflation remains well under control. Yesterday we saw that wholesale costs were soft and today’s consumer price report also pointed to minimal inflation pressures. The Consumer Price Index rose modestly in July. While energy prices edged down, food costs increased moderately. (The all-important bakery component surged, so my diet is safe.) Excluding food and energy, prices were up minimally. Looking at the details, several components stood out. Prices of medical commodities and services continue to surge. The deceleration in medical costs had been going on for quite some time but that is no longer the case. On the other hand, costs of both new and used vehicles keep falling. The slowdown in demand and the large number of vehicles coming off leases are pressuring the sector. Households are also being buffeted by large increases in vehicle insurance. Clothing prices were up in July but for the year, they are still down.

While they wait for wage gains to accelerate, workers can be thankful for the modest inflation. Hourly wages rose moderately and only part of that gain was lost to the low inflation. Still, the increase over the year of real, or inflation-adjusted earnings is pathetic. For all of 2017, real hourly earnings have expanded by less than 1%. Households are earning more, but some of the gains are coming from working longer. Even when you add the rising hours worked to the gain in wages, family spending-power has increased by just over one percent. That is why so many people are unhappy.

MARKETS AND FED POLICY IMPLICATIONS: The Fed may want inflation to pick up, but that would not be good news to households. Wages are growing modestly and the only way spending power has increased at all is that inflation has remained below the Fed’s target rate. As I have noted on countless occasions, it is hard for the economy to grow much more than 2% if earnings are largely flat and that is still the case. Real wages had accelerated during 2015, but the gains have slowed over the past eighteen months. Consumers have had to reduce their savings rate to maintain their lifestyles. That is not good news. So we are stuck in the same trap that we have been in for several years now: Wages are rising modestly so consumption is mediocre. That is keeping growth down, limiting business pricing power and causing inflation to decelerate. The slow growth is also enabling businesses to restrain wages and allow job openings to go unfilled. The Fed members really want inflation to rise above 2%. But if that happens without a concomitant increase in wages, consumer purchasing power will decline, slowing growth. Essentially, the driver of stronger growth appears to be, at least to me, better wage increases. That would expand demand and growth, induce workers to work harder not just longer, improve productivity, pricing power and profits and induce greater investment. That’s my theory and I am sticking to it.

July Producer Prices and Weekly Jobless Claims

KEY DATA: PPI: -0.1%; Goods: -0.1%; Services: -0.2%/ Claims: +3,000

IN A NUTSHELL: “The Fed keeps saying inflation will rebound, but right now, there is little hard data to think that will happen soon.”

WHAT IT MEANS: The members of the Fed are convinced inflation will rebound in the months ahead. Even today, New York Fed President William Dudley repeated that refrain. And I agree that should happen. But it would be nice if there were some data to support that belief. Producer costs went nowhere in July. The weakness in goods costs continued. Yes, food and energy prices declined over the month, but excluding those volatile components, finished goods costs were up only modestly. The big surprise in the report was the drop in services prices. Transportation, warehousing, government, you name it, services costs were down. This decline was so widespread and so odd, given that services had been leading the inflation push, that I am just not certain what is going on. Looking outward, there is not a whole lot of pressure at the intermediate or crude goods levels.

Jobless claims edged up last week, but the level is still quite low, reflecting the tightness in the labor market. This is important because yesterday, the second quarter productivity and labor costs report was released. Labor costs rose only moderately in the second quarter after having surged in the first. Adjusting for inflation, hourly wages, while up in the second quarter, are still down compared to last year. While the Fed members think that some temporary factors will unwind that will start the upward trend in inflation, to sustain the higher rate, wages will have to rise faster. The latest data just don’t say that is happening.

MARKETS AND FED POLICY IMPLICATIONS: Inflation pressures are modest, whether they be producer costs or labor compensation. Job openings are soaring but that hasn’t forced businesses to either raise wages or even increase their recruiting intensity, which DHI reported. Firms are hiring, despite their complaints that they cannot find qualified workers, but they are not paying more for either their new employees or upping the wages of their current workers. That is showing up in the generally decent earnings numbers. But how long that can continue given productivity growth is modest is anyone’s guess. I have been wrong on the wage issue for so long, I no longer say that compensation is about to surge. (Of course, whenever I back off from a forecast, it usually comes true, so don’t be surprised if wages rise faster in the third quarter.) Regardless, inflation, consumer spending and Fed policy all are dependent on wage increases and if they stay low, the Fed will be pressured to go very slowly as it hikes rates and shrinks its balance sheet. As for investors, if earnings stay good, that is all that is needed to keep up the euphoria.

July Non-Manufacturing Activity, Layoffs and Weekly Jobless Claims

KEY DATA: ISM (NonMan.): -3.5 points; Orders: -5.4 points; Employment: -2.2 points/ Layoffs: 28,307; Claims: -5,000

IN A NUTSHELL: “Growth is still decent, but it is hard to see how it could be accelerating given the moderation in both manufacturing and nonmanufacturing activity.”

WHAT IT MEANS: If you believe the equity markets, the economy is on a role. Well, it is expanding, but if you the people at the forefront of businesses, the supply managers, see conditions may be softening a touch. Tuesday, the Institute for Supply Management’s manufacturing index posted a decline across most components and today’s non-manufacturing survey was off broadly as well. Let’s be clear, the levels are still fairly high, but they are not in the strong growth atmosphere anymore. Activity decelerated sharply led by a major easing in new order growth. While order books continue to fill, they are doing so more slowly. And hiring has eased. On the other hand, input prices are rising faster and for more products. That was true for manufacturers as well. Maybe the Fed’s hoped for higher inflation could be coming soon.

Firms are holding on to their workers as if it means their survival, which given the labor shortages, that just might be the case. Challenger, Gray and Christmas report that layoffs were extremely low in July. Actually, only three times n the past ten years has the level been below 30,000, which was the case last month. So far this year, layoff announcements are off nearly 30%. Of course, the energy sector is expanding not imploding and that portion of the economy accounted for over 80% of the drop. The layoffs being announced are not due to the economy. “Demand downturn” accounted for only about 4% of the layoff explanations.

Jobless claims eased last week. The level has been in range that continues to point to tight labor markets, something firms know all too well.

MARKETS AND FED POLICY IMPLICATIONS: Tomorrow is the all-important, at least for tomorrow, employment report, so today’s data should not move markets a whole lot. But the supply managers’ numbers and the layoff data point to different things for the report. Both the manufacturing and nonmanufacturing employment indices moderated, implying job gains should slow. And given the outsized hiring in June, that would hardly be a surprise. Monthly payroll increases averaged over 190,000 in the second quarter but the moderate economic growth rate and the lack of workers implies that pace is just not sustainable. The consensus is for 180,000 and I think that is way too high. If there is a risk, I think it is that the number will disappoint. As for the unemployment rate, the rate was 4.36% in June, which was rounded up to 4.4%. It is not hard to get back to 4.3%. As for the markets, do investors really care about economic fundamentals? First there was the Trump Bump. Then when it finally became clear that tax cuts and infrastructure spending were not going to improve growth this year, the explanation turned to earnings, or Europe or whatever was the reason du jour. So it is hard for an economist to have any idea how the markets will react on a given day. But there is one thing that really should be watched: The wage data. It has been way too low for way too long. Without any solid wage increases, this economy cannot accelerate. Rising wages would also give the Fed the green light to raise rates further as well as shrink its balance sheet. It would take more than one month of faster wage gains, though, to provide that cover.

July Private Sector Jobs and Help Wanted OnLine

KEY DATA: ADP: +178,000; Manufacturing: -4,000/ HWOL: -157,700

IN A NUTSHELL: “Job growth is really solid, even as firms give up advertising for workers they cannot find.”

WHAT IT MEANS: It’s Employment Friday week, which means we get the estimate of private sector job gains by ADP. The employment services firm is predicting that payroll increases were pretty solid in July. Strong hiring by mid-sized firms, those with 50 to 500 employees, led the way. But both the smallest and largest companies added workers at a decent pace. Looking at the sectors, it is nice that energy is adding to not subtracting from job growth. There were strong increases in professional and business services, education and health care. On the other hand, manufacturers cut workers while the construction boom may be slowing as builders added only a modest number of new employees.

While ADP is telling us that firms are hiring, the Conference Board is indicating they are cutting back sharply on their advertising. The number of help wanted ads posted online fell sharply in July. The level peaked at the end of 2015 and has been on a fairly steady downward trend since. Just in the past year, there was a nearly 10% drop. And the fall off was widespread. Declines were seen in nineteen of the twenty largest states and only five states showed increases. Similarly, nineteen of the twenty largest metro areas showed reductions in advertising activity and only four of the top fifty-two areas were up. Finally, every one of the ten occupational categories posted declines. In other words, this is a nation-wide, economy-wide slowdown.

MARKETS AND FED POLICY IMPLICATIONS: If the ADP numbers are anywhere close, something that doesn’t happen all the time, we should get a pretty good employment report on Friday. That raises the following questions: First, if firms are hiring so strongly, why are they complaining they cannot find qualified workers? Are they only hiring unqualified workers? Second, if they are having so much trouble finding qualified workers, why are they cutting back on the search process? The labor market is a real conundrum. Job gains are solid and no matter which measure of unemployment/underemployment you use, conditions are tight. Meanwhile, wage increases are tepid. Something has to give. I don’t think we will get the strong increase that is forecasted (consensus is 180,000). I think it will be less than 150,000. But even my number is more than the labor force growth and should lead to a decline in the unemployment rate. And it should put even more pressure on wages. Until that actually happens, though, I will join the Fed members in being confused about the true state of the labor market. As for investors, they want to see that wages are rising faster for an extended period, so even if we get a pop in labor costs on Friday, I don’t expect panic to set in.

June Spending, Income and Construction and July Manufacturing Activity

KEY DATA: Consumption: 0%; Disposable Income: -0.1%/ Construction: -1.3%; Private: -0.1%/ ISM (Man.): -1.5 points; Orders: -3.1 points; Employment: -2.0 points

IN A NUTSHELL: “The consumer may be slowing down but that has yet to have a major impact on manufacturing.”

WHAT IT MEANS: The economy rebounded nicely in the spring, but the first half of the year was the same as it has been for the last seven years. Now that we are in the second half, the question is: Will the second quarter rise in activity be sustained or will we fall back into the usual pattern? If the consumer has any say, don’t expect any major improvement in growth. Consumption, when adjusted for inflation, was flat in June. A modest rise in services demand was offset by declines in durable and nondurable spending. The broad based moderation in consumption is a concern, especially when you consider that incomes are just not improving. Real disposable income, which is the best measure of spending power since it adjusts for taxes and prices, fell slightly. That is not as much of a concern as it might appear since the drop was due to a major cut back in interest and dividend income. This is a wildly volatile component. Wage and salary gains were good but still nothing spectacular. Households are trying to maintain their lifestyles and they are doing that by cutting their savings rate.

Despite tepid consumer demand, the manufacturing sector is in good shape. Yes, the Institute for Supply Management reported that the activity index fell in July. Actually, just about every component was off. So why do I say conditions remain strong? The levels of the overall and component indices are still pretty high. New orders are increasing strongly, just not robustly. Firms are adding to payrolls at a solid pace, even if it is slightly less rapidly than in June. And order books continue to fill, providing hope that production will continue to increase. Indeed, the overall index seems to be pointing to GDP growth closer to 4% than the 2% we have seen so far this year.

The June construction report was released and it showed that building activity fell sharply. A major reduction in public sector activity made the numbers look really bad, though the lack of increase in the private sector was a real disappointment.

MARKETS AND FED POLICY IMPLICATIONS: Until I see differently, I am going with my headline from last week’s GDP report: Same as it ever was. The consumer is spending but is hardly exuberant. Income growth is just not strong enough to pull us out of this 2% economy. Yes, manufacturers are saying things are good, but with vehicles sales trending downward compared to last year, it is likely there is little room for further improvement. And construction is going nowhere. All this points to another quarter of maybe 2.50% growth, give or take a quarter percentage point. So, why are investors so buoyant? Earnings are holding up and as long as that continues, the party could keep going and going and going.

June Durable Goods Orders and Weekly Jobless Claims

KEY DATA: Orders: +6.5%; Excluding Aircraft: +0.2%; Capital Spending: -0.1%/ Claims: +10,000

IN A NUTSHELL: “It still doesn’t appear as if the private sector is investing heavily, and that is troubling.”

WHAT IT MEANS: Another day, another indication that the economy continues on its less than stellar growth path. Durable goods orders soared in June, but don’t get too carried away by the headline number. Nondefense aircraft demand surged by 131%, making up just about all of the increase. Still, the details weren’t terrible. Orders for metals, both raw and fabricated rose and the demand for machinery and communications equipment was up. But the computer and electrical equipment and appliances sectors posted declines. The real concern in the report was the measure of private sector capital spending. This indicator was off slightly after having posted a sharp rise in May. Businesses just cannot seem to make up their minds if they want to go all in on the future economy or move ahead cautiously. With all the chaos in Washington, it should not be a surprise if firms take a wait and see attitude.

New claims for unemployment insurance jumped last week. The four-week moving average, which smooth’s out the volatile data, was flat and remains at a pretty low level. The labor market is tight and a week from tomorrow the July employment report is released. It should give us a better indication of how tight things really are. With the Fed hoping for inflation, the wage and hours worked numbers continue to be the real focus of attention.

MARKETS AND FED POLICY IMPLICATIONS: With Congress wrapped up in the theater of the absurd, businesses are now flying by the seat of their pants. How long will health care dominate the agenda? The quagmire that is health care, which sucked the life out of Democrats, seems to be trapping Republicans. The failure to actually come up with an alternative over the past seven years is causing chaos and there seems to be no simple way out of it. At least there is no simple political way out. When you claim you can quickly and easily replace the ACA with a plan that lowers costs, provides better health care and makes insurance more available, you have creating a challenge that is not likely to be met. The problem is, there is no second best when you start reducing the number of people insured, at least politically. How easily the Republicans can pivot to tax reform, and the impact of the health care debacle on their ability to actually reform the system rather than doing the usual, which is provide tax cuts, is just not clear. And that uncertainty has to weigh on corporate decision-making. As for investors, earnings look good so there appears to be little worry about the future.

July 25-26 2017 FOMC Meeting

In a Nutshell: “No funds rate hike but more hints that the balance sheet reductions are coming.”

Rate Decision: Fed funds rate range maintained at 1.00% and 1.25%

The FOMC members came to Washington with not much expected and they did pretty much what was expected: They kept the funds rate at 1.00% to 1.25% and signaled that it was the time to reduce the balance sheet was near. As for the details of the statement, the view of the economy was largely the same as it was in June. Everything is solid or expanding. Inflation is now ‘running below 2 percent” rather than “running somewhat below 2 percent”. In other words, not much of a change. There hasn’t been a lot of data since the June 14-15 meeting, so there was little reason to change the outlook.

What everyone was looking for was a signal on when the Fed might start shrinking its balance sheet. The Committee stated: “For the time being (emphasis added), the Committee is maintaining its existing policy of reinvesting principal payments from its holdings”. It then added: “The Committee expects to begin implementing its balance sheet normalization program relatively soon (emphasis added)”. In other words, the signal was sent to the markets that the there will be some reduction in the balance sheet sometime this year.

Okay, what should we make of this? First, expect the Fed to announce that the balance sheet adjustment will begin either at the September or November meeting. As for the funds rate, it is not likely to be increased at the September meeting unless the economy picks up steam and inflation, especially wage inflation, accelerates. If it is not hiked in September, expect the next move to come the meeting after the announcement of the balance sheet reduction. My guess: Nothing in September, November 2nd for the balance sheet move and December 13 for the next rate hike. That is also likely to be Fed Chair Yellen’s last meeting, so she will exit at the end of January with the interest rate and balance sheet normalization under way.

(The next FOMC meeting is September 19-20, 2017.)

June Consumer Confidence and April Home Prices

KEY DATA: Confidence: +1.3 points/ National Home Prices (Over-Year): 5.5%

IN A NUTSHELL: “Confidence is rising, but there is some uncertainty about the future setting in.”

WHAT IT MEANS: As the year grinds on and the economy continues to improve slowly, the euphoria about the future is beginning to wane. The Conference Board reported that consumer confidence rose in June, reversing a decline seen in May. The key to the increase was a jump in the impression about current conditions. Consumers felt that both business conditions and the labor market improved solidly over the month. Importantly, the percent of people saying jobs are plentiful kept rising while those feeling that jobs were harder to get declined. However, the outlook about the future, while still solid, is not as optimistic as it had been. Fewer respondents expected business conditions to improve and there was an increase in those who expect jobs to be harder to get in the future.

Home prices have been rising much faster than inflation and the question being raised is: How long can that continue? Well, one measure, the S&P CoreLogic Case Shiller national home price index did jump in April, but over-the-year, the gain was a little slower than in March. Indeed, the change from last year has been in a fairly tight range for the past five months, varying between about 5.4% and 5.6%. Other indices are still showing signs of accelerating housing price gains, so we need to wait before we conclude the situation is stabilizing.

MARKETS AND FED POLICY IMPLICATIONS: The second quarter is coming to an end and there are few indications that growth was robust. The consumer didn’t buy motor vehicles at any great rate in April and May. Yesterday, it was reported that durable goods orders declined in May and most of the manufacturing reports coming from the regional Federal Reserve Banks have pointed to slowing manufacturing activity. The trade deficit doesn’t look like it will be shrinking much, if at all, so don’t look to the foreign sector for much help. Maybe inventories built, but if that was due to slower sales than expected, it isn’t a positive sign for the economy. And why would business invest heavily? Demand is not growing rapidly and it only makes sense to wait until the tax changes, if any, are known before making a decision. To change things around, the consumer will have to spend more and while it is nice that people think current conditions are improving, it would better if they were becoming more, not less confident about the future. So, investors will have to find something else, if they actually need something, to drive markets up further. But with two hikes under their belt, the Fed members may want to see better growth before they make the next move this year.  

June Home Sales

KEY DATA: New Sales: +0.8%/ Existing Sales: -1.8%

IN A NUTSHELL: “Home sales need to pick up further if construction is to add much to economic growth.”

WHAT IT MEANS: The housing market has been wandering around for most of 2017 and it isn’t clear if that pattern will change anytime soon. Today, June new home sales were released and the results were good but not great. Yes, there was rise in total demand, but the level is nothing spectacular. Indeed, it is probably still at least twenty percent below what might be considered normal, let alone strong. At least the trend is up, especially when compared to 2016 levels. Looking across the nation, weakness in the South offset strength in the West and Midwest. Sales were flat in the Northeast. Median prices were actually off from June 2016 as there were a lot more lower-priced houses sold. While that is likely a one-month wonder, the trend in price gains has been down.

On Monday, the National Association of Realtors reported that existing home sales fell in June. It seems that there is one month were demand rises followed by one where sales falls. This saw tooth pattern has led to only a relatively small increase in sales since December 2016. Regionally, demand rose only in the Midwest. There just aren’t a lot of homes for sale and prices are rising, though at a decelerating pace.

MARKETS AND FED POLICY IMPLICATIONS: We need the housing market to be strong if the economy is to accelerate. The sector has been adding to growth, but not by much. That is happening despite low mortgage rates. We also saw that the National Association of Home Builders confidence index slipped in July, pointing to only modest gains in construction. Housing starts should increase, as permit requests are outstripping starts, but if demand doesn’t pick up, that rise in construction is not likely to be significant. When you add the housing data to the consumer information, they point to only a minimal increase in growth. The Fed will be ending their meeting soon and we will know what the members think about the economy. It is clear that the FOMC members feel further increases in interest rates are needed and the Fed must start shrinking its balance sheet. To do that, though, inflation has to stay close to the target. It hasn’t done that lately. A better housing market would help and that is happening only slowly. That said, investors are focusing on earnings and that will be the case since they cannot use expectations of major tax cuts and spending increases to power the economy. It just seems that when one reason to take the markets up dissipates, a new one is created. Around and ‘round the markets go, where they stop no one knows.