Category Archives: Economic Indicators

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 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.

May NonManufacturing Activity, Employment Trends and Revised First Quarter Productivity

KEY DATA: ISM (NonManufacturing): -0.6 point; Orders: -5.5 points; Hiring: +6.4 points/ Employment Trends: +0.7%; Productivity: 0% (up from -0.6%)

IN A NUTSHELL: “The economy is neither accelerating nor slowing, but the labor market is looking up.”

WHAT IT MEANS: The Fed is meeting next week and since the members continue to say they are data driven, we need to look closely at the last set of numbers that will be released before the decision is released on June 14th. One of the more important private sector numbers is the Institute for Supply Management’s (ISM) reports on manufacturing and nonmanufacturing. Last week, ISM found that manufacturing production moderated in May. Today the supply managers indicated that the remainder of the economy, which is most of the economy, also slowed. The details of the report, however, seemed to point to continue decent growth in this sector. Orders grew much more slowly, but they had surged in April, so the level is still quite solid. Indeed, they were up enough to cause backlogs to expand and firms to hire a lot more workers.

While the May jobs report was less than many expected, realistically, it was what should have been expected. The huge ADP payroll gain forecast created a bullish view of the number that dominated the discussion. But as noted on Friday, the report still points to a solid labor market and today’s numbers reinforce that view. Not only did the ISM hiring index jump in May but so did the Conference Board’s Employment Trends Index. The Chief Economist said it best: “Employment will likely grow fast enough to continue tightening the labor market.”

If the economy is to accelerate to the 3% or more growth that the administration projects, productivity will have to surge. While the government revised upward the first quarter number, on a year-over-year basis, the 1.2% rise is half as fast as it needs to be to reach the growth target.

MARKETS AND FED POLICY IMPLICATIONS: With the employment report behind us, the next two big ones before the FOMC announcement are retail sales and consumer prices. They will be released the morning of the 14th and it is not likely they will be so disturbing that the Fed will not raise rates. For those at the Fed who may have been concerned about the jobs report, today’s data should calm the weak kneed. The labor market is just fine. In addition, the economy is growing at a pace enough to create more jobs and reduce the unemployment rate further. The only “worry” is the decline in energy costs, which is pushing inflation further away from the target. Thankfully, we haven’t seen cut backs in the energy patch and it was that sector’s downturn that slowed growth significantly. But the real question is when will the next rate hike occur? Consumers are becoming debt burdened but wage gains remained stubbornly low. Uncertainty about government policy is hardly helping businesses make expansionary long-term plans and that too is likely slowing things. And finally, the magic of sequestration is keeping government spending in line and the next budget is a huge question mark, so it is hard to see where fiscal policy will help out. Put that together and 2017 looks like it will come in at trend, maybe 2¼%, enough to support at least one more increase after next week’s likely hike. Rate hikes don’t seem to worry investors. Actually nothing seems to worry investors and today’s data should not do anything to cause concern to suddenly appear.

May Employment Report and April Trade Deficit

KEY DATA: Jobs: +138,000; Private: +147,000; Revisions: -66,000; Unemployment Rate: 4.3% (down -0.1 percentage point); Wages: +0.2%/ Trade Deficit: $2.3 billion wider

IN A NUTSHELL: “The lack of workers and modest economic growth are holding back job gains.”

WHAT IT MEANS: This week, I warned that the payroll report could be well below expectations and it turns out that was indeed the case. Job gains In May were significantly below consensus and almost half what the closely followed ADP report estimated. Nevertheless, the report was not weak. Yes, there were some real issues we saw in the data. The brick and mortar retail sector is reeling from Internet competition and jobs are disappearing. The slowdown in vehicle sales has led to manufacturers cutting back payrolls. Meanwhile, construction, health care, finance and restaurants are still adding workers at a very solid pace. So far this year, the economy has created an average of 162,000 per month, which is more than enough to keep the unemployment rate falling. And, it is more than enough to allow the Fed to raise rates on June 14th.

On the unemployment front, the headline rate fell to the lowest level in sixteen years, while the really stupid unemployment rate hit its lowest level since November 2007, just before the Great Recession officially hit. In other words, no matter how you measure it, the labor market is tight. While the participation rate fell, it is still at the average over the last three years. Similarly, nothing should be read into the decline in the labor force since it had been surging at an unsustainable pace for several months. It is now growing at a more trend level. While the low level of available workers should be leading to higher wage gains, that was not the case in May. Average hourly earnings rose modestly – only 1.8% on an annualized basis.

The tree that fell in the forest today was the April trade deficit. It widened as exports fell but imports rose. That is not something we want to see. Even adjusting for inflation, it looks like trade could slow growth this quarter.

MARKETS AND FED POLICY IMPLICATIONS: I cannot to brag that I said this week that the employment number should be in the 140,000-range. I didn’t estimate that lower number because of some great model I developed. I made that estimate because the lack of qualified workers due to the low unemployment rate simply didn’t support the high job gains that had been previously reported. The reality is that the May payroll increase should simply be viewed as bringing us in line with firms should be adding given the overall state of the economy. With the downward revisions to March and April, we now are where we should be. Yes, the three-month average fell to 121,000 but the data have been hugely volatile lately, so let’s wait a while before saying hiring has slowed dramatically. The decelerating job gain trend is something investors and the Fed will watch as it could also be signaling a moderation in growth. Indeed, if the trade deficit does widen and vehicle sales stay as soft as they were in April and May, second quarter growth may not be snapping back as solidly as expected. But with investors essentially giving the Fed a free ride in two weeks, I would be surprised if the FOMC doesn’t move in two weeks.

May Help Wanted Online and April Pending Home Sales

KEY DATA: HWOL: +195,600/ Pending Sales (Over-Month): -1.3%; Over-Year: -3.3%

IN A NUTSHELL: “The decline in pending home sales is another sign that the housing market is slowing.”

WHAT IT MEANS: For well over a year, firms cut back on their advertising for open positions. That pattern changed in February and the Conference Board’s measure of online want ads has now increased for three consecutive months. The increases were spread across the entire country with forty-eight of the fifty-two metro areas surveyed posting gains. All twenty of the largest areas were up. Similarly, the rising demand for labor was seen in most occupations as all ten of the largest categories experienced increases. If the job gains are slowing down, and we will know better about that on Friday, it is likely because of a shortage of qualified workers rather than weakening demand.

Another day, another sign of issues in the housing market. Pending home sales, which are signed contracts, fell in April. That was the second consecutive month that the National Association of Realtors leading indicator of sales declined. The pace of purchases has also dropped from one year ago, not a positive sign for the market. Looking across the nation, three of the four regions were down in April, with only the West showing a rise. Over the year, every region was in the red.

MARKETS AND FED POLICY IMPLICATIONS: Friday we get the employment report and today’s data, which are really second level numbers, shouldn’t make much of difference to investors or even the Fed. It is interesting that my estimate of about 140,000 new jobs being created in May (consensus is 185,000) is viewed as being disappointing. In reality, it is enough, over time, to keep the unemployment rate declining slowly. The 225,000 per month level that so many are clamoring for would create real problems for the economy. At that pace, given the growth in the labor force, the unemployment rate would be at or below 4% by the end of next year. Since 1980, the rate has been that low just five times and all came in 2000. There hasn’t been an unemployment rate below 3.8% in nearly fifty years – during the Viet Nam War era. We would be entering uncharted waters for the modern economy and anyone who thinks that a labor market bubble couldn’t form is well, probably is a former Fed Chair (Greenspan and Bernanke failed to understand the implications of the tech and housing booms). So let’s hope that we get moderate job gains, even if they disappoint some, because there is only so far the unemployment rate can drop before big problems start appearing. And by the time we see the whites of the problems’ eyes, it will be too late.

April Durable Goods Orders and Revised 1st Quarter GDP

KEY DATA: Durables: -0.7%; Excluding Aircraft: -0.4%; Capital Investment: 0%/ GDP: +1.2% (up from 0.7%)

IN A NUTSHELL: “Businesses are just not investing heavily and that could weigh heavily on second quarter growth.”

WHAT IT MEANS: If the economy is going to grow at 3% for as long as the eye can see, businesses better spend lots of money on capital goods. That is the only way productivity, which has largely been going nowhere, will improve. Well, that is not happening. Durable goods orders fell in April, led by a sharp decline in commercial aircraft demand. But even excluding aircraft, orders still fell. Purchases of vehicles, computers and communications equipment did rise, but that was more than offset by declines in machinery, electrical equipment, appliances and metals. But the key in this report is always the measure that best indicates capital spending. For the second consecutive month it was flat and has barely budged this year. That is hardly a sign that firms are confident enough about future growth to start investing in it.

The economy grew in the first quarter by a little more than initially thought. The upward revision was nice to see and came from a pick up in consumer spending and a slightly narrower trade deficit. Still, the report was nothing great and with business equipment spending being revised downward, it reinforces the view that growth remains at the same disappointing level we have seen for the past seven years.

MARKETS AND FED POLICY IMPLICATIONS: The economy is just not picking up any steam. Yes, second quarter growth could be in the 3% range, but that would still only mean the first half growth rate was not much more than 2%. And there are no reasons to believe that either businesses or households will spend more rapidly going forward. Consumer debt levels are rising rapidly and the monthly payments are taking away from spending on other goods and services. Meanwhile, the only animal instincts that are breaking out in the corporate arena are in the equity markets. Executives are more than happy to slowly add workers and rake in higher earnings as the economy slowly expands, but they have shown little willingness to invest in the future or pay their workers more. So, where is the future growth going to come from? Got me. On that happy note, let me say to everyone:

Have a happy and healthy Memorial Day weekend!

May Philadelphia Fed Manufacturing Index, April Leading Indicators and Weekly Jobless Claims

KEY DATA: Phila. Fed Index: +16.8 points: Orders: -2 points; Expectations: -11.6 points/ LEI: +0.3%/ Claims: -4,000

IN A NUTSHELL: “The manufacturing sector continues to lead the way, creating expectations that second quarter growth could be quite decent.”

WHAT IT MEANS: Have the animal instincts taken over the manufacturing sector? I think it is too early to make that judgment, but it does look as if activity is springing back. Earlier this week we saw that industrial production soared in April. The Philadelphia Fed’s May reading of manufacturer activity in the MidAtlantic district points to continued gains. The overall activity measure soared to one of its highest levels ever. Over the past thirteen years, it was higher only twice, with one of those times coming just this past February. Now the Philadelphia region is not a major player in manufacturing, but the strong performance does hint at good numbers around the nation. The details of the report were not nearly as robust as the overall number. Orders and payrolls expanded solidly, but not quite as rapidly as in April. On the other hand, order books are filling more quickly and shipments soared. Looking forward, though, there was a lot more caution. Expectations dropped sharply and are now pretty much at the average over the past eight years. Managers are hopeful about the future, but are no longer irrationally exuberant.

Another indication that first quarter growth was an aberration was the solid rise in the Conference Board’s Leading Economic Indicator in April. This follows good gains in the previous two months, so growth should be much better through the summer.

The labor market continues to tighten and jobless claims fell again last week. In addition, the percent of the workforce on unemployment insurance continues to set new record lows. Yes, it is nice to say that the economy will grow by 3% or more, but unless firms find the labor to help drive the greater output, it will be difficult to sustain that level of expansion for very long.

MARKETS AND FED POLICY IMPLICATIONS: The appointment of the Special Council makes it is clear the issues facing the Trump Administration will be with us for a long time. These investigations rarely are concluded quickly. So investors need to focus on the actual economy and right now, it can be said that growth looks like it is back on track – for another year of 2% or so growth. The Republican leadership still wants to get a tax cut/reform bill done by the end of the year, but that could be more hopes than realistic expectations. Thus, it is reasonable not to expect any major economic impact from tax changes for another year. And that is why I don’t expect growth to accelerate much this year. But 2% growth, given the sluggish increase in the labor force, will be enough to keep the unemployment rate slowly falling. That means the Fed is likely to raise rates slowly but steadily. As we move closer to the June 13-14 FOMC meeting, look for the members to stake out their positions – i.e., send messages to the markets about what is likely to happen. If there is no hike in June, as most expect, it almost certainly will come at the July25-26 meeting, assuming second quarter growth isn’t totally disappointing.

April Housing Starts and Industrial Production

KEY DATA: Starts: -2.6%; 1-Family: +0.4%; Permits: -2.5%; 1-Family: -4.5%/ IP: +1.0%; Manufacturing: +1.0%

IN A NUTSHELL: “The pick up in manufacturing activity comes at the right time as home construction seems to have hit a lull.”

WHAT IT MEANS: Watch what people do, not what they say. Yesterday, surveys indicated that housing was moving forward strongly but manufacturing may be slowing. At least that is what the respondents said. Well, today’s data indicate the exact opposite happened in April. First, home construction slowed. Housing starts fell, though the decline was driven by a slowdown in the always-volatile multi-family segment. Sharp reductions in building activity in the Northeast and South overwhelmed solid increases in the Midwest and West. Looking forward, permit requests were off as well. Since permit requests outpaced starts over the past three months – and were well above the April level – look for a pop in starts in May. That, however, will just bring us back to an average pace.

Industrial production jumped in April and the rise was broad based. Not only did we have a nice increase in utility production, but the energy sector rebounded significantly and manufacturing output surged. Eight of the eleven durable goods manufacturing segments and seven of the eight nondurable sectors posted gains. The biggest increases were in vehicles and petroleum. It is nice that the energy sector is growing rather than contracting sharply as it did last year. As for the pop in assembly rates, unless sales pick up, we are could see some shaving in output. There was also a large rise in the production of computers and business equipment, indicating firms may be investing again. That would be good news for growth this quarter.

MARKETS AND FED POLICY IMPLICATIONS: The sharp increase in industrial activity is a clear sign that the first quarter sluggishness is behind us. But we have to be cautious in reading these numbers. March was a strange month and the April data have averaged out the ups and downs. What we need to see is consistently good numbers, not one bad and one good. A 3% or more second quarter will not indicate the economy is in off to the races. It will, however, make it possible we don’t have another sub-2% growth rate. My point is that the data are volatile and if the March and April numbers were switched, we probably would have two quarters both in the 2.25% range. Big deal. Given that investors seem to be turning a blind eye to any negative information but are celebrating anything that looks good, I suspect they will cheer the production report and skip the housing numbers. But they shouldn’t. The April starts number was almost 6% below the average for the first quarter and it will be hard to get above 3% growth if housing isn’t expanding. That is especially true given the less than stellar vehicle sales. I point all this out to make the point that I just don’t know where the earnings will come from to support the constant increase in equity prices. It is doubtful is will come from domestic activity. As for the Fed, it produces the industrial production report and the large increase adds to the belief that the next rate hike is coming very soon.

May Home Builders Index and New York Fed Manufacturing Survey

KEY DATA: NAHB: 70 (up 2 points)/ NY Fed: -6.2 points; Orders: -11.4 points; Expectations: -0.6 point

IN A NUTSHELL: “The housing market is beginning to look a little like it did a decade ago.”

WHAT IT MEANS: The housing market continues to recover and in many metropolitan areas, prices are pretty much where they were at the peak of the housing bubble. Meanwhile, developers are feeling like things are really strong once again. The National Association of Home Builders’ Index rose in May to a level seen only in boom times. I am not saying construction is booming; only that builders feel that way. For the first five months of the year, the index averaged 68, a level that was exceeded only in 2005 and 1999, two economic bubble years. The present conditions and expectations indices are near record highs. Interestingly, though, traffic is good but hardly great. That reflects the reality that sales levels are no where near the peaks we had seen and will not likely be there anytime soon – if at all. I guess what you have to conclude is that builders feel real good about the industry, even if it is running at a lower pace than in the past.

Manufacturing has helped keep the economy moving forward, but the strength of this sector may be waning a touch. The New York Federal Reserve Bank’s Empire State Manufacturing Survey took a tumble in May. Overall activity slowed as orders and backlogs declined. Still, hiring remained solid and respondents were still pretty optimistic.

MARKETS AND FED POLICY IMPLICATIONS: Most economists expect that second quarter growth will rebound from the weak gain recorded in the first part of the year. But it is not clear how strong it will be and what it will say about the state of the economy. Tomorrow we get housing starts and industrial production and if the NAHB and NY Fed surveys tell us anything about what is actually happening, starts should be good but production not so much. That would further muddle the economic picture. Even if second quarter GDP growth is in the 3% range, as I expect, the economy would have expanded during the first half of the year at a roughly 2% pace. In other words, the more things may change in other places, the more the economy remains the same. Yet investors seem to be assuming growth will stay at 3% for as long as the eye can see and that all the other things happening in the world just don’t matter. Aren’t rose-colored glasses wonderful? There is nothing at work that should cause growth this year to be much more than about 2.25%. I don’t know what that means for equity prices, but I do think it raises questions about earnings expectations for the rest of the year. Oh, well, I guess that’s why I am an economist and I don’t run money.