Category Archives: Economic Indicators

June Producer Prices

KEY DATA: PPI: +0.3% Over-Year: +3.4%; Goods: +0.1%; Services: +0.4%

IN A NUTSHELL: “Wholesale cost increases are accelerating and with more tariffs being announced, it is hard to see how consumer inflation will not accelerate as well.”

WHAT IT MEANS: Is inflation a problem? Maybe not yet, but it is hard to see that it will not be a real issue very soon. Wholesale prices rose solidly in June even with a sharp decline in food costs. Excluding foods, it was up at a concerning rate. I point out foods because a large part of the trade war is being fought over agricultural products and a loss of foreign markets would create surpluses in the U.S. and price declines. To the extent the price increases were due to bumper crops, those declines would likely be temporary. So, we should focus on the goods excluding foods and those were up pretty much across the board. Energy prices are rising as well and that is not good news for consumers, especially since they are helping drive a sharp rise in transportation costs.

Over the year, producer prices are up the fastest since December 2011. That is a warning and if we look into the pipeline to see if cost pressures will accelerate of slow, it is clear that they are likely to worsen. At the intermediate level, non-food and energy goods costs are soaring. Processed materials less food and energy were up by nearly five percent over the year and much of that will likely be passed through to finished goods. And the sharp rise in energy costs we saw in June is likely to be as great this month.

MARKETS AND FED POLICY IMPLICATIONS: Wholesale costs are accelerating and now we have threats of further tariffs on China that can only ramp up inflation fears. Of course, they are only wholesale costs. By that I mean the pathway from producer to consumer price increases is hardly straight. But we are getting to wholesale inflation levels that will be hard to absorb without materially reducing earnings. That is a warning for investors that the sugar high from the tax cuts may start wearing off, as businesses have to show increases that are not simply tax related. Higher producer costs, regardless of the source of the cost pressures, are not good news for the markets. If earnings come under pressure, it is likely that at least some of those cost increases will start showing up in the consumer price measures. That cannot make the Fed happy. So, today’s report is not good news as it provides warnings that inflation is likely to rise further and corporate earnings could weaken as we go through the second half of the year.

June Supply Managers’ Manufacturing Index and May Construction Spending

KEY DATA: ISM (Manufacturing): +1.5 points; Orders: -0.2 point/ Construction: +0.4%; Residential: +0.8%/ Ads: -51,000

IN A NUTSHELL: “Robust industrial activity should keep the economy strong for quite a while.”

WHAT IT MEANS: With trade issues starting to slowly, but steadily spiral out of hand, we need to know if the key sectors can withstand the potential problems that a trade war could bring.  Last week we saw that household income, especially wages and salaries, was not growing significantly. Today, though, it became clear that the industrial sector is in very good shape. The Institute for Supply Management reported that its manufacturing index rose in June. Orders continue to increase sharply, though not quite as quickly as they had been. Still, the expanding demand was large enough to force production to rise and order books to continue to fill (though also less rapidly). Both producer and customer inventories are low and that bodes well for future production. Finally, hiring continues at a very solid pace as well. All in all, it looks like the manufacturing sector should be able to lead the way for the rest of the year.

It is also looking like construction is starting to accelerate. Activity jumped in May, led by a surge in residential building, both private and residential. Office construction was also up sharply. However, excluding office, nonresidential construction was weak, which is something that needs to be watched. The economy needs a broad based strong construction to help offset any weakness that the trade battles may create.

MARKETS AND FED POLICY IMPLICATIONS: Can the U.S. economy withstand the counter-tariffs being put on by Europe, Canada, Mexico and China as well as the higher costs created by our tariffs? Right now, given that the level of the tariffs is not huge, it looks that way. That is not to say some industries will not be hurt badly or that growth will not slow, but unless things deteriorate further, a recession will not likely follow just from the current trade skirmishes. However, the longer the tariff mini-war continues, the greater the damage and the slower the economy will grow. That is causing investors to lose some of their exuberance and maybe even creating some caution in the market. But this week contains Employment Friday and some of the concerns about the future course of the economy could be either dispelled or heightened, depending upon the size of the report. The consensus is for strong gain in the 200,000 range. I don’t think that is likely. However, I do think the wage number could be hotter than expected. That would create worries. Regardless:

Have a wonderful and safe July 4th!

Revised First Quarter GDP and Weekly Jobless Claims

KEY DATA: GDP: 2.0% (from 2.2%)/ Claims: +9,000

IN A NUTSHELL: “A disappointing first quarter expansion is likely to be followed by robust second quarter growth.”

WHAT IT MEANS: Is the economy weak or strong? Did the tax cuts add to growth or do little? The answer to both those questions is, of course, yes. The third estimate of first quarter growth came in a little less than expected. The economy grew decently, but consumers did not spend a whole lot of money, especially on big-ticket items, restraining the expansion. Indeed, consumption grew at the slowest pace in five years. But the major reason for the downward revision to GDP came from less inventory building. Firms added to stocks at slower pace than previously thought. That, though, actually is a positive for second quarter growth. The data are indicating that both businesses and households picked up the spending pace in the spring. With less stock in the warehouses, production had to rise even more to meet the emerging jump in demand.

Corporate profit estimates were also revised and they grew robustly, to say the least. When taxes and certain adjustments are taken into account, profits were up nearly 17% over the level posted in the first quarter of 2017. Look for those numbers to get even bigger as we go through the year. Now if we can only get businesses to invest even more of those dollars, the economy would be in great shape.

Jobless claims jumped last week but that is hardly unusual. Smoothing out the ups and downs, the level remains extremely low. Conditions are so tight the firms are once again hiring teenagers. Challenger, Gray and Christmas reported that teenage hiring in May was up 73% over May 2017 levels.

MARKETS AND FED POLICY IMPLICATIONS: The economy does not grow in a consistent manner. Some quarters are disappointments while some exceed even the most optimistic forecasters’ estimates. So don’t make much of the first quarter number. Indeed, we could see second quarter growth at double the first quarter pace. Of course, averaging those two out would put us at where most economists expect growth to be this year: roughly 3%. Given the huge tax cuts, the massive surge in after tax profits, large increases in government spending and an already solid economy, that pace would be a disappointment. Three percent growth is what the president’s economists say is the sustainable level over the next ten years. That is in their forecasts. But if we can only get roughly three percent when you hype the economy at a pace maybe never seen before, you have to be concerned. The impacts of the tax cuts will wear off over the next twelve to eighteen months, so where do we go from there? Businesses may be at a much higher level of activity, but they still have to grow from that level and that means consumer spending will have to be a lot better. And that will require wage growth to accelerate sharply. But we have had no sign that will happen and if it does, what will happen to inflation and interest rates? If you are wondering why so many economists are raising their probability that a recession could start in late 2019 or the first half 2020, that is why.

May Durable Goods Orders and Pending Home Sales

KEY DATA: Orders: -0.6%; Excluding Aircraft: -0.5%; Capital Spending: -0.2%/ Pending Sales: -0.5%; Over-Year: -2.2%

IN A NUTSHELL: “The manufacturing sector is still growing, but maybe at a less robust pace.”

WHAT IT MEANS: One of the highlights of the current expansion has been the rebound in manufacturing. Well, that upturn may be moderating. Durable goods orders fell in May, marking the second consecutive monthly drop. Declines were pretty much across the board as the vehicle, civilian aircraft, computer, electronic equipment and metal sectors all were off. Demand for machinery, communications equipment and defense aircraft did increase. Still, backlogs rose sharply, indicating that production will continue to be strong for quite some time. Slowing vehicle sales and building inventory is not good news for the auto sectors. Finally, capital spending also slowed a touch. While the tax cuts provided the means of invest, firms have not done so consistently as spending has been up and down like a yo-yo this year.

The National Association of Realtors reported that pending home sales were off in May. Weakness in the South, the biggest region, offset gains in the other three regions. Housing’s big problem is not demand, as prices are up sharply. It is a lack of inventory that is restraining sales and that is likely to continue to be an issue for quite a while.  

MARKETS AND FED POLICY IMPLICATIONS: The housing sector is being buffeted by a lack of homes on the market, rising interest rates and soaring prices. That combination does not make for a stable market. The recent moderation in rates should help, but if growth is as strong as most economists expect, inflation and longer-term interest rates should continue to filter upward over the course of the year. And the Fed has made it clear that short-term rates will be rising as well. So, don’t expect this sector to lead the way. In addition, the rising costs to manufacturers from tariffs is just starting to bite and while initially, those costs might be absorbed, there is only so much some of the businesses can stand. We could see them raising prices as long as those tariffs are maintained. As for U.S. firms facing tariffs put on American made products, those impacts are also in the beginning stages. Thus, while the economic fundamentals are strong, some cracks are beginning to appear. Ultimately, investors will have to decide how much of the threats are real and how much bluster. They cannot keep getting whipsawed. Until then, volatility is likely to continue.  

May Housing Starts and Permits

KEY DATA: Starts: +5%; Year-to-Date: +11%; 1-Family: +3.9%; Permits: -4.6%; Year-to-Date: +8%; 1-Family: -2.2%

IN A NUTSHELL: “The rebound in home construction means the sector might actually add to growth this quarter.”

WHAT IT MEANS: Home construction had been lagging this quarter, which was a bit of a surprise. And with mortgage rates rising, there was concern the sector could falter. Instead, housing starts rose solidly in May. But the data were all over the place. For example, construction in the Midwest surged by over 60%. Multi-family building activity nearly doubled and single-family starts jumped 45%. Those changes came after large declines in April. We are talking huge changes that are usually seen in the winter, not the spring. Meanwhile, starts were down in the other three regions, with the Northeast posting a double-digit decline. So we need to step back and see what happens in June before we make any major conclusions about the strength of the home construction sector. Looking forward, permit requests moderated, but they had been running well above the pace of construction and it was inevitable there would be a pull back. A massive increase in the Northeast and a more moderate decline in the Midwest were more than offset by weakness in the West and especially the South. For the last three months, permit requests ran higher than starts, so there is a reasonable expectation that the large jump in construction will be sustained, at least for a couple of months.

MARKETS AND FED POLICY IMPLICATIONS: Second quarter growth looks like it was solid and the remaining question is how big a number will print. Estimates range up to 4% or even more and that cannot be ruled out. I am more in the 3.5% range (actually, a touch below that), but there is still a lot of data to come that could change that. The strong housing number could push up GDP estimates. Regardless, the economy is in good shape, which just about everyone understands. Broad based growth would support the Fed’s expected four moves this year while not spooking investors too much. It is hard to argue that the economy will falter from a fairly modest one-half percentage point increase in short-term rates if the economy is expanding robustly. Indeed, if or when the current trade war fears fade, investors will get back to watching economic variables and those look good.

May Philadelphia Fed Survey, April Leading Indicators and Weekly Jobless Claims

KEY DATA: Phila. Fed (Manufacturing): +11.2 points; Orders: +22.2; Prices: +6.6 points/ LEI: +0.4% / Claims: +11,000

IN A NUTSHELL: “While the strong growth should continue through the rest of the year, the rising pricing power it is supporting is becoming worrisome.”

WHAT IT MEANS: The concerns about strong growth and expansionary fiscal policy being implemented at the wrong time are that inflation and interest rates could surge. So, what firms have been doing when faced with rising demand and increasing costs? One indication comes from the May Philadelphia Federal Reserve’s Business Outlook Survey. Today’s report was for manufacturers and boy was it strong. Manufacturing activity in the Middle Atlantic region jumped in early May, led by a surge in new orders. Firms are not only adding more workers to meet the growing demand but are working their current employees longer. But the real story is in the pricing data. The prices received index hit its highest level in over 29 years. You have to go back to the early ‘80s to find any period where the current level was sustained. Already, 55% of the respondents say they have been raising their prices and almost two-thirds believe they will be able to so over the next six months. In addition, firms are expecting their price increases to be in the 3% range over the next year. That has to worry the Fed members.

Looking forward, the economy should be strong for months to come. The Conference Board’s Leading Economic Index rose solidly again in April. Only two of the ten components, stock prices and housing permits, were down and stocks have done pretty well so far this month. So this index should continue to point to strong economic activity.

On the labor front, jobless claims jumped last week, but the level remains ridiculously low. Of course, I keep saying we are in a labor shortage environment, and I keep believing that, but the proof for workers is in wages and they still are not rising as fast as the claims data would imply.

MARKETS AND FED POLICY IMPLICATIONS: Right now, the trends in inflation and interest rates are not good. Oil prices continue to rise and hit levels not seen since November 2014. Until it is clear what will happen with Iranian exports, oil prices should remain elevated. I would not be surprised if prices back down, but I think we will wind up with higher oil costs as a result of backing out of the Iranian agreement. Unless that decision is modified, the Fed has to assume the higher prices, at least to some extent, are sustainable. That should be a factor in not just the speed of interest rate hikes but also in how fast the Fed will shrink its balance sheet. Meanwhile, rising oil prices and surging bond rates (the 10-year T-Note hit its highest rate in seven years) seem to mean little to investors. I guess they will worry about the future when it comes. But the Fed will not close its eyes to what is going on and a rate hike at the end of the June 12-13 FOMC meeting looks highly likely.

April Import and Export Prices

KEY DATA: Imports: +0.3%; Over-Year: +3.3%; Nonfuel: +0.2%; Exports: +0.6%; Farm: -1.2%

IN A NUTSHELL: “The import price pressures that had been building seem to moderating.”

WHAT IT MEANS: While economists can debate all they want about the lack of wage gains, ultimately what matters is the rate of consumer inflation. Wage increases supported by productivity gains have limited inflationary implications. But retail price increases don’t have to come from just a rise in labor expenses. We get a significant portion of our consumer and producer goods from other nations and that means we have to watch the import price numbers carefully. During the second half of last year, import goods inflation was soaring. So far this year, import price inflation has moderated, as can be seen in the April report. We know that energy prices are rising. However, nonfuel cost increases are not as threatening. They were up moderately in April. Food prices were down, capital good costs were flat and consumer goods import prices rose modestly. Just about all the gain came from the industrial supply sector and it wasn’t all petroleum. In addition to petroleum-based products the cost of other industrial inputs such as wood and minerals were also up sharply. On the export side, firms were raising prices in just about every sector except farm products. Agricultural exports are extremely exposed to a backlash from the administration’s trade policies and that may explain, at least in part, the large decline. Between April 2015 and April 2016, farm export prices were up 4.6%. Over the past year, they rose only 1.4%. In April, the only export products that didn’t show large price declines were related to fish/seafood.

An early May reading on consumer confidence came out today. The University of Michigan’s Consumer Sentiment Index was flat during the first half of the month. Expectations rose but respondents thought that current conditions were not as strong as they had been.

MARKETS AND FED POLICY IMPLICATIONS: The more moderate increases in import prices are nice to see. The rise in foreign product costs have been strong enough to convince the Fed to continue tightening but not so high that the members need to worry that inflation will suddenly soar. That is, inflation is running neither too hot nor too cold. It is running just right for rate hikes every other meeting and that is what most economists, including myself, expect. Investors seem to be growing comfortable with that pattern of rate increases and they should be. A solidly growing economy and a move back to more normal interest rates are indications that the negative impacts of the Great Recession are finally disappearing. Now we can start focusing on the next set of problems, which already be cropping up. As Jamie Dimon noted, there’s a 100% chance of another economic downturn. Of course there is. But the issues are when and what will cause it. Recessions are created by either bubbles bursting and/or policy mistakes. Potential bubbles are stocks and interest rates, while the policy mistakes could fiscal policy at the wrong time, too much Fed tightening and/or trade risks. Together, though, they do add up to a formidable list of potential issues that could derail the economy, maybe not in the next twelve to eighteen months, but not much after that.

April Consumer Prices, Real Earnings and Weekly Jobless Claims

KEY DATA: CPI: +0.2%; Ex-Food and Energy: +0.1%/ Real Hourly Earnings: 0%; Over-Year: +0.2%/ Claims: unchanged

IN A NUTSHELL: “Inflation may not be soaring, but it is high enough to  wipe out most of the gains workers are seeing in their paychecks.”

WHAT IT MEANS: Solid economic growth and tight labor markets have yet to translate into rapidly accelerating inflation. The Consumer Price Index rose moderately in April and excluding food and energy, it increased only modestly. The details, though, were all over the place. There were strong increases in gasoline and fuel oil prices, but electricity and piped gas costs fell. Food price gains picked up steam, though cookies and ice cream costs were off sharply – thankfully. Interestingly, medical care costs were tame, with medical commodity prices actually down. Over the year, both medical commodity and services costs rose less than the overall price index, a real surprise. I thought medical costs were soaring. Oh, well, another misconception put to rest. And then there are used vehicle prices, which dropped sharply. The record sales in 2015 and 2016 are having an impact as the two and three year old vehicles coming off leases are flooding the market. That helped restrain the rise in the overall index. Since people don’t usually buy vehicles frequently, I am not sure if the sharp decline in used vehicle prices matters a whole lot to the average worker. But the cost of housing does and that keeps rising sharply.

Even though inflation did not jump in April, neither did wages. So, when you adjust the rise in hourly earnings by the increase in consumer prices, you find that household spending power went nowhere. Worse, over the year, consumer costs were up by 2.4% and hourly earnings by 2.6%, so real earnings rose a pathetic 0.2%. As I say month after month, it is hard to sustain strong growth if consumers don’t have the income to spend and that is the case.

 That wages are not increasing is a conundrum that defies explanation. Jobless claims, when adjusted for the labor force, remained at record lows last week. In addition, job openings are at record highs and the number of positions available is about the same as the number of people unemployed. No matter what measure you use, even the really stupid unemployment rate, you know, the one that adjusts for people saying their frustrated or they want a full-time job but cannot find one (for whatever reason), it is clear that labor markets are tight.

MARKETS AND FED POLICY IMPLICATIONS: Today’s data raise questions that investors may not be asking. Specifically, how can companies that are linked to the consumer make money when incomes are rising minimally? The savings rate is extremely low and the recent rise seems to indicate that households are either saving the tax cuts or paying down debt. Thus, if we are to maintain a growth rate close to 3%, businesses will have to start investing the tax cuts they received. Will they do that? It makes sense to improve efficiencies by upgrading machinery and equipment, but many the large, publicly traded companies appear more intent on raising dividends, increasing stock buybacks and/or bidding for other companies. The merger and acquisition phase seems to be just getting started. So, yes, we could see 3% growth this year, but it will be hard to sustain. And if we get it, how will firms keep wages and prices down in that strong growth economy? That is the real question.

April Producer Price Index

KEY DATA: PPI (Final Demand): +0.1%; Ex-Food and Energy: +0.2%; Goods: 0%; Services: +0.1%

IN A NUTSHELL: “Despite the modest increase in wholesale costs, the inexorable rise in inflation remains inexorable.”

WHAT IT MEANS: Inflation pressures are building; there is little doubt about that. What is unclear is how much will price increases accelerate. Costs had been rising fairly sharply at the wholesale level, but that was not the case in April. A large decline in food prices coupled with a modest gain in energy helped limit the rise in producer prices to the smallest increase since December. There was minimal pricing pressure on both goods and services and even excluding the more volatile food and energy, costs rose only moderately. Over the year, the gains in both the headline and core indices decelerated, but remained in the 2.5% range, so we cannot say that inflation pressures have disappeared. Looking at the details, there were few outliers. Prices of vegetables and eggs fell sharply, a major factor in the large drop in food. Otherwise, most of the individual categories posted modest to moderate declines or increases, the majority being declines.

Looking into the future, the April report is not likely to become the norm. Intermediate level producer costs rose sharply for food, energy and core (non-food and energy) measures. That was the case at the crude product level, though food costs were down. Basically, there is building pressure in the pipeline.

MARKETS AND FED POLICY IMPLICATIONS: The inflation pressures we see in all the consumer indices are real. With oil prices above $70/barrel and the ending of the Iran agreement likely to keep prices up, it is hard to see how inflation will moderate anytime soon. The Fed looks at the headline number now, so energy matters. I have made the argument to anyone who will listen that over time, it is the entirety of retail price increases that matter to households. The headline increases in the Consumer Price Index (CPI) and Personal Consumption Expenditure deflator (PCE) have been persistently above the core increases and that is what consumers pay. The Fed has moved back toward the top line number, which makes sense. Thus, there is every good reason for the FOMC to continue to normalize both rates and the Fed’s balance sheet. Quantitative tightening will continue and is scheduled to accelerate. Rate hikes are not likely to stop unless there is a major crisis. Investors need to factor that into their thinking. Of course, with all the political issues swirling around Washington, lots of fundamental economic considerations are being pushed to the sidelines.

April Private Sector Jobs and Help Wanted OnLine

KEY DATA: ADP: +204,000; Construction: +27,000/ HWOL: -69,300

IN A NUTSHELL: “Businesses are hiring solidly and they are looking for even more workers.””

WHAT IT MEANS: The latest Fed meeting will end soon but before we get the statement, there are some data to discuss. Since they have to do with one of the Fed’s major concerns, the labor market, it is likely they will be a part of the discussion. Since this is the week of Employment Friday, Wednesday is when we get a snapshot of what private sector hiring may have been. According to ADP, firms were out adding workers at a very solid, if not strong pace in April. The gains were spread fairly evenly across the different sizes of firms, though companies with 50 to 499 workers were the most active. Looking at the specific industries, the need for construction workers remains robust, while health care employees are also in strong demand. The only sector where jobs declined was information services.

The number of want ads posted online faded in April. The Conference Board’s Help Wanted OnLine Index fell, but it has been bouncing around quite a bit lately. That said, the level of want ads is still high enough that we should see solid hiring going forward. There were declines in every region, though the greatest weakness was the Northeast, New York in particular. As for occupations, the demand for computer and mathematics experts continues to soar, while sales people are no longer needed as much. That makes sense since the Internet is not a person-to-person sales vehicle.

MARKETS AND FED POLICY IMPLICATIONS: While the labor market data are important, today is all about the FOMC meeting and the statement that is to be released. The best guess is that the Fed will leave rates alone. Actually, it would be a surprise if anything else were done. The continued strength in hiring has to provide support for the members’ belief that they can continue to raise interest rates without materially affecting the economy. So what we need to watch is the statement and how strong a signal it sends that the next tightening is coming. Most economists, including myself, expect a rate hike at the June 12-13 meeting. If Friday’s jobs report is solid and wage gains continue to accelerate, anything but a hike then would be a shock. In June, we also get the Fed members’ forecasts, which could point to four rather than three increases this year and I think an increase in what may be the terminal rate for this cycle. That would point to four increases, next year as well, which is where I stand.