All posts by joel

February Existing Home Sales

KEY DATA: Sales: -7.1%; Year-over-Year: +2.2%; Prices (Year-over-Year): +4.4%

IN A NUTSHELL: “The volatility in the housing market continues, though the sharp decline in February is something to watch.”

WHAT IT MEANS: With the Fed on hold, or whatever, data move back into the spotlight and this week it is largely about housing. The first number up was the National Association of Realtors’ existing home sales report for February. It was ugly. Sales fell sharply and it wasn’t just due to some weather issues. Demand was off across the nation, though the Northeast and Midwest led the way with double-digit declines. One of the biggest problems holding back the market is supply. While the number of homes on the market rose a touch, inventory, as measured by the number of months of supply given the sales pace, was a meager 4.4 months. A more normal, vibrant market would have something close to six months of supply. Without the product to sell, it is hard to sell homes and that is a factor to consider when determining the meaning of this report. The lack of supply has driven up prices, but the year-over-year gains have also bounced around due to the unevenness in sales across price levels.

The Chicago Fed’s National Activity Index was also released today and it showed the economy slowed in February. This index also has been quite volatile, but has remained in a range that indicates the economy is growing, but not at any great pace.

MARKETS AND FED POLICY IMPLICATIONS: Housing has been trending upward and that is still the case, but the key word is “trending”. Some months are strong, some are weak and it is important not to jump to any conclusions based on just one report, especially given the issues with inventory. The consumer is spending money and we saw that with a recent report that said retail sector profits went up solidly during the fourth quarter. And that spending should spill over into housing. With job gains strong and the labor market tightening, wage gains are holding up and coupled with the continued low mortgage rates, there is every reason to think that housing sales will rise. But since you cannot buy what is not for sale, at least not usually, don’t expect sales to rise consistently. This report will probably be read as another sign of weakness, but that would be jumping to conclusions. On the other hand, and there is always another hand, this is not a report that makes anyone at the Fed worried about the cautious statement that was issued last week.

January Job Openings, February Leading Indicators, March Philadelphia Fed Manufacturing Survey and Weekly Jobless Claims

KEY DATA: Openings: +260,000; LEI: +0.1%; Phil. Fed: +15.2 points; Claims: +7,000

IN A NUTSHELL: “The economic data are firming up and while the Fed appears worried about growth, it has nothing to do with the U.S. economy.”

WHAT IT MEANS: Janet Yellen believes that the lack of wage growth is a sign there is still some slack in the labor market. There may be some truth in that observation, but there isn’t a whole lot of slack. Job openings rebounded in January after having softened at the end of last year. Interestingly, hiring, terminations and quits eased. Firms are looking for a lot more people and they are also holding onto their own workers as hard as possible. I suspect the decline in hiring was due to a lack of supply, not demand. The labor market continues to defy traditional economics, which says that if you have excess demand, prices (in this case wages) should rise. Still, there just aren’t enough people around to fill all the openings and the steady acceleration in wage gains should continue.


Adding to the view that the labor market is tight was the weekly jobless claims number. Yes it rose. However, adjusted for the size of the labor force, claims are at historic lows. In addition, the number of people continuing to collect unemployment insurance is going down and percent of those receiving aid is also at the lowest in history.

On the manufacturing front, the Philadelphia Fed’s Manufacturing Survey jumped sharply in early March. Orders went from declining modestly to rising solidly. This report reinforces the similar results seen the New York Fed’s Empire State survey that was released on Tuesday.

Looking forward, the Conference Board’s Leading Economic Index rose in February after declining the previous two months. This is another indication that whatever slowdown we had been seeing is behind us.

Fed Policy Commentary: A Day Later: Yesterday, the FOMC backed off on the number of expected rate hikes this year. Why, I really don’t know, but they did. If you look at the recent data, and the members are supposed to be data dependent, it is clear that whatever economic issues concern them, it cannot be U.S. economic weakness. Which brings me to the conclusion that there are real problems with the way the Fed is seeing things. How can you go from expecting four 2016 rate hikes in December to only two in March while the data indicate the labor market is at full employment and inflation is on the rise? Their dual mandate is close to being met. The change in expectations was not a small one: It cut this year’s projected rate increase in half! Solid job gains and the recent indications that China and Europe are not falling apart would seem to support as strong if not stronger U.S. growth this year, but the members downgraded their GDP forecast from 2.4% to 2.2%. Huh? I can understand their downward revision to overall inflation since few were expecting the subsequent huge decline in energy costs. But why was core inflation revised downward when all indications are that it is accelerating? The consensus forecast mystifies me and that raises questions about how many rate changes we will actually get. All this information was supposed to provide transparency. Instead, it seems to provide reasons to think the members have little idea what is going on.

March 15, 16 2016 FOMC Meeting

In a Nutshell: “The Fed is more than willing to wait a little longer before making another move.”

 Rate Decision: Fed funds rate range maintained at 0.25% and 0.50%

Going into today’s FOMC meeting, there was great uncertainty about where the members stood as to when the next rate hike would happen and how many there might be this year. Well, we still are not certain about anything the Fed is going to do, but it looks like the members are willing to punt for a little bit longer.

The Committees statement was about as wishy-washy as it can get. The labor market is getting better, households are spending okay and the housing market is improving. But at the same time, business spending and the trade situation are soft. Inflation may be picking up but it is still below its target. Basically, nothing is strong, except job gains, but nothing is really weak.

In addition to the normal statement, the Fed also released the estimates of members’ forecasts for economic growth and interest rates. This occurs every other meeting. There was a downgrade to growth and inflation and a slowing in the expected rise in rates. Instead of the projected four rate hikes we saw in December, the members now think it might be more like two. Of course, the number will depend upon the course of the economy, so we can expect two rates hikes, give or take two rate hikes. I wish I was only kidding, but I am not.

The reason I am now even more uncertain about the Fed’s future course of action comes from an answer to a question posed to Fed Chair Yellen. Basically, it was put to her that the economy has pretty much met the Fed’s full employment goal (the current unemployment rate is 4.9% compared to the long run estimate of 4.8%), and inflation is moving up toward it’s 2% goal, and is only lagging because of the recent decline in oil prices. Given those facts, what would it take to get another rate hike? The answer seemed to be: “when conditions are right, the members will know it”. No, Chair Yellen didn’t say that, but that is what I took from the answer.

What is the Fed policy takeaway? The Fed seems to be willing to accept lower rates for a longer period of time and if that means higher inflation for a period of time, so be it. While I have forecast the next move to occur in April, it looks like June is the earliest that could happen. And for it to happen, core inflation would have to remain above target, overall inflation would have to move up closer to target, which implies oil prices would have to keep slowly rising, and wage gains would have accelerate. We could get all those things happening before the June 14-15 meeting, but not in the six weeks between now and the next FOMC meeting on April 26-27.

(The next FOMC meeting is April 26-27, 2016.)

February Consumer Prices, Housing Starts and Industrial Production

KEY DATA: CPI: -0.2%; Excluding Food and Energy: +0.3%/ Starts: +5.2%; Permits: -3.1%/ IP: -0.5%; Manufacturing +0.2%

IN A NUTSHELL: “With the manufacturing and housing sectors improving and inflation on the rise, the Fed could easily signal that rate hikes are coming, possibly sooner than most think.”

WHAT IT MEANS: It was a good day for the U.S. economic data, at least if you like growth and a continued pick up in inflation. Consumer prices fell in February. So what else is new? Well, how about the broadening of price pressures outside the energy sector? Excluding energy, prices rose solidly. The core, which also excludes food, rose by the fastest pace in nearly four years. Looking at the details, there were few categories where prices actually declined. While it was good to see that cookie prices were down, that was offset by a rise in donut costs. Oh, well. There was one major outlier that may have artificially upped the price increase: Apparel prices surged 1.6%. That makes no sense at all since most of our clothes are imported and I don’t see that kind of increase in the import price data.

On the housing front, builders look like they are getting those shovels back into the ground. Housing starts jumped in February despite a massive, likely snow-induced, 50% drop in the Northeast. The Midwest, South and West were all up solidly. There were also increases in both the single-family and multi-family segments of the market. Looking forward, permit requests did fall. However, they had been running well ahead of starts. Even after the February decline, the three-month average for permits is still above the average for construction, so I don’t look at the drop as indicating a future slowdown in activity.

Industrial production fell sharply in February. Not to worry as utility output was down big-time. That’s weather. Meanwhile, manufacturing output increased decently, adding to a strong gain posted in January. The industrial heartland is coming back and is no longer the weakest link.

 MARKETS AND FED POLICY IMPLICATIONS: While yesterday’s data came down on the side of the Fed taking the cautious route at its meeting, today’s numbers, especially the inflation report, is a warning that the days of no price pressures are behind us. The FOMC cannot slough off the idea that inflation is not an issue, despite the headline declines in the reports. There is a broadening in the price pressures and while it is not high yet, it is no longer below the Fed’s target, when you remove energy. Because of the recent drop in petroleum prices, it may take until the fall before the year-over-year energy price decline is largely wiped out. But when that happens, the overall index will also exceed the Fed’s target and the Fed members have to start planning now for that eventuality. With the Fed’s statement and Janet Yellen’s press conference coming soon, investors are likely to remain cautious. But while the Fed is likely to keep rates steady, I think the members are willing to hint that rates could be going up. Investors may not be fully prepared for that.

February Retail Sales and Producer Prices

KEY DATA: Sales: -0.2%; Gasoline: -4.4%; “Control”: 0%/ PPI: -0.2%; Finished Consumer Goods less Food and Energy: +0.3%; Services: 0%

IN A NUTSHELL: “As the latest FOMC meeting starts, the members are faced with a consumer that is far from exuberant and prices that are well contained.”

WHAT IT MEANS: The Fed members are meeting to figure out what to do next, if anything, and today’s numbers are no help. Not surprisingly, retail sales fell in February. Lower gasoline prices and a modest decline in vehicle sales were major factors in the drop. But there were also declines in furniture, electronics and appliances, department stores and supermarkets. We even bought less online. The only strong areas were clothing, building supplies and restaurants. Eating out is once again in. So-called “control group” sales, which exclude autos, gasoline, building materials and food services, were flat. Since this measure best mirrors the GDP consumption number, it points to less than stellar household spending this quarter, especially since last month’s control group gains was revised downward sharply.

On the inflation front, wholesale prices declined, as usual. With another sharp drop in energy costs, a fall in overall producer costs was a given. Most other areas were also tame. There was no rise in services costs, which had been driving the index. However, prices of finished consumer goods excluding food and energy continue to increase faster than any other category, indicating pressure on household prices may be building. Looking down the road, the pipeline appears to be largely empty. Intermediate and unprocessed goods prices were also largely down over the month.

One other number was released today and it was a good one. The New York Fed’s Empire State manufacturing index rose sharply. What it now shows is that instead of declining dramatically, the New York manufacturing sector is starting to increase, though modestly. Orders are picking up and expectations are rising. Hiring, however, has remains stunted.

 MARKETS AND FED POLICY IMPLICATIONS: Well, if you don’t like the economic data, wait a month and they will be revised. That is what happened with the retail sales numbers, which is a warning to the Fed. What you see today may not be what you see not too far down the road. The FOMC made that mistake in September, when it saw all sorts of weakness around the world and stepped back from hiking. That was also the case in January, when the Committee was again worried about the world and commodity prices. One constant, whether the Fed members wanted to accept it or not, was that the U.S. economy was in good shape. It is, but is it in as good a shape as we thought when the data told us consumers were spending this quarter? The retail sales report will only make it more difficult for those on the Fed who want to resume the tightening process. That said, with incomes rising and job growth strong, the prospects are for households to spend on things other than vehicles, both new and used. All those new vehicle loans – and the resultant monthly payments – are sapping consumer buying capacity. Still, household spending is disappointing and that could temper the statement that the Committee issues as well as Chair Yellen’s comments at tomorrow’s press conference.

February Employment Report

KEY DATA: Payrolls: +242,000; Private Sector: +230,000; Manufacturing: -16,000; Mining: -19,000; Hourly Earnings: -0.1%; Unemployment Rate: 4.9% (Unchanged);

IN A NUTSHELL: “When the job market and the GDP numbers diverge, go with the employment numbers.”

WHAT IT MEANS: Some politicians, economists and business commentators still believe the economy is going into the tank. Well, don’t tell that to those doing the hiring in the private sector. Job gains soared in February and what made the number so impressive is that both the reeling mining and hurting manufacturing sectors cut back sharply.   Meanwhile, the services sector hired as if boom times were here. Firms may be making a commitment to workers as the number of employees coming from temporary help firms actually declined. Big increases were recorded in construction, retail trade, health care, professional services, education, finance, restaurants and hotels. In other words, we added jobs at every skill and pay level.

As for the unemployment rate, it remained at 4.9% for the second consecutive month. That was not a surprise. But with the labor force surging, the participation rate rising and the number of frustrated workers declining, worker confidence is growing that it is now possible to either find a job or find a new job. The U-6 unemployment rate, which includes every person who has a beef with the labor market for any reason, hit its lowest level since May 2008 and is where it was in the spring of 2004. The rate could be lower, but it is clearly no longer high.

The one disturbing number in the report was the decline in hourly earnings. But as I have noted before, these data have only been around for a decade and we really don’t know how the measure responds to changes in labor market conditions. There are better measures of compensation, but since investors seem to follow these numbers even though they don’t really know what they mean, I have to report them.

MARKETS AND FED POLICY IMPLICATIONS: In the fourth quarter of 2015, the economy added workers at a robust 240,000 per month pace yet GDP grew by a meek 1%. So far this quarter, job gains have averaged 207,000, also a solid gain and the consensus growth rate for the current quarter is just a little over 2%. Really, does anyone believe that businesses are hiring like crazy if the economy isn’t strong enough to require those added workers or there are real fears the economy is headed down the drain? Executives are being as conservative as possible so the strong job growth numbers point to a solid domestic economy. But that also means the economic concerns the Fed had in January have largely dissipated. The labor market is tightening, oil prices have stabilized, the equity markets are moving back up and fears of the world crashing and burning have eased. In other words, the Fed got fooled again. The members turned cautious last September when we had similar worries and then went into turtle position in January when they returned. This report allows the FOMC to send out signals that a second rate hike is coming. A good March employment report would provide all the cover the Fed needs. I think it happens in April. Janet Yellen has argued the Fed can increase rates at any meeting, not just one that has a press conference attached to it. She could prove her point after the April 26-27 meeting. That’s my guess and I am sticking to it.

February NonManufacturing Activity, Layoffs and Weekly Jobless Claims

KEY DATA: ISM (NonManufacturing): -0.1; Activity: +3.9; Orders: -1.0; Employment: -2.4/ Layoffs: -18%/ Claims: +6,000

IN A NUTSHELL: “With manufacturing stabilizing and the services sector still expanding, it should be clear to most that the recession fears were overblown.”

WHAT IT MEANS: The services sector has kept the economy going during manufacturing’s down period and while it is not booming along, it is still growing. The Institute for Supply Management’s NonManufacturing index eased just a touch in February, but the details didn’t confirm a major slowdown. The business activity/production index jumped, indicating firms are doing better. Yes, the new orders index eased, but orders are still increasing, just not as quickly. But there was one cautionary number. The employment index went into the red. Since most of the jobs come from services, this creates some concern that tomorrow’s job number may not live up to expectations.

Challenger, Gray and Christmas reported that layoff announcements in February were down from the January total but up from February 2015. The energy sector continues to hemorrhage positions. This is a lagging indicator, since it takes a while for layoff announcements to turn into actual job cuts. So, looking outward, the high level of announcements would seem to point to slower job gains in the months ahead. Looking backward, layoff announcements trended downward during the end of 2015 and that bodes well for the February jobs number.

Unemployment claims edged up last week but the four week moving average is still extremely low and well below the 2015 levels. This report also points to a decent payroll rise in February.

Finally, fourth quarter 2015 productivity and costs numbers were revised and came in better than expected. Of course, that is because everyone was expecting some really ugly numbers. Instead, they were just simply bad. Productivity fell “only” 2.2% instead of 3% while labor costs rose “only” 3.3% instead of 4.5%. A pick up in growth this quarter is likely to cause those numbers to change dramatically when we get the first quarter 2016 data.

MARKETS AND FED POLICY IMPLICATIONS: Most, but not all the data we have gotten in the past few weeks have been a little better than expected. Even today’s numbers surprised on the upside. That doesn’t mean the economy is booming – it is not. But growth continues and given that trend growth is maybe 2%, we are still exceeding that pace. And since we only need at most 150,000 new jobs to keep the unemployment rate going down, we should get that tomorrow as well. What I think will be key to Fed thinking is the hourly wage number. It rose sharply in January as firms came through with announced increases in minimum wages. If we get anything decent in February, it would signal that wage pressures that we see building are not temporary. That would provide the cover for the Fed to start sending out messages that their desire to raise rates further will be met, and possibly soon. Indeed, the March 16 FOMC statement and Janet Yellen’s press comments after the meeting could be more hawkish than people expect. But let’s see tomorrow’s report before we decide that rate hikes are coming.

February ADP Jobs Estimate and Help Wanted Online

KEY DATA: ADP: +214,000; HWOL: -162,100

IN A NUTSHELL: “It looks like the labor market is still tightening, though the softening in online want ads is a cautionary sign.”

WHAT IT MEANS: Friday we get the February employment report and with signs showing the economy is once again growing decently, the labor market is again the key factor in any future rate hikes. So, what might the jobs report look like? If the ADP estimate of private sector payroll gains is any guide, last month’s payroll increase should be a lot better than the 151,000 increase we saw in January. The ADP report showed that job increases were pretty evenly spread across all sizes of companies. They were also fairly even increases across industries. The services sector led the way, but there were a lot of new positions added in construction. The only weak link was, not surprisingly, manufacturing, which posted a decline in payrolls. Yesterday’s Institute for Supply Management’s manufacturing report showed the sector to be stabilizing, so there may not be many jobs cuts in the sector.

Whether job growth will accelerate was brought into question by the Conference Board’s February Help Wanted OnLine index, which fell sharply. The upward momentum seems to have been stunted over the past few months. Why that is happening is unclear. It could be that the economy is slowing, which seems to be the logical conclusion. The other may be that firms have not been able to fill so many of the jobs they already have open that they are cutting back on their advertising. Regardless, the softening is something to watch.

The Fed’s so-called Beige Book was released today. This contains discussions about economic activity in the nation and in each of the Fed Districts. Economic activity expanded in most districts and the labor market was decent, with wage gains strong in many areas. However, manufacturing, as we are seeing in most measures, was soft. The Fed members have done little to signal that the next rate hike is coming anytime soon, so we can be reasonably comfortable that there will not be any surprise at the end of the March 15-16 meeting.

 MARKETS AND FED POLICY IMPLICATIONS: The jobs report could be crucial in setting the tone of the FOMC’s statement in two weeks. A strong one where wage growth is solid again, could provide the cover for the members to warn that another rate hike may be in the works. I expect payrolls to increase by about 225,000. That would be enough to make the argument that the labor market is still tightening. If it were followed by an even better March report, which comes out before the April 26-27 FOMC meeting, especially if the unemployment rate falls again, then it would hard to imagine the Committee not considering a rate hike. The problems the FOMC members worried about, including declining equity markets and continued weakness in oil, seem to have dissipated. World economic weakness persists, but it is not any worse than in December when rates were increased. And it appears that investors are beginning to recognize that the reports of a recession on the horizon were not much different than the fears about Mark Twain’s death – somewhat premature. As long as oil prices remain stable or slowly increase, the equity markets should be able to accept the reality of a decent economy and higher future rates. But I never underestimate the ability of investors to react in ways that you never expect.

January Spending and Income, February Consumer Confidence and Revised Fourth Quarter GDP

KEY DATA: Spending: +0.5%; Income: +0.5%: Prices: +0.1%/ Confidence: -0.3%/ GDP: +1% (Up from 0.7%)

IN A NUTSHELL: “With consumers spending, incomes growing and confidence stable, it is hard to understand why we are seeing all those stories about a recession on the horizon.”

WHAT IT MEANS: “The recession is coming, the recession is coming” – Really? While I may look a little like Alfred E. Neuman (not really), I don’t go around saying: “What me worry?” I do worry when there are good reasons to worry. That is not right now. It is hard for the U.S. economy to fall into recession if the consumer is spending and guess what, that is happening. Consumption was strong in January and it was across the board. Solid gains were posted for durable and nondurable goods as well as services. More importantly, households can keep up the pace, as income growth was robust. Wages and salaries are on the rise, which is what we would expect from the tight labor markets. Consumers may be spending, but the rise in incomes has been enough to keep the savings rate constant. On the inflation front, while the overall increase was not significant, a lot of that was from commodities. The cost of services, which is nearly two-thirds of consumption, continues to accelerate. The year-over-year increase in the Fed’s favorite inflation measure, the Personal Consumption Expenditure price index, was the highest in over a year. Excluding food and energy, the index was up the fastest in three years. We may still be below the Fed’s inflation target, but the target can now be seen by the eye, not just on radar.

Another reason to be optimistic is that consumer confidence is not crashing, despite the mayhem in the markets. The University of Michigan’s February reading of Consumer Sentiment did tick down, but the decline was not nearly as much as might be expected given the stock market declines. The concerns did show up in expectations, which fell sharply.

The government revised fourth quarter GDP growth up a bit. A small decline was expected, so the modestly faster growth pace was a nice surprise. The revisions were minor in most categories and don’t alter the perception that the economy eased at the end of last year.

MARKETS AND FED POLICY IMPLICATIONS: The long awaited rise in wages and salaries is starting to show up. Now, we shouldn’t expect the sharp January increase to be repeated as some of the gain came from first of the year raises. But with jobless claims low and job openings high, it is likely that the wage acceleration that has been occurring for the past three years should continue this year. With incomes rising and financial conditions improving, there is every reason to believe households will continue opening their wallets. This report provides more ammunition for those at the Fed who say that market volatility should be watched but should not be the determinate of policy. It’s the economy and inflation that matter. Growth is rebounding, inflation is picking up and stocks have recovered about half the loss posted this year. In other words, conditions are moving back toward supporting a rate hike.    

January Durable Goods Orders and Weekly Jobless Claims

KEY DATA: Durables: +4.9%; Excluding Aircraft: 1.7%; Capital Spending: 3.9%/ Claims: +10,000

IN A NUTSHELL: “The broadly based rise in demand for big-ticket items is a sign that manufacturing sector is starting to stabilize.”

WHAT IT MEANS: The weakest link may still be the weakest link, but it may not be that weak anymore. The manufacturing sector, battered by the rising dollar and the collapse in oil prices, has faltered recently. However, given the surge in durable goods orders in January, the problems are starting to disappear. Yes, the wildly volatile aircraft sector accounted for about two-thirds of the gain, but demand for private and defense airplanes was not the only source of strength. Machinery, electrical equipment, computers, communications equipment, motor vehicles and metals were all up solidly. As for business capital spending, there was a strong rebound there as well. One month doesn’t constitute a trend, but maybe the oil complex cut backs are easing and demand in the rest of the economy will start showing through. Though orders were strong, so were shipments, which led to a modest rise in backlogs. Order books need to fill faster if production is to accelerate.

On the labor market front, jobless claims rose solidly last week, but that is hardly a concern. The previous week’s level was extremely low, so we just got back to very low levels of claims. The data are consistent with a solid rise in payrolls in February.

MARKETS AND FED POLICY IMPLICATIONS: So, what should we make of the economy? If the weak is no longer that weak, and the strong, which is the labor market, remains strong, then I think it is fair to say the economy is in good shape. But investors don’t seem to care that much about the economic data. If oil prices fall, so do stock prices. If oil prices rise, so do stock prices. So, maybe we should just forget the economy. Not. Ultimately, the umbilical cord binding stock and oil prices together will be cut and economic fundamentals will once again matter. Will the markets rebound at that point? It really depends upon which stocks you are looking at. Domestic firms should do just fine. However, international firms have to worry about the dollar and growth in the countries where they do business. The dollar has stabilized, at least when you look at the indices, so executives will have to come up with other excuses if their earnings don’t do as well as investors thought they should. Regardless, the Fed will not place huge importance on foreign earnings, and therefore the stock prices of international companies, unless the markets crash and burn. It is still the U.S. economy that is job one. Friday we get January incomes, spending and the all-important Personal Consumption Expenditure index. Other inflation measures have been moving up and if the PCE follows, that would be another reason to think the Fed members will start talking about future rate increases.