All posts by joel

August Consumption, Income and Pending Home Sales

KEY DATA: Consumption: +0.4%; Disposable Income: +0.4%; Prices: 0%; Excluding Food and Energy: 0.1%/ Pending Sales: -1.4%

IN A NUTSHELL: “Consumers are spending their growing incomes and that should help the confused members of the Fed make up their minds about raising rates.”

WHAT IT MEANS: If the Fed members need data that show the economy is in good shape, all they have to do is look at the consumer spending and income numbers. Consumption jumped in August after rising solidly in July, indicating the households are out there doing their part to make sure that the economy is strong. We knew that vehicles were flying out of showrooms, but people also spent heavily on nondurable goods and services. Services, which are two-thirds of spending, had been lagging until this year and the rise we have seen continues unabated. So far this quarter, adjusting for inflation, consumption is growing at a very respectable 3% pace. Can this pace be sustained? Given the income numbers, absolutely. Disposable income, which is what we actually have to spend, not what we earn, rose strongly for the fifth consecutive month. Even adjusting for inflation, household earnings are rising solidly. The key has been a rebound in wages and salaries. They are now growing decently and given largely nonexistent inflation, consumer spending power is up a robust 3.7% since August 2014.

On the housing front, the National Association of Realtors reported that pending home sales fell in August, which was unexpected. Only in the West did contract signings rise. Demand is up solidly over they year, but the rate of increase is slowing, in part because of higher prices but also because there is not much inventory to choose from. Black Knight Financial reported that their National Home Price Index rose moderately in July and is up 5.3% over the year. The Index is only 5.5% below the peak reached during the housing bubble.

MARKETS AND FED POLICY IMPLICATIONS: Fed members, including Chair Yellen and NY Fed President Dudley, are trying to ease the confusion created after the last FOMC meeting. While that may have be an heroic task given the Tower of Babble that the Fed has become, today’s talk by Mr. Dudley did reinforce Chair Yellen’s Thursday’s comments that the suddenly critical international events were really not that important, so never mind. Mr. Dudley also reiterated that he thought rates would rise this year and inflation could actually reach the Fed’s 2% target next year. This is the person who warned that a rate hike was “less compelling” just before the last meeting, so listen carefully to his words. The Fed members, at least those in favor of raising rates soon, look like they got the message to talk with a unified voice. That voice says rates will be increased this year, so maybe we should believe them. Maybe. Clearly, the U.S. economy is growing solidly and if you believe the Blue Chip Forecasters panel, of which I am a part, we should get above-trend growth once again in the third quarter as well as next year. Panelists also expect inflation to exceed 2% soon. Conditions are either already in place, or are expected to be in place in the foreseeable future, for the Fed’s growth and inflation targets to be met. Whether the members act or not this year, though, remains anyone’s guess.

Revised Second Quarter GDP, September Consumer Confidence and Fed Chair Yellen’s Comments

KEY DATA: GDP: +3.9% (from 3.7%)/ Confidence: down 4.7 points

IN A NUTSHELL: “With the economy in good shape, Chair Yellen’s strong hints that hike this year is likely have to be heeded.”

WHAT IT MEANS: Second quarter GDP was revised up again. Consumers spent even more than thought and business construction was actually decent. On the other hand, the inventory build was a little less. There was also an upward revision to profits, which grew a little faster than initial estimated. Overall, this report reminds us that the U.S. Economy is in good shape.

Consumer confidence faded in September as the University of Michigan’s Consumer sentiment index fell fairly solidly. However, this was likely due to the wild volatility in the equity markets early in the month. Indeed, confidence rose from the mid-month reading.

Chair Yellen’s Comments and Fed Policy: Last night, Fed Chair Yellen gave a speech that should be reviewed closely. Yes, she reiterated a lot of what had been said, but there were some clear messages that she was sending. First, She once again stated that she and most other Fed members expect to raise rates this year. As today’s data show, the economy can absorb a rate hike. As for the Chinese wrench that was thrown into the rate hike gears, she noted that “we do not currently anticipate that the effects of these recent developments on the U.S. economy will prove to be large enough to have a significant effect on the path for policy.” In other words, never mind. On the inflation front, she is sticking to her view that “inflation will return to 2 percent over the next few years as the temporary factors that are currently weighing on inflation wane”. We now know that the “medium term”, the phrase used in the FOMC statements, refers to a “few years”.   As for those who argue we should wait until all the uncertainties have dissipated, she noted that “monetary policy affects real activity and inflation with a substantial lag. If the FOMC were to delay the start of the policy normalization process for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession.”   Finally, she quashed the “one and done” rate hike theory when she noted that after the first increase, there would be a “gradual pace of tightening thereafter.” The Fed is not going to simply stop, look and listen. Once started, the members expect to move in a restrained, but consistent pattern.

With only two meetings left before the end of the year, October 27-28 and December 15-16, it seems that it will take disappointing data to prevent a rate hike. If by December, the unemployment rate is at or below 5% (not a heroic assumption since it is currently 5.1%), job gains are strong enough to point to further unemployment rate declines and there are indications that wage inflation is accelerating even modestly, the FOMC should finally pull the trigger. With only one employment report and no Employment Cost Index number before the October meeting, it looks like December 16 could be H-Day, the day the long-awaited hike occurs.

August New Home Sales, Durable Goods Orders and Weekly Jobless Claims

KEY DATA: Home Sales: +5.7%; Prices: +0.3%/ Orders: -2%; Excluding Transportation: 0%/ Claims: +3,000

IN A NUTSHELL: “A revitalized housing sector, coupled with soaring vehicle sales, should help turnaround the soft manufacturing sector.”

WHAT IT MEANS: The more data we get, the more we see that the U.S. economy is solid enough to withstand a rate hike. Maybe most encouraging is the housing market. The real question in this sector had been the new housing component. The biggest bang for the buck comes from home construction and you don’t get new homes built unless people are buying them. Well, they are doing that. New home demand rose solidly in August after a surge in July. So far this quarter, sales are up by over 8% from the second quarter average. Housing starts should continue climbing. Three of the four regions posted gains, with only the Midwest down. There was a huge rise in the Northeast, which was good to see since it has been lagging. The one thing that could slow sales going forward is the dearth of product. The inventory of homes for sale remains pretty low. As for prices, they have largely flat lined.  

The manufacturing sector has been wandering in the desert lately and it is not clear if it has found its way out yet. Durable goods orders fell in August, driven partly by a slowdown in both civilian aircraft and vehicle sector demand. Boeing sales always bounce around. What was surprising, and likely to change, was the drop in the vehicle component. This year’s sales could be the second highest sales on record and the August pace was one of the highest ever. The orders decline was not a reflection of any weakness in the sector. Still, this report was nothing to brag about. Declines in orders were posted in computers, communications equipment, fabricated metals and electrical equipment. Business capital spending, excluding aircraft and defense, was also off slightly.

On the labor front, the tightening continues. Unemployment claims are at rock bottom. Firms need to find a way to get people to apply and then take their offers, as the openings are there.

MARKETS AND FED POLICY IMPLICATIONS: Janet Yellen speaks at 5:00 PM today and I am not sure if that is good or bad. The Fed Chair has a chance to explain in detail what the FOMC members were thinking when they decided to punt. They might only want to make sure no Chinese or emerging market collapse was in the works but we just don’t know. She needs to do an awful lot better at communicating what are the key factors that will drive the Fed’s rate hike decision. As for economic conditions, at least in the U.S. they are fine. European manufacturing growth is still decent, though the Euro Zone’s Purchasing Managers’ Index eased a touch. What the VW scandal means for Europe is anyone’s guess, but the Fed cannot change the course of events. So, it comes down to China, I think. If the Fed Chair doesn’t roll back the impression that it is all about China, the market roller coaster ride will continue, possible for quite some time.

August Existing Home Sales

KEY DATA: Sales: -4.8%; Prices (Year-over-Year): +4.7%

IN A NUTSHELL: “Home sales are still solid, even if they did come off their 8½ year high.”

WHAT IT MEANS: The housing market is being watched closely as it has been a key driver of growth and we know that the Fed is locked into the domestic economy. Okay, I will stop being snarky about the Fed. No, I will not! Anyway, the National Association of Realtors reported that existing home sales dropped more than expected in August. After having reached in July a level not seen since February 2007, a slight come down was forecast, and we got it. Still, let’s not get carried away here. This was the third year in a row that sales fell in August. Is there a seasonal adjustment issue here? Probably not, but it is worth noting. If you chart the monthly difference in existing home sales, there do not appear to be any trends you can find on a monthly basis. Looking at the details, sales were down sharply in the South and West, they fell relatively modestly in the Midwest and were flat in the Northeast. On the costs side, prices rose moderately, but the gain over the year was the smallest in a year. The South and the West continue to post price increases of 6% or more, the Midwest was up 4% while there was a modest 2.4% rise in the Northeast. As for inventories, they rose from July’s level but were still down over the year. The supply of homes remains fairly low.

MARKETS AND FED POLICY IMPLICATIONS: The world is trying to figure out what the FOMC members were thinking when they met last week and decided not to raise rates. Some of the Fed members were out trying to provide some perspective. St. Louis Fed President Bullard, who didn’t vote, said he would have dissented as he is in favor of raising rates, while San Francisco Fed President Williams, who voted, said the decision was close. Chair Yellen speaks on Thursday at UMass Amherst on “Inflation Dynamics and Monetary Policy” and hopefully that will provide some perspective on what she is looking at. We will likely get a lot more comments over the next couple of weeks. But it is still unclear what the key factors are that will shift the close decision from no move to let’s get going, so we really need to wait and listen to the comments from more of the Fed membership. As for the markets, the housing report may be viewed as negative, but I think we can dismiss the decline as being a normal down after several ups. Also, third quarter sales are averaging 2.8% above the second quarter and that translates into a nearly 12% annualized quarterly increase. And that is happening despite the relative dearth of homes on the market. It is likely supply, not demand, that is creating the slowdown in sales, as buyers cannot find that “perfect” home. Fed member comments, economic issues around the world and trends in oil prices will likely overwhelm the economic numbers this week. Next week we get consumer spending on Monday and the September jobs report on Friday, at which point we can start thinking about the domestic economy again.

September 16-17 ‘15 FOMC Meeting

In a Nutshell: “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.”

Rate Decision: Fed funds rate maintained at a range between 0% and 0.25%

The Fed decided that all economic and financial issues in the world are its concern and given the uncertain global economic and financial conditions, the start of rate normalization would have to wait. Boy, what a difference seven weeks make. After the July FOMC meeting, conditions seemed to be in place for a September rate hike. Indeed, fifteen of seventeen participants indicated they expected rates to be increased this year. That number dropped to thirteen and one member even thinks rates will not be increased until 2017.

So, what changed? First, oil and other commodity prices fell. There was a concern that the labor market needed further improvement, though the rate is near the members’ long run rate of 4.9%. Fed Chair Yellen explained that there is some extra slack in the market because of the falling participation rate and the elevated level of part-time workers who want full-time jobs.

But the real shift was the central position of foreign issues. The recent instability in China, the rise in the dollar and the weakness in countries dependent on commodities for growth (e.g., Canada) caused the FOMC to rethink its timing of a rate hike. Adding these worries to the energy declines and supposedly labor market slack. The members’ lowered their inflation outlook for the next couple of years. And since inflation remains well below the Fed’s target, The Committee decided not to go for it on fourth and one, but instead punted.

So, when will the Fed start raising rates? While Chair Yellen said that October is a live meeting, it is unlikely the FOMC will get enough compelling information about China and the financial markets over the next six weeks to make an October hike possible. Indeed, we don’t even know what will constitute enough knowledge of what is happening in China, especially since the Chinese data are questionable, at best, and their policies are hardly transparent.

The Fed, by making China, the dollar and the world financial markets central to its decision process, has muddied the waters. Indeed, investors seem as confused as most economists. On the news, the Dow quickly dropped about 80 points, but then rallied sharply, rising over 200 points. However, once Yellen started explaining things, the index fell over 200 points.

The Fed will eventually start raising rates, but it is no longer clear what benchmarks will have to be met before that decision is made. It could be December, but it could be sometime in 2016 as well. Right now, I don’t think anyone, including Janet Yellen, has any idea.

(The next FOMC meeting is October 27-28, 2015.)

August Consumer Prices and Real Earnings and September Home Builders Index

KEY DATA: CPI: -0.1%; Excluding Food and Energy: +0.1%; Gasoline: -4.1%/ Real Hourly Earnings: +0.5%/ NAHB: 62 (up 1 point)

IN A NUTSHELL: “Modest inflation is inflating spending power, which is good for households even if it is worrisome for the Fed.”

WHAT IT MEANS: One more day, thankfully. But until tomorrow afternoon, when Janet Yellen and her dysfunctional band of not very merry central bankers let us know what they decided to do or not do, the inflation and economic growth data remain front and center. Inflation is still not too hot, not too cold and not just right. Consumer prices fell in August as gasoline costs plummeted. With prices falling faster so far this month, expect September consumer prices to be down again. The one area where costs are rising at a solid pace is shelter. Rents and home prices are jumping. We are also paying more for our sustenance, both at home and at restaurants. There is growing price pressure on the three major food groups: Cakes, cupcakes and cookies. With the dollar strong and import prices falling, it is not clear why clothing costs are increasing, but they are. Medical care has cooled a touch, at least when it comes to services, though not for medical commodities. The surging vehicle sector is suffering from trade-in overload and used vehicle prices are falling, not surprisingly. And finally, airline fares are crashing like, well let’s skip that analogy.

While the Fed members may be paralyzed by the horror of low inflation, households are probably dancing the jig. An acceleration in wage growth, coupled with declining inflation, led to a surge in real wages in August. With hours worked also increasing, weekly income, adjusted for inflation, rose a solid 2.5% over the year.

On the housing front, conditions remain strong. Homebuilder confidence improved again in September as the National Association of Home Builders’ index hit its highest level in nearly a decade. Sales and traffic are increasing but expectations of future sales were off. Every region posted a gain except the West, which was flat.

MARKETS AND FED POLICY IMPLICATIONS: There are two issues that could keep the Fed from raising rates tomorrow: Low inflation and market volatility. Excluding food and energy, consumer costs are up 1.8% over the year. That is below the Fed’s target but not so much so that it should worry a whole lot of members. The CPI tends to run a touch hotter than the Fed’s preferred measure, the Personal Consumption Expenditure (PCE) price index, but not by very much. So, while inflation is not accelerating, it is not so far from the target that the Fed couldn’t fudge things. As for market volatility, my stance is clear: The Fed has no business protecting investors who don’t believe the Fed is going to do what it has said it wants to do, which is raise rates. Indeed, the uncertain over rate hikes is probably the major cause of the volatility. So, the Fed should raise rates tomorrow, even if the members have not synched their messages with that action very well. Whether they will or not is still anyone’s guess.

August Retail Sales and Industrial Production

KEY DATA: Sales: +0.2%; Vehicles: +0.8%/ Industrial Production: -0.4%; Vehicles: -6.4%

IN A NUTSHELL: “Given the strength of vehicle sales, I think we can safely discount the decline in industrial production that was the result of a cut back in vehicle assemblies.”

WHAT IT MEANS: In two days we will know whether the Fed has begun moving rates back toward normal or is waiting for a better time to do that. Today’s data really don’t change any thinking. Retail sales rose modestly, but that came after a sharp increase in July. Also, there was a large cut in gasoline sales, which was likely do to price not demand factors. People ate at home and in restaurants, bought clothes and electronics, but stayed away from furniture and home building stores. Essentially, after a very strong July, people continued to spend in August.

Industrial production was surprisingly weak in August. But that was likely nothing more than vehicle makers changing over models more randomly than they used to, making seasonal adjustments difficult. In July, vehicle production soared 10.6% but was down 6.4% in August. Huh? Sales are booming and vehicle makers are just doing what they now do, which is to offer new vehicles when the time comes. There was also a decline in airplane output and we know the contractors have massive backlogs. So, don’t worry about the output decline. It was probably technical, not fundamental.

MARKETS AND FED POLICY IMPLICATIONS: In1999, former St. Louis Fed President Bill Poole presented a paper to the Philadelphia Council of Business Economists that argued the Fed should “synch” the markets, not “sink” the markets. Basically, Fed moves should not be a major surprise to investors. But that requires relatively clear communications. The current Fed members have not done that very well at all. Thus, as we await Thursday’s decision, there remains uncertainty. It may just be that high level of uncertainty is what prevents a rate hike. If so, a move in October, which would come with better messaging and a clear indication that something is up (like rates?) by scheduling a conference call with the press become much more likely. This Fed needs to do communicate much better.

Let me end this commentary with some of Dr. Poole’s concluding comments made 16 years ago:

“I believe that a policy agenda designed to heighten the degree to which the Fed and the markets are in synch is an ambitious and worthy objective. We in the Fed need to work on two fronts, in my opinion. One is the policy front itself, making sure that policy actions are as appropriately timed and scaled as possible. The second is on the disclosure front making sure that knowledge inside and outside the Fed converges to the maximum possible extent.

… The conclusion I have been discussing—that, with full convergence of information, Fed policy actions will not affect market prices because the market has already predicted them—initially surprised me. But the more I think about the matter, the more compelling the conclusion is.”

To that I say, Amen!

August Producer Price Index

KEY DATA: PPI: 0%; Less Food and Energy: +0.3%; Goods: -0.6%; Energy: -3.3%; Services: 0.4%

IN A NUTSHELL: “While wholesale goods costs continue to go nowhere, pressures on services expenses are building.”

WHAT IT MEANS: The key concern for the economy is not growth but prices and today’s Producer Price Index numbers didn’t do much to clarify the situation. Wholesale costs were flat in August as a sharp rise in services expenses was offset by an even larger decline in goods prices. Most people focus only on the goods component, but services make up two-thirds of the index, so we really do need to keep them in mind. On the goods side, energy declines continue to lead the way. In contrast, food prices rose sharply. Goods costs excluding food and energy were off a touch as were capital goods prices. Where there are rising prices was in the services sector, especially trade. Transportation and warehousing is benefitting from the declining energy costs and their prices are down. Real price pressures are developing in the goods and services components closest to the consumer: finished and personal consumption goods and services. Over the past few months there has been a clear acceleration in prices in most of those areas. Looking into the future, there are no goods price pressures in the pipeline.

The University of Michigan’s mid-month reading of consumer sentiment came in well below expectations. Households seem to be bummed by the craziness in the stock markets. But let’s keep in mind that swings created by equity market volatility don’t necessarily translate into changes in consumption as people have learned not to spend their gains.

MARKETS AND FED POLICY IMPLICATIONS: Inflation is clearly not an issue, except for the simple fact it is actually too low. Producer costs should not cause consumer goods prices to rise much, though there could be some issues on the services side. But services don’t get the same press as goods so the focus of attention is on food and energy and not much else. Still, there is little reason to expect that the Fed’s target of 2% for inflation will be reached soon, even if you exclude food and energy. Will it be met in the medium term? Probably, but it will have to come from increasing prices pressures in services and for some domestically produced goods. With the dollar strong, import prices will remain soft, so don’t look for any help there. It is doubtful that anybody’s thinking has been changed by today’s data, so have a great weekend.

August Import and Export Prices and Weekly Jobless Claims

KEY DATA: Imports: -1.8%; Nonfuel: -0.4%; Exports: -1.4%; Farm: -2.6%/ Claims: -6,000

IN A NUTSHELL: “Another day of data, another set of solid labor market but weak inflation numbers.”

WHAT IT MEANS: As we limp exhausted into the final week before the Fed either does something or forces us to face upwards of three more months of water torture, the data seem to be laughing in our faces. We would like the economy to be strong and inflation to be trending upward, but alas only one of those is happening. The good was a drop in the weekly jobless claims numbers. While the weekly data are volatile, the smoothed, four-week moving average has been pretty constant. It is quite clear that few firms are cutting back on their workforces.

On the bad side, if you consider consumer prices that don’t go anywhere a problem (consumers clearly don’t!), the prospects for inflation accelerating anytime soon are not great. Import prices tanked again in August and it wasn’t just energy. Industrial supplies excluding petroleum, consumer goods, vehicles and capital goods prices fell as well. Only the cost of imported food was up and that was due largely to a jump in seafood prices. Looking across the world, prices are down for every major region. Only some Southeast Asian countries increased their prices for goods sold in the U.S. Over the year, the biggest import price declines have come from countries throughout the Americas. The Pacific Rim nations have not been dumping their products on the American markets at greatly deflated prices. As for our exports, every major category posted a drop in prices except vehicles, which was flat. The agricultural sector has seen its prices fall by 14% over the year. That is a big ouch.

MARKETS AND FED POLICY IMPLICATIONS: Right now, investors are totally baffled, in part a consequence of the bizarre Fedspeak. Think of it: We had Bill Dudley saying that the data were “less compelling” but Stanley Fischer saying, “When the case is overwhelming, if you wait that long, you’ll be waiting too long”, and “There’s always uncertainty”. So, what’s “compelling”? And, what’s “too long”? While economists might enjoy the process of parsing sentences and even words, investors simply go crazy. Add to that the reality that if anyone can tell us what is going on in China, then we will all know, you have a state of uncertainty that can only create volatility, which is precisely what we have. One day it looks like China is not that bad and the markets rally. The next day the Fed might raise rates and stocks crash, though I wish I knew why a message that the economy is strong enough to absorb a rate hike is considered bad for business. It just shows how screwed up things are. So, let’s make it through this week and get to next week, when a new group of data, which includes retail sales, industrial production, consumer prices and housing starts will once again cause Fed members to twist like Chubby Checker. At lest they will be doing it in the semi-privacy of an FOMC meeting.

July Job Openings, Hires and Quits

KEY DATA: Openings: +430,000; Hires: -199,000; Quits: -43,000

IN A NUTSHELL: “With openings at record highs but hiring slowing, businesses are falling further behind on meeting their staffing needs.”

WHAT IT MEANS: It’s tough being an HR executive these days. On one side you have everyone saying they need more employees while on the other side you have workers hesitant to move and CFOs who don’t want to pay more. So what do you do? Apparently, punt! The Bureau of Labor Statistics reported that open requisitions for positions soared to a record high in July as companies in just about every industry had trouble finding new employees. Only the construction and arts and entertainment industries posted fewer openings. As has been the case for quite some time, the lack of workers is spread across skill levels. While professional and business services had the highest rate of openings, accommodation and food services came in second. Even with jobs openings growing by leaps and bounds, firms have not been able to find suitable workers at the wages they want to pay. Indeed, the rate of hiring declined. Part of the problem is that workers are just not leaving their jobs. The quit rate is still very low as employees still are willing to stay with the devil they know than the devil they don’t know. But that is likely to change and when it does, openings could spike even further.

MARKETS AND FED POLICY IMPLICATIONS: How long businesses can make due with so many opening positions is something I just cannot figure out. I would have thought that by now, firms would have capitulated and started to attract workers by paying more. But they haven’t. As the U.S. economy continues to expand, firms will have to find even more workers to meet the growing demand. With the unemployment rate pretty much at full employment and with the underemployed not meeting the skill, age or required salary profiles, there are not a lot of people out there to attract anyway. Normally, that sets off a bidding war, but we are not in normal times. Firms seem to be willing to go without and pray that productivity will save the day – or whatever has to be saved. But productivity has been lagging and as I have argued before, that may be because workers have learned that worker harder doesn’t lead to more income, so they just don’t work harder. In other words, firms are in a trap. They need to raise wages to attract workers, especially from other firms, but they are unwilling to do that. They hope to get more fro their employees but just providing a job doesn’t have the same impact now as it did five years ago. So, I will repeat my oft-repeated refrain: Wages need to rise if businesses are to produce more, households can buy more and growth can accelerate. Until that happens, we will remain in this moderate growth cycle and business leaders will continue to complain about the less than stellar economy. The Fed watches this report, known as JOLTS, carefully. The members are aware that the only way the current conditions don’t eventually lead to rapid wage growth and a rebound in inflation is if the economy slows. So, they can wait for the inevitable and raise rates then or assume the inevitable will occur and raise rates now. Next week’s FOMC meeting cannot come soon enough as we are all suffering Fed Fatigue.