All posts by joel

Second Quarter GDP and Weekly Jobless Claims

KEY DATA: GDP: +2.3%; Consumption: +2.9%; Investment: -0.6%; Private Domestic Demand: +2.5%; Consumer Inflation: +2.2%; Excluding Food and Energy: +1.8%/ Jobless Claims: +12,000

IN A NUTSHELL: “Moderate growth and a slight firming in inflation don’t provide either side of the rate-hike debate with much ammunition.”

WHAT IT MEANS: Yesterday, the Fed hinted, slightly, at a bias toward raising rates in September, but they didn’t send a particularly strong message. One of the reasons is that the economy continues to grow at a moderate pace. Second quarter GDP came in a little less than expectations. Keep in mind, the Bureau of Economic Analysis, which crunches the numbers, completed the first round of a massive revision of growth and the way the data are seasonally adjusted. The first quarter of this year, which looked like it contracted by 0.2%, is now seen as having grown by 0.6%. So we started the year out above where we thought, which makes the gain a little better – though nothing spectacular. Second quarter growth was powered by strong vehicle demand. But households bought nondurable goods and spent a fair amount on services. In contrast, business investment declined. Much of that came from a drop in equipment spending, which is probably the oil-patch retrenchment. Housing added nicely to growth, the trade deficit helped as it narrowed a little and inventories played a modest role in slowing activity. The federal government continues to do whatever it can to kill the economy but at least state and local governments are spending again. There was a new measure created that reflects private domestic demand as it excludes trade, inventories and government spending. It rose solidly. This will be watched closely as it relates to what is happening in the domestic economy. On the inflation front, the Personal Consumption Expenditures price index rose at an annualized pace that should make the Fed members happy. Even excluding food and energy, it was near the Fed’s target.   Now it just has to keep that up.

Jobless claims rose last week but the level and 4-week moving average remain at historic lows when adjusted for the size of the labor force. The July employment report, which comes out at the end of next week, should be pretty good.

MARKETS AND FED POLICY IMPLICATIONS: The economy is not booming along. But that doesn’t mean it is soft either. It is growing fast enough to keep job gains at a level so that the unemployment rate will continue declining. Going forward, while it is not likely that spending on vehicles will be as strong as it was in the spring, stability in the oil patch should lead to a pick up in business investment. My expectation is that we should see growth at or even in excess of 3% over the next two quarters – but we don’t have any proof of that yet. For the Fed, the key numbers may be private domestic demand, which is growing solidly, and consumer inflation, which is slowly accelerating. Everything considered, this report really doesn’t add much to the argument over whether the Fed should hike sooner or later. Data over the next two months retain their primary position in the decision process.

June Leading Indicators and Weekly Jobless Claims

KEY DATA: LEI: +0.6%/ Claims: -26,000

IN A NUTSHELL: “With jobless claims hitting the lowest level in over forty-one years and indicators of future growth soaring, we are seeing clear signs that the economy is in really good shape.”

WHAT IT MEANS: Next week we get the first reading of second quarter GDP growth and whatever the level may be, it is only the starting point for what looks like accelerating economic growth. The Conference Board’s Leading Economic Indicators Index jumped once again in June. This makes three consecutive months of large gains and the index is clearly pointing to an economy that is picking up steam. The moderate rise in current economic indicator shows that the expansion was decent but not spectacular in the spring. But if the economy is building off of those gains, then the summer could be really strong. Indeed, with the housing market starting to soar, we should expect growth this quarter to be really good, possibly above 4%.

Another reason I am forecasting robust economic activity for the rest of the year is that the labor market is really tightening. Weekly jobless claims hit their lowest level since November 1973. Keep in mind, the labor force was only about 58% of what it is now, so we are looking at historically low numbers. One week’s jobless claims numbers shouldn’t be over-valued, but the rise we had seen over the past few weeks looks like it was temporary or just a seasonal adjustment issue. It is awfully hard to seasonally adjust data on a weekly basis, which is why I always argue that we should watch the four-week moving average. That remains at a pretty low level and points to a pretty good July jobs report. Keep in mind, the number of jobs “created” is really a net number. It is the difference between new hires plus new companies creating new positions minus the total of job losses, which includes terminations, retirements and company shut downs. If terminations are low, the net is high, everything being equal. That is why we follow jobless claims and translate the level into job gains.

MARKETS AND FED POLICY IMPLICATIONS: The next two weeks should be telling for the Fed. Yes, they meet next Tuesday and Wednesday, but if the members really are data driven, then second quarter GDP and employment costs, as well as the July payroll and unemployment data should be critical to any decision to raise rates in September. Next week, the FOMC, which hates to take any firm stand, will likely send a strong signal that it is getting ready to move but temporize by wanting to see additional solid job, income and inflation data. They should have it by the end of August and the members will have enough time to give enough speeches to make it clear a hike is coming. Meanwhile, investors are probably more worried about earnings than the Fed, but if they are, then they have lost their way. Earnings look backward while some of the data are telling us about what will happen. If my forecast is anywhere close to being right, firms that are domestically focused should do well going forward and isn’t that what investors should be concerned about?

June Existing Home Sales

KEY DATA: Sales: +3.2%; Prices: +6.5%

IN A NUTSHELL: “Dear Janet: The housing and labor markets are in great shape, so what are you waiting for? Your friend. –Joel”

WHAT IT MEANS: Well, so much for issues with the housing market. Yes, conditions weakened early this year but are there any doubts left that the problems were weather related? I don’t think so. Housing starts and permits jumped in June and existing home sales did the same. The National Association of Realtors reported that home sales hit its highest annualized rate since early 2007. All parts of the country took part in the party. Since June, demand is up by nearly 10%, with every region posting an increase of 7% or more over the year.   While sales are rising, inventories are barely budging and that mismatch is having the expected impact: Prices are soaring. Indeed, the median cost of an existing home hit its highest level on record. And with mortgage applications up solidly over the year, it looks like the housing market surge will be sustained.

MARKETS AND FED POLICY IMPLICATIONS: The FOMC meets next Tuesday and Wednesday and while there is almost no chance (I never say never when it comes to the Fed) that a rate hike will be announced, that doesn’t mean some serious signals that the Fed will finally pull the trigger will not be sent. We do get two more jobs reports and the second quarter GDP numbers before the September 16-17 meeting, so there is still some uncertainty about a move, but the odds of an increase continue to rise. If we see payroll increases in the 225,000 to 250,000 range in July and August, even just one downtick in the unemployment rate and any acceleration in wages, it will be hard for the Fed to say they need to see more good news. What would they be waiting for? Not a recovery in housing. That is here and indeed the issue is rising prices, not weak demand. Consumer spending? If wages keep rising, can retail spending be far behind? We may not have robust growth, but it is clearly solid enough to absorb a rise in short-term rates from 0% to 0.25%. I mean, seriously people, would that really crash the economy? A rate hike in September looks more and more likely.

June Consumer Prices, Housing Starts and Real Earnings

KEY DATA: CPI: +0.3%; Excluding Food and Energy: +0.2%/ Starts: +9.8%; Permits: +7.4%/ Earnings: -0.4%

IN A NUTSHELL: “With housing accelerating and inflation edging upward, the barriers to a Fed hike are starting to crumble.”

WHAT IT MEANS: With Greece on the back burner for now, we can focus on the U.S. economy again and the data seem to be trending upward. The residential sector looks like it really is on the move as housing starts jumped in June. Yes, there was a major decline in May, but the wild swings were due to outsized changes in the ever-volatile multi-family segment. Comparing second quarter starts to first quarter numbers, the monthly average rose 17% – not annualized. In other words, residential investment should be up big-time in the second quarter GDP report that comes out July 30th.   The increases were unevenly distributed across the nation. The lagging Northeast is finally coming around and the South is really strong. But the Midwest seems to be fading while in the West, construction is still solid but not moving forward. The best news was that permit requests were off the charts. Second quarter permits ran nearly 9% above starts and that points to even strong construction in the months to come.

The economy is one part of the Fed’s decision function; Inflation is a second segment. Consumer prices rose moderately in June, led by another jump in gasoline costs. But it wasn’t’ just fuel or eggs. Most other major components were up as only used vehicles and clothing posted declines. Excluding food and energy, prices rose by 1.8% over the year, not far from the Fed’s target. Over the last five months, overall consumer inflation has been running at a nearly 3% annualized pace. That should reduce concerns about too low inflation. When the energy price collapse comes out of the year-over-year comparisons in the fall, overall inflation should approach the Fed’s target. That is why Fed Chair Yellen keeps pointing to the medium term when it comes to inflation.

The modest acceleration in inflation may make the Fed’s decision easier, but it hurts workers. Real earnings fell in June. Flat wages and rising prices don’t make for a good combination when it comes to purchasing power.

MARKETS AND FED POLICY IMPLICATIONS:Could it be? Yes it could. Something’s coming, something good (?). If (you) can wait.The wait for the first rate hike may not be that much longer. As the data come in, it seems the only soft spot in the economy is the manufacturing sector. And with prices beginning to move toward the Fed’s target, the concerns about raising rates should be fading. Is the economy strong enough to absorb a rate hike? Let me ask it this way: Would a 25 basis point increase really make the cost of money prohibitive? Hardly. The July FOMC meeting is likely to contain a real battle over how much to hint at a rate hike. The Fed Chair seems to want to get it over with as reasonably soon as possible. But others are holding out as the data are not overwhelmingly strongly. Investors really should start building in a hike and jettison their “when I see it I will believe it” attitude.

July Home Builders Index, Philadelphia Fed Manufacturing Survey and Weekly Jobless Claims

KEY DATA: NAHB: 60 (unchanged)/ Phil. Fed: -9.5 points/ Claims: down 15,000

IN A NUTSHELL: “The housing sector is moving to the forefront and if manufacturing can ever get its act back together, this economy could really accelerate.”

WHAT IT MEANS: The economy continues to expand at a moderate pace even as we would like to see it grow more rapidly. One of the factors in this decent but not great expansion has been a rotation in sector leadership rather than broad based growth. Housing has been a laggard, but that looks like it is changing rapidly. The National Association of Home Builders/Wells Fargo Housing Market Index is now at a level not seen since November 2005. From January 2001 to December 2005, the housing bubble period, the index averaged 63. Given that the current reading is 60, it appears that builders are getting bulled up once again. We are not talking a new bubble here, but we are looking at significant gains in activity, especially in the single-family segment. Also, it looks like the long-suffering Northeast will be seeing a lot more construction as that region’s index has finally broke into the black.

While housing is coming back, manufacturing continues to decelerate. The Philadelphia Fed’s manufacturing index dropped sharply in July. The sector is still growing, but not strongly. And with backlogs going nowhere and payrolls largely flat, it doesn’t look as if manufacturers in the Philadelphia region will be ramping up production soon. Confidence about the future is picking up, but it is still below recent high levels.

On the labor market front, last week new unemployment claims jumped, raising questions about future job gains. Well, never mind. This week, most of the rise was wiped out. While the level is still a touch higher than it had been for much of the past year, it is now back to where solid job gains should be expected.

MARKETS AND FED POLICY IMPLICATIONS: Fed Chair Yellen keeps repeating that a rate hike is coming, probably this year. She also keeps warning that the first one doesn’t matter: It is the pathway going forward that is critical. But markets keep focusing on hike number one and the data keep telling us that it is unclear which meeting this year it will occur. I have not ruled out September, as I believe the labor market data, including compensation gains, will be strong enough to convince the members that the economy can absorb a rate hike. In particular, follow the compensation numbers reported in the quarterly Employment Cost Index. Second quarter data will be released on July 31st. These data are much more comprehensive than the monthly hourly wage numbers and have been accelerating.   If that pick-up continues, and the unemployment rate falls even a little over the next two months preceding the September 16-17 FOMC meeting, the Fed could consider making its first move then. As for investors, when you get divergent economic numbers, the best thing is to punt, especially since earnings are coming out.

June Producer Prices, Industrial Production and 2nd Quarter Workforce Vitality Index

KEY DATA: PPI: +0.4%; Goods: +0.7%; Services: +0.3%/ IP: +0.3%; Manufacturing: 0%/ WVI (Year-over-Year): +4.1%

IN A NUTSHELL: “Manufacturing remains sluggish but with business costs rising the labor market tightening, the Fed remains on track for a rate hike this year.”

WHAT IT MEANS: One of the sore spots with the Fed is the continued underperformance of inflation. I know that sounds weird, but having inflation at a reasonable level, which means neither too hot nor too cold but just right, is one of its two mandates. The FOMC has said that 2% is the target and that is nowhere in sight. Yesterday we saw that import prices remain tame and that should restrain consumer costs. Today, however, we see that wholesale prices are starting to pick up. Yes, energy is a factor and it looks like we could be in for another down leg on those costs, but even excluding energy, producer prices are finally accelerating a bit. And the bird flu’s impact on food costs cannot be dismissed as wholesale egg prices skyrocketed. But even excluding food and energy, the cost of producer goods was up. Indeed, the special index personal consumption goods excluding food and energy has risen 1.5% over the year. That is not high, but it is clearly moving back toward levels that the Fed can live with. On the services side, we are also seeing a touch of acceleration. Don’t forget that services are nearly two-thirds of the total Producer Price Index.

One major disappointing segment of the economy has been the manufacturing sector. Manufacturing output was flat in June, the second consecutive month of no gains. Second quarter production rose at a meager 1.3% annualized pace – not good. That said, the details were less discouraging. The June number was depressed by a large cut back in vehicle assemblies. Given the strong sales, that should reverse. There was also a solid rise in business equipment production, another positive sign. Excluding vehicles, manufacturing activity was up solidly, so we should probably discount the headline number.

The Fed is also concentrating on the labor market. ADP’s second quarter Workforce Vitality Index show the labor market improved from its first quarter slowdown. Importantly, hourly wage gains are accelerating, as are turnovers. The issue of retention has not been a major concern for employers for this entire decade but that could be changing rapidly.

MARKETS AND FED POLICY IMPLICATIONS: Today, Fed Chair Yellen again tried to soften up the beaches by reiterating we are on track for a rate hike this year. If don’t believe that and it happens, shame on you. Today’s data help her out. On inflation, she is not saying that the rate has to be at 2% for the FOMC to start hiking rates. She has said it must be making progress for that rate to be reached in the “medium term”. She can wait probably up to a year. A tightening labor market where wages are rising faster would help create the belief that would happen and the ADP report points to that reality. And if we really examine the industrial production data, it is not that bad. So, taken together, today’s data support the Fed Chair’s message that the economy can support a rate hike.

June Retail Sales, Import and Export Prices and Small Business Optimism

KEY DATA: Sales: -0.3%; Excluding Vehicles: -0.1%/ Import Prices: -0.1%; Nonfuel: -0.2%; Export Prices: -0.2%; Farm: -1.5%/ NFIB: -4.2 points

IN A NUTSHELL: “With consumers not buying, inflation decelerating and small businesses worried, the greatly expected second half boom may turn out to be a little less robust.”

WHAT IT MEANS: While not all economic indicators were showing a rapid recovery, there were many signs that the economy was really picking up some speed. Well, it might be time to sit back and rethink this a bit. May retail sales were robust and while June vehicle demand was strong, it was below the huge May sales pace. So most economists, including myself, expected consumer spending to grow minimally in June. Well, it didn’t. Instead, demand declined, even when vehicles were excluded. Sales at electronics, appliances and general merchandise stores were pretty solid, but demand for furniture, clothing, building materials was off, we didn’t buy anything online and we didn’t go out to eat. Weird. Worse, gasoline purchases rose and that was likely due to a rise in prices. In other words, this was not a very good report.

The gap between the Fed’s inflation target and the inflation rate has been widening slowly and today’s import price report indicates that trend could continue. Import prices fell in spite of an increase in energy costs. Food costs dropped sharply, while consumer and capital goods as well as vehicle prices were flat. Only energy related products showed a rise. On the export side, prices fell as well and the long-suffering agricultural sector continued to see its prices drop.

As for small businesses, confidence took a major hit last month. It had risen back to normal levels in May, but it seems June was a bummer, reflecting the lack of consumer spending we saw in the retail sales report. Firms didn’t hire anybody and kept wages stable.

MARKETS AND FED POLICY IMPLICATIONS: Today’s reports were disturbing as they point to an economy that may not be picking up as much steam as seemed to be the case. Why the downturn in consumption occurred is baffling. Plenty of jobs are being created and confidence picked up, so why households stayed home is unclear. With the FOMC meeting in two weeks, reports that show modest consumer spending and moderating inflation play into the hands of those who want to push off hiking rates. No one expects the Fed to do anything at the July meeting, but there was the possibility that the Committee would signal that the economy was strong enough to absorb increases in rates. That may not occur. Even if it doesn’t, a September rate hike cannot be ruled out as we get two more jobs report before then, but they will have to be strong. As for the markets, who knows what will drive activity today. The weak reports would normally be taken as a positive for stocks as they could delay the inevitable. There is also the Iran agreement and that would point toward lower energy costs. Regardless, we need the consumer to get back into the game and soon.

June Manufacturing Activity, Jobs, Layoffs and Help Wanted

KEY DATA: ISM (Manufacturing): +0.7 point/ ADP Jobs: +237,000/ Layoffs: +3,808/ Help Wanted: -144,300

IN A NUTSHELL: “Manufacturing is starting to recover and with job gains strong, the accelerating economy looks like it is picking up even more steam.”

WHAT IT MEANS: Today we had a data dump as everyone rushed to beat the long July 4th weekend. For the most part, the numbers point to a pretty solid economy and the potential for a very good payroll number tomorrow. Let’s start with the Institute for Supply Management’ June Manufacturing report, which rose to its highest level since December 2014. Yes, it is still below what we saw in the second half of last year, but rising is better than falling. Importantly, new orders are rising solidly and that is leading to better hiring. The report did have its warts. Production moderated, backlogs eased and export demand moderated. Still, this report furthers the belief that the industrial sector’s problems are fading.

As for the labor market, there was one really strong report and two warning flags. First, the good news. ADP’s estimate of June job gains was well above expectations. Small businesses are adding workers like crazy and mid-sized firms are hiring solidly as well. However, large companies, especially those with more than 1,000 workers are not adding to payrolls very rapidly. Mergers, acquisitions and the strong dollar are likely the reasons that these companies are not doing much. Still, the ADP number has been underestimating national job growth and if that pattern persists, we could be looking at an employment increase in excess of 250,000 (I have been at 252,00). It is also likely that the unemployment rate will tick back down to 5.4%.

While job gains should be strong in June, going forward, the increases may be more moderate. Challenger, Gray and Christmas reported that layoff notices rose in June and were up by 17% during the first half of the year compared to the same period in 2014. The energy sector has been the reason for the increase but the large declines seem to be behind us. But other sectors are still cutting and it is unclear why. Also, the Conference Board’s Help Wanted OnLine measure dropped, pointing to a slowing in openings. Still, job openings are extraordinarily high, so I don’t expect any major moderation in hiring.

MARKETS AND FED POLICY IMPLICATIONS: The economy has shifted back into solid growth mode. The strong payroll gains in the small business sector point to broad based growth. Wage gains have been solid and consumers have the means to spend. Clearly, they have the confidence to buy more.   Yesterday’s sharp rise in the Conference Board’s Consumer Confidence Index clearly says that. The May construction report was also strong and that, in conjunction with a recovering manufacturing sector implies that all components of the economy are now moving forward. Greece may be dominating the news but tomorrow the jobs report will hold sway. A strong June jobs number would make it clear the economy can absorb a rate hike and the Fed can move at any time it wants. Indeed, a reasonable resolution of the Greek impasse could mean the green flag will go up at the July 28-29 FOMC meeting.

May Pending Home Sales

KEY DATA: Sales: +0.9%

IN A NUTSHELL: “With households signing contracts to buy homes at a growing pace, we should see even better housing sales in the months ahead.”

WHAT IT MEANS: The housing market just keeps getting better. The National Association of Realtors Pending Home Sales Index, a leading indicator of existing home sales, rose solidly again in May. The index is up over 10% between April 2014 and April 2015 and has clawed its way back to its April 2006 level. For the first five months of the year, pending home sales were up by a very solid 7.3%. The May increase was not spread evenly across the nation. The Northeast, which has been lagging, had the best gain. There was also a solid rise in pending sales in the West. However, there was a slowdown in activity in the South and the West. Still, except for the Northeast, the three other regions have shown strong increases in activity over the first five months of the year compared to the same period in 2014.

Texas has been hit hard by the decline in energy prices but the free fall may be ending. The Dallas Fed’s Texas, while still negative, moved up solidly in June. Declining output in the oil patch has cast a pall on the industrial production numbers nationally and if slowdown is fading, that should lead to better national manufacturing data.

MARKETS AND FED POLICY IMPLICATIONS: All eyes are on Greece right now so almost any U.S. economy except the most important ones are likely to be put aside by investors. Why anyone should be shocked if Greece defaults is beyond me, but I have said the same thing about the Fed raising rates. Markets may be efficient, but not necessarily rational. And that is important to remember when it comes to Fed policy. The housing numbers are showing that this sector is getting better. To the extent that rising prices will bring forth more supply and ultimately even more sales is good, at least for a while. On Thursday we get the June employment report and that is likely to be very good, though not as strong as the May one. A decline in the unemployment rate to 5.4% would put it almost at the Fed’s full employment level. Another good gain in wages would show that the tight market is doing what it should be doing: Allocating scarce labor resources through the pricing mechanism. Rising incomes imply that consumption should improve even more going forward as well. In other words, by the end of this week, it should be clear that the U.S. economy is strong enough to absorb a rate hike. So, should the Fed try to save irrational investors who have decided to wait until they see a Greek default or a Fed rate hike before doing anything? I may be in a minority believing they shouldn’t, but investors have had the information to make rational portfolio decisions for quite a while now and it is not the Fed’s job to bail them out if they don’t do that. We talk about moral hazard and the Fed should not keep creating additional moral hazard. Boy it is good to get that off my chest. Basically, I think the Fed should start raising rates and stop acting as the not so invisible hand covering up for irrational investors in the equity, bond, currency, housing and whatever other market it is supposed to be protecting.

May Spending and Income and Weekly Jobless Claims

KEY DATA: Consumption: +0.9%; Income: +0.5%; Inflation: +0.3%; Excluding Food and Energy: +0.1%/ Claims: +3,000

IN A NUTSHELL: “Consumers have the money to spend and they are doing just that.”

WHAT IT MEANS: Another day, another day of good economic data. Oh, I have said that before. Well, I expect to be able to say that many more times. Yes, I am poking fun at the Fed’s evaluation of the economy. There are those that look into the future who are called forecasters. There are those that evaluate current data and we call them nowcasters. And there are those that can only see the past and we call them Fed members. Enough. The good news today was the income and spending numbers. Consumers went out and bought a lot of everything in May. We knew the report would be strong because of the jump in vehicle sales. But it was not just durable goods demand that was up.   Demand for nondurables was also robust and spending on services continues to be solid – even when adjusted for inflation.   So far this quarter, consumption is running at a 2.5% annualized pace. A moderate June increase would get us to 3%. With services, which is two-thirds of all spending, holding up, that is a possibility even if vehicle sales fade from their ten-year high.   Strong gains in income add to the belief that the consumer will continue to spend solidly. Income rose sharply and much of that increase came from gains in wages and salaries. Adjusting for inflation, disposable income for the first five months of the year is up a strong 3.6% compared to the same period last year. Consumption outstripped the strong rise in income and the savings rate eased. Inflation picked up, but

The tight labor market remains tight as new claims for unemployment insurance inched up last week. The level is at historic lows when adjusted for the labor force and that means hiring is likely to continue to be strong with wage gains accelerating as well. More firms are announcing they are raising the minimum wage they are paying their workers and as that trend spreads, even small businesses will have to follow or risk losing workers.

MARKETS AND FED POLICY IMPLICATIONS: People have the money to spend and it looks like they are actually spending it. The labor market is tight, wages and incomes are rising solidly so we should expect consumers to help lead the economy forward. I had commented that this report was the one on which I was focusing. It shows that on the consumer side, everything is good shape: Both spending and income are solid. The only issue for the Fed is inflation. While it is ticking up, the rate over the year is still well below the Fed’s target. As the declines in energy start coming out of the index, that will change and it would not be surprising if the overall index is running at a 2.5% pace by the end of the year. Excluding food and energy, though, the index doesn’t seem to have much upward momentum. Modest inflation and Greece are the only two things standing in the way of the Fed finally becoming a more positive about the current and future economy. Basically, the economy is strong enough if the Fed wants to move and the markets, especially the fixed income markets, need to start taking that into account.