All posts by joel

April Consumer Prices and Real Earnings

KEY DATA: CPI: +0.1%; Excluding Food and Energy: +0.3%/ Real Earnings: 0.0%; Year-over-Year: +2.3%

IN A NUTSHELL: “The only downward price pressures were in food and energy and gasoline prices have already turned, so all that is left is food.”

WHAT IT MEANS: Inflation has been a non-starter for a long time but it seems to be starting up again. The Consumer Price Index rose modestly in April, but the details tell a different story. About the only places where prices declined were in energy, including gasoline, and airline fares. I don’t know where the government gets its airline fares from but I haven’t seen any declines in my travels. As for energy, we all know that prices at the pump have jumped and the decline in natural gas costs also seems to be over. So, expect a strong rise in this component next month. Food prices were flat, but there are contradictory factors at work in this sector. Imported food costs are down but avian flu is driving up egg prices. Food may continue to restrain the overall index for a while, but not by much. As for other categories, the cost of services continues to rise solidly, led by shelter and medical care expenses. Those two categories make up almost 40% of the index and there is every reason to think that solid increases will be sustained. Vehicle prices are also rising and with demand solid, that should continue as well.

The modest rise in overall consumer prices kept worker incomes, adjusted for inflation, from falling in April. Over the year, incomes are up decently and the gains are slowly accelerating. That is good but not great news for workers.

MARKETS AND FED POLICY IMPLICATIONS: While inflation is not a major concern, the pattern of prices is changing. It used to be hard to find any category where costs were going up but now the opposite is true: Most categories are posting increases.   Inflation is rising in the services component and only some commodity price declines are keeping consumer prices from rising more strongly. This report is decent enough that the Fed doesn’t have to say that inflation is too low anymore. Of course, it is the Personal Consumption Expenditure deflator, not the Consumer Price Index that the Fed watches, and that is running a little cooler. But they trend together, so don’t be surprised if the Fed’s benchmark inflation index also shows an upward trend. Basically, inflation is neither holding the Fed back from moving nor pushing it to hike rates, which in my mind, reduces the barrier to a rate hike. If you approach the Fed’s thinking as being biased toward a move, then this report keeps a rate hike in play. Whether investors will see it that way is anyone’s guess. It is the day before the Memorial Day weekend and if the lack of traffic going into Philadelphia this morning is any indicator, people have already headed out. I hope everyone has a good one.

April Existing Home Sales, Leading Indicators and Weekly Jobless Claims

KEY DATA: Sales: -3.3%; Prices (Year-over-Year): +8.9%/ Leading Indicators: +0.7%/ Claims: +10,000

IN A NUTSHELL: “While housing sales are still yo-yoing, an improving economy and rising prices should lead to better activity in the months ahead.”

WHAT IT MEANS: It’s the housing two-step: One month up, the next month down. That said, the market is improving as the trend in demand is up. In April, the National Association of Realtors reported a small drop in existing home sales. But demand did jump in March to the highest rate in eighteen months. One major reason for the failure of sales to rise more consistently is a lack of supply. The inventory of homes for sale did jump, but it is still lower than last April. It is hard to sell homes when product is limited. That may change as prices are surging in almost all regions. The lack of available houses for sale is forcing buyers to bid up prices. While that may seem to be a negative for the market, it is not. As equity increases, more people will be able to move and that will raise supply and increase sales. Also, rising prices, in a manner similar to rising mortgage rates, would force buyers to make decisions more quickly and that too could increase the sales pace.

But maybe the biggest impact on the housing market could come from the economy itself. The Conference Board’s Leading Economic Index surged in April after a strong rise in March. If you believe this measure does portend future activity to at least some extent – and I do – it looks like we are in for strong growth in the months ahead. The Conference Board’s measure of current activity improved, further pointing to an end of winter slump.

Jobless claims rose last week but that is hardly the story. The level remains quite low and the four-week moving average, which smooth’s out the weekly ups and downs, is at historic lows when you adjust for the size of the labor market.

MARKETS AND FED POLICY IMPLICATIONS: We still have not fully recovered from the damage done by the housing bubble and the biggest problem remains home values. You cannot sell your home if you are under water and if you want to buy a new house, you need enough equity to put down on your next home. The worry about rising prices, at least for now, is misplaced. We need higher prices to reduce the biggest impediment to higher sales: Low inventory. Thus, I welcome higher prices. The jump in the leading indicators points to improving activity ahead and the claims numbers show that firms are holding on to their workers as tightly as possible and that combination can only lead to higher wages. The Philadelphia Fed’s May Manufacturing Business Outlook report indicated that to attract workers, nearly half the firms are raising wages. It is not the case for all new workers, but with a majority of the respondents hiring, how they will get those workers without raising salaries is anyone’s guess. Solid job gains and a further rise in wages would be enough to push the Fed to tighten. The members want to get back to a more normal rate structure and the sooner the better.

April Industrial Production

KEY DATA: IP: -0.3%; Manufacturing: 0%; Oil and Gas Well Drilling: -14.5%

IN A NUTSHELL: “The energy sector contraction is slowing things down, but there are other sectors where the economy’s underlying strength is showing through.”

WHAT IT MEANS: No good deed goes unpunished and that is the case with the lower energy prices. The precipitous drop in oil prices has led to a massive reduction in energy sector activity that has yet to be offset by consumers spending their windfall. Nothing shows that more than the April industrial production numbers. Output fell for the fifth consecutive month, led by declines in utilities and mining. Oil and gas drilling is down 46.5% over the year. But there were some solid output gains, especially in durable goods manufacturing. Strong demand led to a ramping up of assembly rates in the vehicle sector. There were also robust increases in the electrical equipment and appliances sector, wood products and minerals. This helped the durable goods segment post a modest rise. But there was weakness in the non-durables component. In addition to energy, the food sector also came in with a large decline. I cannot say for certain, but the growing avian influenza epidemic may be having an impact on that segment of the economy. That offset decent gains in printing and petroleum products. In other words, there were a lot of ups and downs in this report.

Two other releases added to the uncertainty about the economy. Surprisingly, the University of Michigan’s mid-month reading of consumer sentiment dropped sharply. What is totally bizarre is despite some of the lowest jobless claims numbers on record, workers are once again worried about losing their jobs. It used to be that if you looked to your left and someone was gone, you got worried. If you looked to your right and that person was also no longer there, you panicked. Now, even though everyone is still working next to you, people are concerned. A second report, the New York Fed’s Empire State Manufacturing Index, indicated that activity and orders picked up in early May, but the rate of growth was nothing spectacular.

MARKETS AND FED POLICY IMPLICATIONS: Today’s numbers raise the possibility that the expected spring sprint is turning into a slow walk. The economy is growing, but the hangover in the oil patch and consumer uncertainty is keeping activity from expanding at a strong pace. Second quarter growth should be good, but the hopes for a repeat of the over-4% rise posted in the spring of 2014 are becoming dashed. That should keep the Fed on hold at least through June. With the FOMC being data driven and given it is unclear how long the data have to be strong to actually elicit a rate hike, it is hard to rule out any future meeting. But we will have to have strong May and June employment and consumer spending numbers if July is to come into play. That is probably how investors will read today’s data as well.

April Producer Prices and Weekly Jobless Claims

KEY DATA: PPI: -0.4%; Goods: -0.7%; Services: -0.1%/ Claims: 264,000 (down 1,000)

IN A NUTSHELL: “Despite an even tightening labor market, inflation is totally under control, complicating the Fed’s decision-making.”

WHAT IT MEANS: Life would be so much simpler for the Fed members if there was “normal” inflation, but alas, that is not the case. Yesterday we saw that import prices declined and today it was producer prices that were negative in April. The wholesale cost declines were really broadly based as both goods costs and services prices dropped. At the final demand level, which is the most processed, you have to search long and hard to find any product where prices rose and even there, the gains were relatively modest. Even in the services sector, which is about 63% of the index, the price increases we had been seeing have largely dissipated. There is some pressure at the intermediate level for services, but the pipeline for goods inflation starts all the way back at the crude component. And we know that the pathway from crude costs to finished goods costs in rarely straight. About the only measure that showed some inflation was the special index which excludes food, energy and trade. This was up modestly and over the year, the gain was less than one percent. Basically, there are no inflationary pressures the Fed has to worry about.

As for the labor market, unemployment claims remained at a level that we haven’t seen in fifteen years. Adjusting for the size of the labor force, we are now at record lows. That clearly indicates firms are holding onto workers as much as possible.  As labor needs keep expanding, firms will have to look to other methods to fill the growing job openings, so it is just a matter of time before wage gains jump. And don’t expect a slow acceleration. We are talking about a dam breaking here and the longer companies hold by the waters, the greater the flood.

MARKETS AND FED POLICY IMPLICATIONS: To hike or not to hike, that is the question. Right now, the economic and inflation data are mediocre enough that the Fed can stand pat. But Janet Yellen and her band of not so merry monetary policy makers are also concerned about the labor market. Looking just at the monthly hourly wage numbers, there doesn’t seem to be any compensation pressures building. But that is not the case when you look at the much more comprehensive employment cost index. That measure is accelerating and the rate of increase is back to the average for the last expansion. The unemployment rate is at or very near full employment, jobless claims are at record lows and job openings are near record highs. Oh, and it looks like the dollar has peaked. What this tells me is that the Fed must keep its finger on the trigger, even if it doesn’t have to pull it just yet. That said, investors love weak economic or inflation data, as it implies no immediate Fed rate hike, so the wholesale price numbers should make lots of traders happy.

April Retail Sales and Import and Export Prices

KEY DATA: Sales: 0%; Excluding Gasoline: +0.1%/ Import Prices: -0.3%; Nonfuel: -0.4%; Exports: -0.7%; Farm: -0.8%

IN A NUTSHELL: “Forget ‘shop ‘till you drop’, let’s just hope consumers simply start shopping!”

WHAT IT MEANS: I assumed it would take some time for households to start spending the “windfall” from the lower energy costs, but this is getting crazy. Retail sales went nowhere in April, which wasn’t a huge surprise given that vehicle sales has slowed somewhat. But when you look at the details of the report, there were few segments where spending picked up. The biggest winner continues to be restaurants. I guess you can say that the few extra dollars and improving confidence is inducing people to eat out again, which is great. The warmer weather brought helped drive strong demand for sporting goods, health care purchases were up and online shopping was solid. But consumers are not buying anything that costs a lot. Electronics stores continue to suffer, as they have for quite a while. Furniture sales fell, though they had been doing better earlier in the year. Gasoline, department store and supermarket sales were also off. Sales for the first four months of the year compared to the same period in 2014 were up only 1.9%, not a great performance.

On the inflation front, there are few reasons Fed members should fear any major increases in prices anytime soon. Import prices decline sharply despite a jump in fuel costs. Indeed, energy was just about the only component that posted a rise. The cost of imported food, consumer goods, capital goods and even industrial supplies excluding petroleum were all up. Vehicle prices were flat. On the export side, agricultural prices are cratering. They are down over 15% from April 2014, which should really hurt farmers’ incomes. Still, except for vehicles, most other export prices were down.

MARKETS AND FED POLICY IMPLICATIONS: Where have all the shoppers gone? Got me. It looks like people are using the modest funds left over from not pumping it into their gas tanks for smaller items – or are actually saving it. Retail sales disappointed in April, especially since the weather was a lot better and people were expected to be out shopping. Does this mean consumer spending will be weak this quarter? Not necessarily. On a non-price adjusted basis, retail sales in April are running at a moderate pace above the first quarter average. Increases in May and June would push that up significantly. Also, these data don’t include services, which is two-thirds spending, so we really cannot count the consumer out just yet. The next retail sales number is released just before the next FOMC meeting, so that report may take on even more importance. But the FOMC doesn’t really have to worry about inflation. Foreign companies are using the strong dollar to push down their prices so they can sell more. Given the weakness in economies around the world, that is smart business. The dollar may have stabilized, but until it falls, the downward pressure emanating from lower import costs will limit domestic firm pricing power. Taken together, this report will likely be read by investors as being positive since it lowers the already low probability that the Fed will hike rates in June.

April Employment Report

KEY DATA: Payrolls: +223,000; Revisions: -39,000; Unemployment Rate: 5.4% (down 0.1 percentage point); hourly wages: +0.1%

IN A NUTSHELL: “Not too strong is not strong enough.”

WHAT IT MEANS: Wrong again. Yes, job gains improved in April, but they were nothing special. We averaged about 250,000 new positions a month during the previous twelve months so why anyone would like 223,000 is beyond me. The gains were fairly broad based but no sector, other than construction, really stood out on the positive side. Restraining the total was continued energy sector layoffs. Mining and logging was down 15,000. So, instead of adding jobs, this sector is now cutting them. The gains in retail were mediocre and manufacturing has largely flatlined.

The unemployment rate fell to its lowest level in nearly seven years. The decline came as the labor force and participation rate increased while the number of people unemployed and the number of people working part-time for economic reasons declined. So, it is hard to criticize the decline.

But the discouraging news was in the wage data. Despite the shrinking availability of workers, hourly wages continue to rise modestly. I am not sure how good this measure is, but it is watched carefully and that is all that matters, as it is not showing any signs of growing wage pressures.

MARKETS AND FED POLICY IMPLICATIONS: If you think the continuation of the bull market is the most important thing, then this report was tonic. If you think that a strong economy is critical, then this report was disappointing. Yes, job gains improved, but they were not particularly great and the revisions indicate that firms didn’t “hire ‘till they were tired” in the first quarter. In addition, despite a seven-year low in the unemployment rate, wages have yet to rise solidly on any sustained basis. I believe that every one of the Fed members would like to see an economy so strong that they have to raise rates. They don’t have one yet. We are almost six years into the expansion and it is getting a bit old. The Fed needs to get back to normal rates and the sooner the better. This report doesn’t force anyone’s hand, so it is not likely we will get a rate hike in June, even if job gains surge and wages jump in May. One month is hardly a trend. So investors may love this report as it puts off the day of reckoning, but that only raises the risks of this extended low rate policy.

April Job Cuts, Small Business Hiring and Weekly Jobless Claims

KEY DATA: Job Cuts: 61,582/ Claims: 365,000 (up 3,000)

IN A NUTSHELL: “Firms keep announcing more layoffs, small businesses are hiring and jobless claims are at record lows, and you wonder why I am confused?”

WHAT IT MEANS: Tomorrow we get the April employment report and hopefully the headline numbers will not continue to confuse things. Yesterday’s ADP private sector job growth estimate was a major disappointment but like the weather, if you don’t like the number, just wait a day. Of course what we saw today hardly clarifies the situation. On the disturbing side, Challenger, Gray and Christmas reported that announced layoffs surged in April to its highest level in three years. The energy sector is driving the rise with about one-third of the layoffs and all of the increase placed at the feet of falling oil prices. For the first four months of the year, layoffs notices are up by 40,000 while energy sector announcement have surged by 55,000. Texas accounts for 35% of the total notices as the Texas economic miracle turns into the Texas economic mess.  With energy prices rising, some of those notices may be rescinded and future announcements will likely be a lot lower.

There is a lag between announcements and actual job cuts and so far, few of those notices have turned into layoffs. Jobless claims rose modestly but adjusting for the size of the workforce, we are at record lows. Texas actually reported a decline in claims. Since payroll changes are calculated as the difference between hiring and firing, we go into tomorrow knowing that the firing portion of the equation is low. That holds out hope that the total job gains will be better than expected after the ADP number came out.

Supporting the view that the job picture is still quite strong was the release of the National Federation of Independent Business’s April employment survey. Firm hiring remained strong and plans to add workers keep increasing. The biggest problem is finding qualified workers and the jobs openings index reached levels not seen since before the recession hit. Of course, paying higher wages might help, but that was not part of the survey.

MARKETS AND FED POLICY IMPLICATIONS: I remain convinced the labor market is in a lot better shape than the consensus seems to believe. Expectations are for job gains of about 220,000 tomorrow. Even if the March number is revised upward to 150,000, that would give us a two-month average of only 185,000 and a three-month average of about 210,000. In contrast, the economy added 260,000 jobs per month between March 2014 and March 2015. Has the trend dropped by 50,000 a month? Makes no sense to me, even if you factor in the oil patch problems. Indeed, if we stay anywhere near the current level of jobless claims, the paucity of job cuts points to payroll gains closer to 300,000. But that is just one economist’s view. The uncertainty, though, has to be playing on investors’ minds, especially with the 10-year Treasury rate rising 30 basis points in one month. In any event, we will know soon enough how many jobs the economy actually created.

April ADP Jobs Estimate, Help Wanted Online and First Quarter Productivity and Costs

KEY DATA: ADP: 169,000/ Help Wanted: -104,500/ Productivity: -1.9%; Labor Costs: +5%

IN A NUTSHELL: “As we get conflicting information on the labor market, the Fed members have to feel very conflicted about when to start raising rates.”

WHAT IT MEANS: I had been hoping that the April data would start showing a clear trend, but alas, that is not yet the case. Decent if not solid Institute for Supply Management reports seemed to point to better economic conditions, including job gains, and that made sense given the low level of unemployment claims. But the ADP estimate of private sector job growth was well below expectations. There were reasonable increases in small business payrolls, moderate gains at mid-sized firms but almost no hiring at large companies. While we all know that the energy sector is cutting back, it is hardly clear that many of the layoffs have already occurred. Notices usually have to be given first. And the ADP report indicated that large service firms didn’t hire that many workers, which doesn’t match the ISM report. That said, the ADP estimate raises serious questions about the strength of Friday’s employment report.

Adding to the uncertainty about the April jobs numbers was the Conference Board’s Help Wanted Online index. There was a decent sized decrease in the number of want ads posted online. These data do bounce around on a monthly basis, so maybe that is all that was going on. Also, it is not clear the reason for the drop. Was it a result of a softer economy? If so, Friday’s number may be disappointing. Or, did firms finally start actually start filling all those open positions? The number of new ads was down much less than the total number of ads, which could mean HR is catching up. That suggests a better than expected jobs reports. I am not certain what Friday’s number will look like, but I am sticking with my view that it will be much, much better than the ADP report indicates.

Meanwhile, labor costs keep rising. Unit labor costs, which adjust compensation for productivity, jumped in the first quarter. GDP growth was weak (and the revisions should show it to have been even weaker), so it was no surprise that with more people working, output per worker would decline. But the jump in labor costs also came from a strong rise in compensation. That is a factor in the Fed’s decision calculus.

MARKETS AND FED POLICY IMPLICATIONS: While it is mostly about jobs, it isn’t all about jobs anymore. Compensation matters. Since the first quarter growth number was likely an anomaly, we can dismiss the productivity weakness. But it looks like compensation is accelerating and that is crucial for the Fed. The rising labor costs will not only put pressure on firms have to raise prices, but growing incomes should increases demand, providing a greater ability to pass those higher costs through. So watch on Friday not only the number of jobs and the unemployment rate, but also the wage data. Indeed, investors may look past a mediocre payroll number if the wage increase is sharp, since that could influence the Fed the most.

April Supply Managers’ Non-Manufacturing Survey and March Trade Deficit

KEY DATA: ISM: +1.3 points: Employment: +0.1 point / Trade Deficit: $15.5 billion wider; Imports: +7.7%; Exports: +0.9%

IN A NUTSHELL: “With the temperature rising, so is the economy.”

WHAT IT MEANS: I keep arguing that the soft economic conditions were just a function of the wicked winter weather, and the solid rise in the April Institute for Supply Management’s Non-Manufacturing index adds to that belief. The level was the highest since November. New orders rose solidly and order books filled, indicating that future activity should be strong as well. Payrolls continued to rise solidly, providing hope that the April employment report will be quite good as well. All this happened even as the oil industry continued to show real weakness.

Funny thing about port strikes: Ships anchored in a harbor don’t count toward imports. The West Coast port strike and its aftermath have totally messed up the trade data. The huge surge in imports in March (the rise was the largest on record!) was undoubtedly the result of the ships finally making it to port and being offloaded. The large rise occurred despite continued slowing in oil imports. Exports, meanwhile, rose modestly. Given that the import data are so skewed by the ending of the port strike, it really makes no sense to even discuss what went on. However, the deficit, adjusted for inflation, was greater than what was implied by the first GDP report, so it looks like the first quarter number will be revised downward. We may have another first quarter GDP negative number.

A couple of other reports also pointed to better economic conditions. The New York Supply Management report rebounded sharply in April, indicating that manufacturing conditions in that part of the nation improved solidly. CoreLogic reported that housing prices accelerated in March as a lack of supply, coupled with growing demand is driving up home values. And the Paychex/HIS Small Business Jobs Index inched up, indicating that the nation’s jobs creators are continuing to do just that.

MARKETS AND FED POLICY IMPLICATIONS: The economy stalled in the first quarter, but it appears that there is no reason to think the softness was anything different than we saw last year. With housing prices rising, manufacturing and services production levels increasing and negative impacts of the port strike turning around this quarter, we could see another near-5% second quarter growth rate. I expect Friday’s employment report to be a big one and I am not ruling out a number north of 300,000. That would bring us closer to what I believe is the trend of about 250,000 to 300,000 per month. A decline in the unemployment rate to 5.4% is also possible. Bond rates are starting to reflect the distinct possibility that the economy is indeed in good shape and the Fed could start raising rates this summer. Equity investors might want to start considering that possibility as well.


April Supply Managers’ Manufacturing Index, April Consumer Confidence and March Construction

KEY DATA: ISM: no change; Orders: +1.7 points; Employment: -1.7 points/ Confidence: +2.9 points; Construction: -0.6%

IN A NUTSHELL: “Consumers may be smiling more but they are not making manufacturers happy.”

WHAT IT MEANS: The manufacturing sector’s winter malaise appears to have stretched into the spring. The Institute for Supply Management’s April Manufacturing index indicated that the sector is growing, but not at a particularly solid pace. The details of the report were somewhat strange, though. New orders, including imports and exports, rebounded. That would seem to be good news, especially since firms ramped up production to meet the growing demand. Yet employment was down. With order books thinning, it is not clear when job growth will accelerate. And to confuse the matters more, fifteen of the eighteen industries reported they were growing. So you tell me what is going on here and we will both know.

The consumer will ultimately determine the direction of the manufacturing sector. Wage gains are accelerating and with that, confidence is improving. The Thompson Reuters/University of Michigan Consumer Sentiment index jumped in April, as both the perceptions of current conditions and expectations for the future were up. The index reached its second highest level since 2007. This report, though, contradicts the Conference Board’s finding that household confidence fell in April. Thus, it is hard to say what people are really thinking.

Construction activity moderated in March as residential building pretty much tanked. There was also a sharp decline in public construction. The only bright spot in the report was the rise in private nonresidential building. With permits exceeding starts, I expect that we will see construction rise solidly in April and May.


MARKETS AND FED POLICY IMPLICATIONS: So far, the hoped-for rebound remains just that: A hope. Some data are solid, some are soft and some are, well, totally confusing. It is hard to argue that the manufacturing sector is getting a lot better, even if orders are improving. Consumers are feeling better, or not, depending on which survey you like. And wages are rising; at least it looks that way. So, what does this all mean? Got me. This week’s data have provided no road map to the future. Maybe next week’s employment report will clarify things, at least I hope so. We have six weeks before the next FOMC meeting, so like the weather, if you don’t like the data, just wait a day. While economists may be willing to watch things evolve, traders don’t have quite that attention span. But is bad economic news good news for the markets or bad news? And what about the bond market? The 10-year Treasury rose above 2.10% for the first time in six weeks. Huh? I guess with the dollar seemingly on a downward trend, there is concern that inflation could accelerate and the Fed may be able to raise rates. As I said, the data are showing no strong pattern and with the FOMC members saying they are focusing on the data, this is not a good time for confusion.