All posts by joel

March Housing Starts, April Manufacturing Surveys and Weekly Jobless Claims

KEY DATA: Starts: +2%; 1-Family: +4.4%; Permits: -5.7%; 1-Family: +2.1%/ Phila. Fed: +2.5 points; Employees: +8 points/ MAPI: -2 points/ Jobless Claims: up 12,000

IN A NUTSHELL: “While builders are still slow in getting more shovels in the ground, the signs point to a lot more activity in the next few months.”

WHAT IT MEANS: While builders are becoming more positive about conditions, they are not doing that much about it. Housing starts rose in March, but the rise did not unwind the large February decline. First quarter activity was nearly 9% below the fourth quarter 2014 average. That is hardly a surprise given the winter weather. The data were all over the place. Better weather led to a more than doubling of construction in the Northeast and a 31% surge in the Midwest. In contrast, starts fell by nearly 20% in the West and by over 3% in the South. No pattern there. What caused only a limited rise in construction activity was a major downturn in multi-family activity, especially in the West. That is likely the result of normal volatility in the data, implying we really shouldn’t be too worried that starts didn’t rebound more in March. Indeed, there is every reason to believe that the April report will be quite strong. First, single-family construction is not faltering. Second, and more fundamentally, there were roughly 300,000 more permits taken out during the first quarter than there were starts – and almost all of them were for multi-family dwellings. As I always note, builders are not paying for permits for the fun of it. Those permits are going to be used in the spring.

The manufacturing sector took a big hit this winter as both weather and a strong dollar slowed the sector down. The latest data don’t indicate any major improvement. The Philadelphia Fed’s manufacturing survey rose modestly in early April. Firms are hiring a lot more people but how long that will last is uncertain as new orders are growing more slowly. Expectations rose, but minimally. A second survey, one done quarterly by the Manufacturers Alliance for Productivity and Innovation (MAPI), indicated that activity also eased modestly in the first quarter. Despite a rise in current orders, capacity utilization and investment, most other indicators declined. My take away is that conditions moderated but didn’t fall greatly.

Jobless claims rose a touch, but they remain at levels consistent with solid to strong job gains.

MARKETS AND FED POLICY IMPLICATIONS: The headline housing numbers didn’t tell the full story. While construction failed to rebound sharply in March, I would be shocked if the April numbers were not robust. Sharp declines in multi-family starts often are followed by large increases, and the gap between permits and starts in that segment points to that happening. The strong dollar is taking a toll on manufacturing and that is likely to be an issue for a while. But the sector is holding in, even if it is not leading the way. All in all, the first quarter was a disappointment but there is reason to expect conditions to improve as we go forward. But we need data to show that is happening before the Fed does anything.

March Industrial Production and April Home Builders Confidence

KEY DATA: IP: -0.6%; Manufacturing: +0.1%/ Home Builders Index: 56 (up 4 points)

IN A NUTSHELL: “Manufacturing is starting to come back and with developers pretty optimistic, the outlook for spring economic activity is becoming a lot brighter.”

WHAT IT MEANS: Spring is here and guess what? Builders have smiles on their faces once again. The National Association of Home Builders/Wells Fargo Housing Market Index jumped in April. It is nearing levels that would be consistent with pretty strong home construction. Expectations about current and future sales were up sharply. I have little doubt that the warmer weather is heating things up. Don’t be surprised if the February housing start collapse is totally wiped out in March. I expect housing activity to get back to 2007 levels by the end of spring.

While April may be the month the economy flowers, March continues to growl. Industrial production fell sharply in March, but the major reason was a cut back in utility activity as the winter started to break and a major reduction in oil and gas production, which we all knew was coming. As for manufacturing, output did rise, but only modestly. But vehicle assembly rates have bounced back and business equipment production was up, so there seems to be some signs that conditions are firming. That said, the New York Fed’s manufacturing index tanked in early April, so we need to be cautious before we say that the industrial sector is getting back up to speed.

MARKETS AND FED POLICY IMPLICATIONS: We still have quite a few more March numbers before we get the spring data, so don’t expect the reports that are coming out to be great. The winter hurt but we just don’t know how much and we may have to wait about two more months before we have a clearer picture of the economy. That, of course, brings us to June, so it is looking like a rate hike that month is becoming unlikely – as much as I don’t want to admit that. While two great employment reports and an acceleration in wages could bring that month back into play, the Fed probably wants to soften up the beaches for a rate hike and there may not be time to do that. As for the markets, investors have earnings to deal with and rate hikes to put out of their minds, even if the Fed is highly likely to move within the next six months. Failing to plan for that is done at your own peril.

March Retail Sales and Producer Prices

NAROFF ECONOMIC ADVISORS, Inc.

Joel L. Naroff

President and Chief Economist

215-497-9050

joel@naroffeconomics.com

KEY DATA: Sales: +0.9%; Excluding Vehicles: +0.4%/ PPI: +0.2%; Goods less Food and Energy: +0.2%

IN A NUTSHELL: “Consumers are picking up the shopping pace but they can spend a whole lot more.”

WHAT IT MEANS: It finally looks a lot like spring but that doesn’t mean the winter weather still isn’t with us, at least when it comes to economic data. Retailers took a hit because of the cold and snow and the March data seem to indicate that as conditions moderated, consumers started venturing out to the stores again. Retail sales jumped, helped by a sharp rebound in motor vehicle purchases. Indeed, vehicle purchases jumped 5.5%, though dollar sales were up less. There was also strong demand for furniture, clothing, building supplies and general merchandise. People also ate out a lot when they shopped. But not every segment got some additional loving by consumers. Sales of electronics and food for home fell and we also didn’t do a lot of shopping online. There was also a strange decline in gasoline purchases. Gasoline prices were up over 10% but sales, which are not adjusted for prices, were down. That doesn’t make much sense.

On the inflation front, wholesale costs rose moderately in March. Rising energy costs helped, though even excluding energy, producer prices increased a touch. Goods prices had been falling for several months, but no matter how you sliced or diced the data – and the report does that in a wide variety of ways – costs were up in March. That, actually, is a good sign as it indicates demand may be coming back. Services inflation, which has softened recently, moved back into the positive range. We had not been seeing much there as lowered transportation costs kept services prices under control. Looking down the road, the price increases in intermediate and unprocessed products generally fell only modestly. That points to a possible further slowing in the wholesale disinflationary process.

 

MARKETS AND FED POLICY IMPLICATIONS: March was a transition month as the weather eased, but not everywhere and not as much as most of us would have liked. The solid, though not spectacular, retail sales numbers point to a consumer that is finally venturing out. The rapidly improving April weather should lead to another solid rise in spending, though we will not know that for another month. This is the first indicator that supports the view that it was the weather, not a general economic slowdown, that led to the weak first quarter reports. That would normally make investors a little more comfortable, but we are in the midst of earnings season, so the hits and misses coming from companies will likely be the driving force in the markets. Since the Fed members try not to react to any given monthly number, the retail numbers should remind them that the April and May data, which will be out before the June FOMC meeting, could be telling. However, inflation remains quite subdued, so the Fed doesn’t have to be impatient. In other words, the April 28,29 FOMC will likely be non-event as there will be few non-weather-impacted data points that will be released before then that could cause a change in the statement.

 

March Import and Export Prices

KEY DATA: Imports: -0.3%; Nonfuel: -0.4%; Exports: +0.1%; Farm: -1.7%

IN A NUTSHELL: “Declining import prices provide fuel to the argument that the Fed doesn’t have to worry about inflation, at least for now.”

WHAT IT MEANS: The debate over when the Fed should or will raise rates continues to rage as the hawks and doves weigh in on an almost daily basis. If you believe the Fed members, rates should either be increased in June or next year. I guess that is a tight shot pattern when it comes to Fed policy. Just kidding. In any event, since the Fed claims to be data driven, what do the numbers tell us about potential Fed actions? Well, on the inflation front, there doesn’t seem to be much to worry about. Import prices fell in March and once again, fuel was not the driving factor. Indeed, for the seventh month in a row, nonfuel import costs declined. Every major category, included food, was down. Nonfuel import prices are of by 1.9% over the year, a clear restraint to any attempt by U.S. firms to raise prices. As for our exports, the farm sector continues to be battered by lower prices – they are down 13.5% since March 2014. Only fish prices are up.

MARKETS AND FED POLICY IMPLICATIONS: Controlling inflation while keeping growth solid is the Fed’s dual mandate. With the dollar strong, import prices are likely to be well contained, limiting to an extent domestic inflation. That can allow the Fed to focus more on growth, at lest that is the argument that the doves are making. The hawks simply say that the stronger dollar and low energy prices are transitory factors keeping prices low. Continued trend or above trend growth, coupled with a tightening labor market, improving worker incomes and the eventual turnaround in the dollar and energy prices imply that rising inflation is not that far off. Who will win the debate? My view is the data will firm sharply over the next two months. That may come too late for a June increase, but not for a July or September one. What worries me about the public discussion, especially by non-Fed commentators, is the apparent broadening of the perceived Fed mandate. Those that worry about the dollar argue the Fed cannot raise rates because it would further increase the dollar, lowering exports and restraining inflation and growth. Those that are focused on the equity markets argue that a rate hike would shock the markets, causing a correction so the Fed has to make equity prices a concern. The bond market gurus say that negative interest rates around the world make it impossible for the Fed to raise rates or limit its capacity to do so, implying that the bond market should control Fed actions. So now the Fed seems to actually have a quintuple mandate: Control inflation while keeping the economy solid, equity prices high, the dollar from getting too strong and limiting the impact on bond markets. Huh? People, we are approaching the six-year mark for this expansion. The post-World War II average is 5 years. The last three expansions averaged almost 8 years, with the longest being 10 years. In other words, one other thing the Fed has to consider is that the next recession could occur within a few years and if rates are not up by then, it will be forced to resort, once again, to non-traditional policies. The Fed has to raise rates back to more normal levels and the longer it waits, the faster it will have to act.

August Existing Home Sales

KEY DATA: Sales: down 1.8%; Prices (Year-over-Year): up 4.5%

IN A NUTSHELL:   “The rotation from investor to homeowner continues and that is keeping a lid on housing sales and prices.”

WHAT IT MEANS:  When no one else would buy a house, investors saw an opportunity and they came in by waves.  That started the housing rebound and led to solid increases in prices.  Now that costs are rising back toward levels that might have existed if we didn’t have the surge and bust, investor opportunities are shrinking and so is their share of the market.  The result: Existing home sales seem to have hit a plateau.  They fell in August and are down fairly sharply from the August 2013 pace.  But the weakness was hardly spread across the nation.  The West and South saw declines but there were almost equal increases in the Northeast and Midwest.  Over the year, sales in the West are down almost 10%, an indication that investors are pulling back sharply as this area was a prime spot for activity in the past.  As for prices, they are still up over the year and it looks like the deceleration has stopped. The number of homes for sale, while down in August, has been on a modest upward trend.  Still, it is not that much higher than existed during the early 2000s, before the irrational exuberance really hit.  Indeed, price increases and inventories seem to be reasonably well in line with historical patterns.

MARKETS AND FED POLICY IMPLICATIONS: The housing market is in transition from investor-driven to owner-occupied.  As is usually the case with transitions, you get some dislocations and that is happening.  But the sales pace has flattened over the past few months, not fallen, and that is good news.  First time buyers are still in the game and rates remain at very low levels, so the outlook is good for the market.  Just don’t expect any surge in sales, which also is something positive.  We hardly want another bubble.  Housing should be a positive for the economy this quarter but maybe not a huge one.  Of course, with Janet Yellen hung up over “extended period”, this type of report can only add to her obsession.  Why do anything to cause rates to rise when housing is not surging, especially since it is the key interest sensitive sector in the economy?   And with Charles Plosser retiring this spring, a major hawk will be leaving the group of bank presidents.  It will be interesting to see who replaces him.

August Housing Starts and Permits and Jobless Claims

KEY DATA: Starts: -14.4%; 1-Family: -2.4%; Permits: -5.4%; 1-Family: -0.8%/Claims: 280,000 (down 36,000)

IN A NUTSHELL:   “Home construction keeps bouncing around but with builder confidence soaring, it is likely the August slump will be followed by a September surge.”

WHAT IT MEANS:  Housing starts cratered in August but the Alfred E. Neuman in me holds strong: I am not worried.  July’s level was revised up to the highest rate in nearly seven years.  A 31.5% decline in buildings of five units or more was the major reason for the August drop and this component is extremely volatile.  For the first eight months of the year, starts are up by nearly nine percent, keeping up hopes that we could see another double-digit rise in construction activity.  I think that is likely for two reasons.  First, permits are still running above starts.  That points to an acceleration in construction.  Second, the National Association of Home Builders/Wells Fargo Housing Market Index surged in August to its highest level since November 2005.  Builders can get irrationally exuberant at times, but that is usually when construction activity is surging.  So look for a rebound when the September numbers come out.

With the Fed still focusing on labor, the sharp drop in the weekly jobless claims number was eye opening.  We are about as low as can be expected.  Don’t be surprised if this number soars soon.  The closing of three casinos in Atlantic City will likely mess up the data for a short time.   Also, the Philadelphia Fed’s Business Outlook Survey showed that activity grew at a somewhat slower pace in September.   Nevertheless, orders were strong, backlogs grew and hiring jumped.  Those details point to continued strength in the manufacturing sector.

MARKETS AND FED POLICY IMPLICATIONS: Housing continues to improve even if the gains are inconsistent.  Builders are a pretty confident bunch and that can only be because they are seeing activity pick up.  Thus, the fall off in construction activity should not be viewed as any sign of weakness.  With the labor market tightening, Janet Yellen may be repeating her point that if the data are stronger than expected, the Fed is prepared to act sooner than whatever the term “extended period” means.  Indeed, if housing starts do bounce back and manufacturing continues to grow strongly, that is precisely what the Fed will have to do.  Regardless, investors may be a bit confused by the inconsistencies of these numbers but that has never stopped them before.

A further thought on the Fed’s leaving in “extended period” in the statement.  Given her weird comments about the meaning of the phrase, that it was not calendar based but data based, I can only conclude that the Fed members would like to remove the words but only when they think the markets will not overreact.  They don’t want another 100 basis point gap up in rates.  I suspect that as soon as there are consistently robust job gains and the unemployment rate drops below 6%, which could happen by the end of the year, the phrase will be removed.  December is my guess.

Sept 16-17 ‘04 FOMC Meeting

In a Nutshell: “… a range of labor market indicators suggests that there remains significant underutilization of labor resources.”

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

Quantitative Easing Decision: Bond purchases reduced by $10 billion to $15 billion.  Quantitative easing is expected to end at the next meeting.

One again, the FOMC and Janet Yellen tried to provide some clarity about how the monetary authorities will proceed with rate hikes when they eventually come.  And again, we did not get much that was new.

On the economic front, the economy continues to improve but there remains a significant amount of slack in the labor market.  That was Chair Yellen’s reason why wages are showing little change.  It is all about a tight labor market and the Fed doesn’t see that situation occurring soon.  As it does four times a year, the FOMC released the members’ forecasts for growth, inflation and unemployment rates. The central tendency of the forecasts puts full employment in the 5.2% to 5.5% range, which is not expected to be reached until sometime in late 2015 or early 2016.  However, the members are a bit more optimistic about pace of decline in the unemployment rate.

As for when the Fed might tighten, those who thought that the FOMC might signal that rates could rise sooner rather than later were disappointed.  The Fed Chair made it clear that she was in no hurry to raise rates.  But she also noted that the decision is not “calendar driven” but is “data driven”.  The hawks are not making very much inroads into Fed policy.

Finally, the Committee went over procedures for normalizing policy.  One new thing was that the FOMC would be targeting rate ranges rather than a given rate.  That may be reflection of the concern that transitioning to a normal Fed policy and a normal Fed balance sheet will likely have some bumps in the process.  It would be amazing if the Fed pulls off the normalization process without any hiccups.

So what should we make of all this?  Janet Yellen is firmly in command at the Fed and we should stop doubting it.  She is a dove and until the data make her think differently, she will run monetary policy accordingly.

But I have some issues with the Fed’s forecast.  The unemployment rate has declined by about 0.7 percentage point for the past three years yet the members think the decline will slow sharply starting in 2015 and only edge down in 2016 and 2017.  Yet growth is expected to be a lot stronger over the next two years than it had been.  This doesn’t seem to be consistent.  But it is necessary for the members to argue that the funds rate will not be increased soon and will not be raised quickly, which they seem to be indicating.

August Industrial Production

KEY DATA: IP: -0.1%; Manufacturing: -0.4%; Vehicles: -7.6%

IN A NUTSHELL:   “If you believe that vehicle production is crashing, I have a bridge for sale and you can buy as much of it as you like.”

WHAT IT MEANS:  One of my more common warnings is that the headline number hides what is truly going on and the devil is in the details.  Well, welcome to the August industrial production report.  Output fell in August for the first time since January, and we know what the weather did to everything that month.  Worse, manufacturing production was down sharply.  So, has the industrial sector finally come to a grinding halt?  Yeah, right.  The biggest decline was in vehicles, where assembly rates dropped by nearly 12%.  Of course, the pace of new vehicle construction had surged by almost 13% in July, highlighting the problem with seasonal adjustments when trends change.  The important point is that vehicle sales in August hit their highest level in 8½ years, so output is likely to expand further.  It is clearly not shrinking.  Indeed, the 3-month assembly rate average was the highest since early 2006, when the housing bubble was funding everything that moved and didn’t move.  Meanwhile, the rest of the economy was doing just fine.  Production of high tech products, consumer products, business equipment and business and construction supplies were all up. 

Adding to the belief that the manufacturing sector is in great shape was the September Empire State Manufacturing Survey, a product of the New York Federal Reserve Bank.   The index hit its highest level in almost five years as new orders surged, hiring jumped and backlogs built.  Enough said.

MARKETS AND FED POLICY IMPLICATIONS:  It is sometimes good to get a headline that is so obviously misleading as today’s industrial production number.  It is not that the data are wrong; it is just that sometimes the marquee number is not reflective of what is actually going on.  The data are often volatile and the seasonal adjustments sometimes don’t work right if conditions change.  That was true with today’s industrial production decline and was likely the case with the weak August employment report.  Basically, the manufacturing sector is strong and should continue to lead the way.  The FOMC starts its 2-day meeting tomorrow and on Wednesday Janet Yellen will hold a press conference.  I expect the statement and the discussion to focus on changing the thinking from rates staying low an extended period to the strategy that the data will drive decisions.  If the numbers are stronger than projected, the Fed will be prepared to move sooner than expected.  This report changes nothing and investors will have to start getting used to the reality that the Fed is going to raise rates, most likely during the first half of next year.

August Retail Sales and Import Prices

WHAT IT MEANS:  The missing link in this economy is strong household consumption.  It’s hard to buy more when your pay is barely keeping up with inflation.  But wage gains are slowly improving and with so many more people working, income is growing.  The added funds are being spent on just about everything.  Retail sales jumped in August, led by a surge in vehicle sales.  With the vehicle sales pace of 17.4 million units being the highest in over eight years, that was hardly a surprise.  But even when you exclude vehicles, consumers were pretty frisky.  Demand for furniture, appliances and electronics, sporting goods, home building supplies, medical products and clothing were all up.  We even went out to eat again.  The only weak links were department stores and gasoline stations.  The decline in gasoline purchases was probably due to the sharp drop in prices, not a fall off in purchases, as these data is not inflation-adjusted.  All this came on top of an upward revision to July sales.

Household spending power is not likely to be eroded very much by inflation.  Import prices dropped sharply in August as fuel costs cratered.  Excluded energy, prices rose just a little, with only vehicles showing a gain, though that was minimal.  The only real trouble spot is manufactured food import costs, which continue to surge.  As for exports, U.S. firms are also getting less for their products with the farm sector once again suffering sharp drops in its goods.

MARKETS AND FED POLICY IMPLICATIONS: The second quarter is setting up to be pretty good.  Consumers are spending again and not just on vehicles.  Right now they are being helped by the drop in gasoline costs, which is leaving a lot more money in their wallets.  Indeed, low inflation is has kept consumption from largely disappearing and with import prices essentially going nowhere, minimal inflation pressures are likely to continue.  Once we get better wage gains, spending could really surge.  The Fed generally treats energy costs as an indicator of consumer spending, not inflation and it looks like the downward trend in prices and the upward trend in household spending should continue.  Since it is all about a tightening labor market and the potential for rising wages, this report should buoy the spirits of the inflation hawks who worry that the Fed is waiting too long to start raising rates.  The FOMC meets next week and the pressure is building for the statement to drop the words “extended period” when describing how long rates will be kept low.  That would provide the flexibility to start tightening sooner than expected.  I suspect that will happen, since the public discussion about doing that has largely taken away any shock that would occur if the statement actually drops that language.  As for investors, it is the usual: Does good economic news trump rising rates?  Who know what side of that coin comes up on any given day?