Category Archives: Economic Indicators

April Producer Price Index

KEY DATA: PPI (Final Demand): +0.1%; Ex-Food and Energy: +0.2%; Goods: 0%; Services: +0.1%

IN A NUTSHELL: “Despite the modest increase in wholesale costs, the inexorable rise in inflation remains inexorable.”

WHAT IT MEANS: Inflation pressures are building; there is little doubt about that. What is unclear is how much will price increases accelerate. Costs had been rising fairly sharply at the wholesale level, but that was not the case in April. A large decline in food prices coupled with a modest gain in energy helped limit the rise in producer prices to the smallest increase since December. There was minimal pricing pressure on both goods and services and even excluding the more volatile food and energy, costs rose only moderately. Over the year, the gains in both the headline and core indices decelerated, but remained in the 2.5% range, so we cannot say that inflation pressures have disappeared. Looking at the details, there were few outliers. Prices of vegetables and eggs fell sharply, a major factor in the large drop in food. Otherwise, most of the individual categories posted modest to moderate declines or increases, the majority being declines.

Looking into the future, the April report is not likely to become the norm. Intermediate level producer costs rose sharply for food, energy and core (non-food and energy) measures. That was the case at the crude product level, though food costs were down. Basically, there is building pressure in the pipeline.

MARKETS AND FED POLICY IMPLICATIONS: The inflation pressures we see in all the consumer indices are real. With oil prices above $70/barrel and the ending of the Iran agreement likely to keep prices up, it is hard to see how inflation will moderate anytime soon. The Fed looks at the headline number now, so energy matters. I have made the argument to anyone who will listen that over time, it is the entirety of retail price increases that matter to households. The headline increases in the Consumer Price Index (CPI) and Personal Consumption Expenditure deflator (PCE) have been persistently above the core increases and that is what consumers pay. The Fed has moved back toward the top line number, which makes sense. Thus, there is every good reason for the FOMC to continue to normalize both rates and the Fed’s balance sheet. Quantitative tightening will continue and is scheduled to accelerate. Rate hikes are not likely to stop unless there is a major crisis. Investors need to factor that into their thinking. Of course, with all the political issues swirling around Washington, lots of fundamental economic considerations are being pushed to the sidelines.

April Private Sector Jobs and Help Wanted OnLine

KEY DATA: ADP: +204,000; Construction: +27,000/ HWOL: -69,300

IN A NUTSHELL: “Businesses are hiring solidly and they are looking for even more workers.””

WHAT IT MEANS: The latest Fed meeting will end soon but before we get the statement, there are some data to discuss. Since they have to do with one of the Fed’s major concerns, the labor market, it is likely they will be a part of the discussion. Since this is the week of Employment Friday, Wednesday is when we get a snapshot of what private sector hiring may have been. According to ADP, firms were out adding workers at a very solid, if not strong pace in April. The gains were spread fairly evenly across the different sizes of firms, though companies with 50 to 499 workers were the most active. Looking at the specific industries, the need for construction workers remains robust, while health care employees are also in strong demand. The only sector where jobs declined was information services.

The number of want ads posted online faded in April. The Conference Board’s Help Wanted OnLine Index fell, but it has been bouncing around quite a bit lately. That said, the level of want ads is still high enough that we should see solid hiring going forward. There were declines in every region, though the greatest weakness was the Northeast, New York in particular. As for occupations, the demand for computer and mathematics experts continues to soar, while sales people are no longer needed as much. That makes sense since the Internet is not a person-to-person sales vehicle.

MARKETS AND FED POLICY IMPLICATIONS: While the labor market data are important, today is all about the FOMC meeting and the statement that is to be released. The best guess is that the Fed will leave rates alone. Actually, it would be a surprise if anything else were done. The continued strength in hiring has to provide support for the members’ belief that they can continue to raise interest rates without materially affecting the economy. So what we need to watch is the statement and how strong a signal it sends that the next tightening is coming. Most economists, including myself, expect a rate hike at the June 12-13 meeting. If Friday’s jobs report is solid and wage gains continue to accelerate, anything but a hike then would be a shock. In June, we also get the Fed members’ forecasts, which could point to four rather than three increases this year and I think an increase in what may be the terminal rate for this cycle. That would point to four increases, next year as well, which is where I stand.

March Personal Income, Spending and Pending Home Sales

KEY DATA: Disposable Income: +0.3%; Wages: +0.2%; Consumption: +0. 4%; Prices (Over-Year): +2.0%; Excluding Food and Energy (Over-Year): +1.9%/ Pending Sales: +0.4%

IN A NUTSHELL: “Inflation is at the Fed’s target level and it is likely the 2% rate will remain in the rear view mirror for quite some time.”

WHAT IT MEANS: With the battle between interest rates and earnings raging on, the crucial economic numbers are those that tell us about inflation pressures. Today, we saw that the Fed’s preferred measure of consumer costs, the Personal Consumption Expenditure price index may have been flat between February and March, but it rose by 2% over the year. Energy costs are up since March and the Chicago Purchasing Managers report that their prices paid neared a seven-year high in April. We could have a big increase in the April index. Even excluding food and energy, prices are also rising pretty much at the Fed’s target pace.

How much inflation accelerates depends upon the willingness and ability of consumers and businesses to spend. We have yet to see the capital investment boom, but that may come in the second half of the year. As for households, the key is income growth and the March report didn’t tell me that there was a huge increase in spending power. Personal income may have been up solidly, but wages and salaries rose more modestly. Income gains are being bolstered by large increases in dividends.   Most middle and lower income households who receive dividends tend to get them in their retirement accounts, so it doesn’t get spent. And there is only so much that upper-income households spend out of increased income. That is why consumption, which rose solidly in March, is not likely to soar this year.

The National Association of Realtors reported that pending home sales improved modestly in March. Weakness in the Northeast and to a lessor extent in the West offset decent gains in the South and Midwest. Over the year, contract signing activity is down, further indicating that the housing market is not accelerating. Indeed, with mortgage rates rising, don’t expect housing to lead the way going forward.

MARKETS AND FED POLICY IMPLICATIONS: Last year, former Fed Chair Yellen argued that the deceleration in inflation was due to temporary factors. Indeed, inflation had accelerated for two years, reaching 2.2% in February 2017 before easing back. Well, Dr. Yellen was correct in her analysis and we are nearing the high hit last year. Indeed, don’t be surprised if the overall index exceeds that peak when the April or May numbers are released. And don’t be shocked if the rate continues to slowly accelerate. So, if you are still holding onto the belief that the Fed will move only three times this year, you might want to reconsider that stance. That said, I don’t expect inflation to spike. In part, that is due to the continued limited gains in wages and salaries that will restrain consumption. And with mortgage rates likely to continue rising, housing is not likely to pick up much steam. Thus, growth is not likely to accelerate significantly, unless businesses actually start investing really heavily in capital goods. So, investors are now facing a conundrum. Interest rates are likely to continue to rise through the rest of this year and into next. Meanwhile, growth should be solid but probably not robust. Will non-tax-driven earnings be able to sustain strong increases? That is a good, and critical, question.

1st Quarter GDP and Employment Cost Index and April Consumer Sentiment

KEY DATA: GDP: 2.3%; Consumption: +1.1%; Consumer Prices (Quarterly): +2.7%; Over-Year: +1.8%/ ECI (Over-Year): +2.7%; Wages: +2.7%/ Sentiment: -2.6 points

IN A NUTSHELL: “The acceleration in growth from the tax cuts has yet to kick in, but it does look like inflation is rising.”

WHAT IT MEANS: Tax cuts and government spending increases should lead to better overall economic activity, but that was not the case in the first quarter of the year. The economy expanded at a moderate pace that was well below the 2.9% rate posted in the fourth quarter of last year or the 3.3% rate in the third quarter. Solid business investment and a narrowing trade deficit were offset somewhat by soft consumer and government spending. Additions to inventory added to growth and that may be a sign that firms expect conditions to improve going forward. But for me, the story in this report was not the economy: It was inflation. Consumer prices rose sharply in the first quarter and even if you take out food and energy, the increase was still very high. Even though the gain from a year ago has yet to hit the Fed’s target of 2%, another quarter of high price increases similar to that posted in the first quarter will get us there.

Adding to my concern about inflation was the report on first quarter employment costs. The increase over the year was the highest in nearly a decade for both the overall index and for wages and salaries. Of real concern is that the private sector costs are growing faster than the public sector, which means that firms are facing even greater accelerating labor cost pressures.

Consumers were a little less optimistic in April than they had been. The University of Michigan’s Consumer Sentiment Index faded, led by a sharp decline in the perceptions of current conditions. Expectations remained solid, though they have stopped rising. The report indicated that the level of the index was consistent with a 2.7% increase in consumption over the next year. Given the tax cuts, that would be disappointing.

MARKETS AND FED POLICY IMPLICATIONS: Growth decelerated for the second consecutive quarter, not usually a sign of an economy picking up steam. But it was unreasonable to expect the impacts of the tax cuts to show up immediately. Businesses will invest more, though it is not clear how much more, and household spending will improve. But the decelerating growth pattern and the softening in optimism creates doubts about the ability of the economy to post the large gains many used to defend the passage of such a large tax cut. That said, there are questions about the first quarter seasonal adjustments, as the growth rates tend to be the lowest of the year. This was just the initial estimate, which will likely change. So don’t give up hope just yet. If as expected, growth does accelerate from the first quarter moderation, it is likely that inflation will follow suit. By the end of the current quarter, consumer price gains, using almost any index, will likely hit or exceed the Fed’s 2% target. Accelerating inflation would support rate hikes for the rest of the year and sustain the upward trend in market interest rates. No good economy goes unpunished and higher wage and price inflation and increasing interest rates are likely to be with us for quite a while. The earnings vs. interest rate battle is on.

March Durable Goods Orders and Weekly Jobless Claims

KEY DATA: Orders: +2.6%; Excluding Aircraft: +0.1%; Capital Goods: -0.1%/ Claims: -24,000

IN A NUTSHELL: “The surge in capital spending that was supposed to be triggered by the tax cuts has yet to be seen, but it is still early.”

WHAT IT MEANS: Remember how the business tax cuts were supposed to induce massive increases in business investment? Well, that has not happened yet. Durable goods orders rose solidly in March, but chalk that gain up to a surge in civilian aircraft orders. Excluding aircraft, demand for big-ticket items was largely flat. Sharp declines in orders for machinery and computers offset increases in demand for metals and communications equipment. Vehicle orders were up minimally. The most closely watched number in this report is nondefense capital goods orders excluding aircraft and after a solid rise in February, orders fell slightly in March. Even more troubling was that this measure was lower in the first quarter than in the fourth quarter of 2017. It was expected to rise if only because firms were cautious at the end of last year as they waited for the tax bill to actually be passed.

Jobless claims cratered last week to the lowest level since December 1969. To put the number in perspective, the labor force back then was half the sixe it is now. Adjusting for the size of the labor force, we are at record low levels. Put simply, labor markets are extremely tight.

MARKETS AND FED POLICY IMPLICATIONS: It is too early to use one my favorite phrases, “never mind”, when it comes to the impact of the tax cuts on business investment. Just because taxes were reduced and incentives were added to foster more capital spending doesn’t mean businesses were ever going to rush out and invest right away. There may be some off the shelf projects that were green lighted, but in general, spending on major projects is not a quick or easy decision. I have argued that second half growth would show accelerating capital spending and I am sticking to that forecast. That said, it is a little disconcerting to see so little new spending plans announced, especially given all the announcements about stock buy-backs, dividend increases and merger and acquisition attempts. Tomorrow, the initial (called advance) estimate of first quarter growth will be released. Consensus is around 2% and nothing released this week is likely to change most forecasts, including mine, which is 2.6%. Whatever we get could be the low point for the year. But how much faster we grow will depend upon the willingness of businesses to put the tax-induced higher earnings to work for things other than stock price increases. As for consumers, there are no clear signs they are spending like crazy either. The labor markets are drum-tight, but wage gains are still less than needed to cause overall economic growth to surge, especially given the steady rise in inflation. Firms seem to be willing to lengthen delivery times rather than increase wages to attract new workers. At least that is what I frequently hear as I tour the country. Tomorrow’s Employment Cost Index may show signs things are changing. On the investor side, the battle between higher earnings and higher rates continues. But the earnings season will end soon while the rise in rates is likely to continue through the rest of this year and probably next. Can you say “choppy”?

April Consumer Confidence and Philadelphia Fed NonManufacturing Index, March New Home Sales, February Housing Prices

KEY DATA: Confidence: +1.7 points/ Phil. Fed (NonMan.): -3.5 points/ Home Sales: +4%/ Home Prices (Over-Year): +6.3%

IN A NUTSHELL: “The economy seems to be settling into a solid but not spectacular growth pattern.”

WHAT IT MEANS: Consumers are upbeat, earnings are solid and the housing market is decent, so there is little to worry about, right? Yes, though the economy is hardly booming along. Households were more upbeat in April as the Conference Board’s Consumer Confidence Index ticked up after having declined in March. Both the Present Conditions and Expectations Indices improved a touch. Respondents thought jobs were still plentiful, though not as much as they had been. Still, they are confident that there will be more jobs in the future.

The Philadelphia Fed reported that non-manufacturing activity in the Mid-Atlantic region continued to expand solidly in April. That said, the pace of growth was down from March and the index level isn’t that high. There were some warning signs in the report. Hiring is slowing, costs are rising and prices are still going up. Pricing power is not great, but it looks like it is enough for firms to continue pushing through higher prices in the future.

New home sales continued on their upward trend in March despite a halving of sales in the Northeast. I guess people couldn’t make it to building sites in the snow. Sales boomed in the West and that made up for the drop in the Northeast and a moderate falloff in the Midwest. Despite solid sales in February and March, developers are still not going out and building like crazy. The supply of homes for supply is relatively low and that could constrain sales.

The S&P CoreLogic Case Shiller home price index rose solidly in February and the year-over-year gain showed that the price increases continue to accelerate. All of the twenty large cities in the survey posted gains of at least 0.5% over the month.

MARKETS AND FED POLICY IMPLICATIONS: The economy is moving forward, which should surprise no one. It was already in good shape and then Congress passed massive tax cuts and a huge spending bill, so there was little doubt we would have a good year. But no good economy goes unpunished and interest rates continue to rise. The 10-year Treasury note posted a 3-handle for a little while today and while that is still quite low, for many it is a bit of a shock. The rate has increased nearly three-quarters of a percentage point in the last six months and with inflation slowly accelerating and energy costs rising, there is little reason to think it will not continue to move upward. That said, 3% is hardly a high rate, historically speaking. But to the extent that the Fed will consider the fiscal stimulus, rising inflation and increasing rates as signs that the economy is getting a little hot, we should expect the FOMC to continue its rate-normalization process. As for investors, as long s there are strong earnings, the higher interest rates may not matter that much. The good but not great economic data, coupled with the higher rates, are warnings that earnings that are economy-driven, not tax cut-created, may be harder to come by in the future.

March Producer Prices

KEY DATA: PPI: +0.3%; Less Food and Energy: +0.3%; Goods (Over-Year): +3.2%; Services (Over-Year): +2.9%

IN A NUTSHELL: “Cost pressures are building at the wholesale level, but it is not clear if they will actually be passed through to consumers.”

WHAT IT MEANS: As we pin ball along the trade war path, we still need to keep our eyes on the fundamentals and inflation is key, especially for the Fed. If price pressures build, the Fed will have to move to keep them from accelerating too sharply. So, what is going on in the real world of economic data? If you believe the March Producer Price Index, costs are rising for firms. Both goods and services prices increased solidly and over the year, the gains keep accelerating. That is the case despite a backing down of energy costs. Instead, food prices jumped, with gains pretty much across the board. The same can be said when you look at the details of the non-food, non-energy categories. There are many more increases than declines, indicating that the costs of finished goods is likely to rise faster, though how much of an acceleration we will se is simply unclear.

Looking down the road, you see the same trend. Food costs are reversing and starting to rise and non-food and energy intermediate goods and services prices are showing signs of picking up steam as well. If energy prices stabilize, or as I expect, start another upward pattern, wholesale cost pressures could become a problem for retailers.

MARKETS AND FED POLICY IMPLICATIONS: There is little question that inflationary pressures are building in the economy. Delivery lead times are rising, as we have seen in the recent Institute for Supply Management’s indices. In manufacturing, the report noted that “This is the 18th straight month of slowing supplier deliveries, and that continues to be a constraint to production growth. Lead-time extensions in many areas, including steel; supplier labor shortages; and transportation delays will continue to restrict production output for the foreseeable future”. The strong economy comes with its own issues and they are starting to show up. But as I remark almost every time this report is released, the path from wholesale costs to consumer prices is hardly straight and often dead-ends. So don’t get too worried, yet. The Fed members, though, will have to consider these trends as it is likely that consumer inflation will be exceeding its 2% target soon and for an extended period. As for investors, it’s still all about trade and China’s President Xi Jinping’s comments the he intends to open up his country to more imports was good news. Of course, the cynic in me remembers that the Chinese have used, for decades, promises of action to forestall actually taking action, so we have to see real changes before we celebrate. Investors, though, have reason to relax a little, which means in this market, surge forward.

March Employment Report

KEY DATA: Payrolls: +103,000; Revisions: -50,000; Private Sector: +102,000; Unemployment Rate: 4.1% (unchanged); Wages (Month): +0.3% Over-Year: 2.7%

IN A NUTSHELL: “Despite the disappointing job gain, nothing has changed in that the labor market remains strong.”

WHAT IT MEANS: Really, now, did anyone actually believe that payroll increases in excess of 300,000 per month were sustainable? If you did, my offer of investing in a Broadway play is still open. The simple reality is that weather and a “reversion to the mean”, or a movement back to trend, combined to create wild swings in the payroll numbers over the past two months. Thus, the ridiculous 65,000 increase in construction jobs in February, which was mild, was followed by a 15,000 decline in March, which was cold and snowy. The average for the two months of 25,000 is probably reflective of the sector’s strength. And really, did retailers actually add over 47,000 workers in February? What mall opened that I didn’t know about? Thus, the 4,000 decline in March brought us to a 21,000 monthly average, which actually may be too high. And so it went down the line. In other words, sometimes conditions combine to create outsized gains or losses, which get reversed over the next couple of months. If you look at the first three months of the year, March (103,000) was too cold, February (326,00) was too hot and January (188,000) was just right.

To me, the key number in the report was hourly wages, which rose solidly. The increase over the year is accelerating but it is not that hot yet. I will start to say that wage inflation is a concern when it breaches 3%. It is likely that price inflation in March exceeded the wage gain, so real wages probably fell. So much for increases in purchasing power. Instead of paying people higher wages, firms are working people longer.

On the unemployment front, the rate remained at 4.1% for the sixth consecutive month. The last time that happened was fifty years ago. The labor force participation rate is stuck in a tight range as the strong economy is pulling people back into the market and Millennials are coming of age, but boomers continue to abandon ship.

MARKETS AND FED POLICY IMPLICATIONS: Nothing has changed. The labor market is just as strong as we thought it was before the March jobs report was released. But now we are getting a better picture of where the trend in job growth may be. It is currently in 200,000-range, which is too high given that labor force growth is well below that. We may be able to sustain the strong increases for a few more months, but not for the rest of the year. Firms are not likely to be able to find the workers they need and will probably have to start moving employees from part-time to full-time. That would add to hours worked and likely raise the average hourly wage rate, but not create any new jobs. The stability of the unemployment rate likely reflects the difficulty of those who were on the sideline but have recently re-entered the market to secure jobs. I suspect they were discouraged because of skill or background check/drug test issues. But the army or underemployed, discouraged and unemployed is shrinking rapidly, so the unemployment rate is likely to start declining again fairly soon. For now, the wage data are not so threatening that the Fed has to take any near-term action. But the acceleration in wage gains is enough to support a move in June. As for investors, there may be disappointment that more jobs weren’t created, but the not-too-hot wage number was good to see. And with the tit-for-tat between the U.S. and China on tariffs escalating, there are bigger worries than a disappointing jobs number that upon inspection wasn’t really surprising.


March Supply Managers’ Manufacturing Survey and February Construction

KEY DATA: ISM (Manufacturing): -1.5 points; Orders: -2.3 points; Employment: -2.4 points/ Construction: +0.1%; Private: +0.7%

IN A NUTSHELL: “The industrial sector has moved from robust to strong, which is hardly anything to worry about.”

WHAT IT MEANS: As the economy picked up steam, manufacturers benefitted greatly. The surge, though, may be ebbing. The Institute for Supply Management reported that manufacturing activity grew less robustly in March. Note, I said less robustly. The level of the index is still quite high, so we can still say the sector is in very good shape. Still, orders moderated as export demand decelerated sharply. Trade wars are never good for business, no matter what the administration may believe. They seem to be willing to accept the pain with the hopes there will be gain and that could happen. It is just that it rarely, if ever, does. There was also a slowing in the increase in production and hiring eased. Still, order books continue to fill and there is every reason to think that that the industrial heartland will continue to expand at a very good pace for an extended period.

Construction activity edged up minimally in February, but the headline number hides the true underlying strength. Private sector building surged led by big increases in office and educational construction. However, public sector activity was down sharply due to large declines in health care and school building. Construction spending is quite volatile and large ebbs and flows are not unusual, so don’t read too much into any one month’s data.

MARKETS AND FED POLICY IMPLICATIONS: There is little in today’s numbers that should worry investors. Manufacturing remains strong and construction activity is still solid. But on a day-to-day basis, economic fundamentals don’t necessarily drive the markets. The tweet of the day, the pronouncements of foreign leaders or the news reports of corporate mistakes often trump the economic data and frequently even the release of corporate numbers. Politics matter and we are in a world of wild and crazy statements, so expect the roller coaster ride to continue unabated. Still, there are some numbers that do make a real difference and Friday we get the March employment report. The February gain was so outsized that it is very possible we could see an extremely weak March job gain. If that turns out to be the case, and I expect it to happen, don’t worry about the headline number. Look at the quarterly job gain average. It should be really strong. Also, watch the wage increase, which in February was surprisingly modest. I expect that to jump, which could create a fear that the Fed could tighten more than expected. Indeed, I expect both of those things to happen: I anticipate a sharp increase in wages and the Fed to raise rate four times this year. So, if you think things in the markets will settle down sometime soon, you just might want to rethink your outlook.

February Existing Home Sales

KEY DATA: Sales: +3.0%; Over-Year: +1.1%; Prices: +5.9%; Inventory (Over-Year): -8.1%

IN A NUTSHELL: “The housing market is decent but with the supply of homes for sale low, it is hard for buyers to find the home of their dreams.”

WHAT IT MEANS: So, is the housing market improving, weakening or stagnant. The answer seems to be yes. Purchases of previously owned houses rose in February, but the level remains somewhat disappointing. Over the year, sales were up minimally and were pretty much at the same pace we averaged during 2017. In other words, it is going largely nowhere. The big problem is the low level of homes on the market, which were down sharply since February. At the current sales pace, there were only 3.4 months of supply on the market, about two months less than what would be considered to be a decent level. There has been a dearth of homes available for sale for nearly four years. In February, a surprisingly sharp drop in purchases in the Northeast restrained the gain. We had one of the warmest February’s on record in some areas, so it would have been expected that contract signings increased. They didn’t. The Midwest was down modestly, while there were strong increases in the South and Midwest. The lack of supply is pushing prices upward and they rose solidly in February.

MARKETS AND FED POLICY IMPLICATIONS: I have been traveling the past week and will be hitting the road again tomorrow (if the Philadelphia airport is open!) for another week. Over the last few days, a slew of economic numbers were released that were really inconsistent. So much so that the Atlanta Fed’s GDP Now estimate dropped below 2%. It had been close to three percent last week. Basically, we saw some better data, such as industrial production, job openings, business and consumer sentiment, but softer numbers, such as retail sales and housing starts. Today’s reading on existing home sales falls in the middle. The housing market is okay but if buyers cannot find the home they want, they tend to continue looking. That seems to be the situation with a lot of things in the economy. Right now, first quarter growth is looking a little softer than most economists, including myself, expected going into the year. But the tax cuts have not yet kicked in, so there is hope a strong 2018 will ultimately emerge. It is this somewhat unclear economy that is overhanging the Fed’s decision making. And when you add to that the uncertainties over trade, it only complicates the FOMC’s potential actions even more. That said, the Fed has embarked on a rate normalization strategy and fed funds hikes and the reduction of its balance sheet (quantitative tightening) should continue unabated unless a major crisis occurs.