June Industrial Production and July Housing Market

KEY DATA: IP: +0.6%; Manufacturing: +0.8%; Vehicles: +7.8%; Excluding Vehicles: +0.3%/ NAHB: 68 (Unchanged)

IN A NUTSHELL: “Manufacturing rebounded in June, but it was largely due to a surge in motor vehicle assemblies.”

WHAT IT MEANS: It is hard to focus on the fundamentals of the economy when there is chaos in Washington, but that has to be done. While we are highly confident that second quarter growth was strong, the issue of sustainability remains. Today’s data only muddy the waters further. Industrial production jumped in June, led by a strong showing in manufacturing and mining. But the manufacturing upturn came after an even larger decline in May. In both cases, the changes were due to a vehicle assembly whiplash: Sharply down then up. For the first six months of the year, vehicle production has run just slightly above last year’s average, which indicates we really shouldn’t expect this sector to lead the way. Excluding vehicles, manufacturing output increased moderately, which is the way we should look at the monthly numbers unless we start seeing a sustained rise in vehicle sales. Otherwise, the details were decent but not spectacular. Energy drilling continues to soar and aerospace, machinery, computers and electronics increased solidly. Capital spending is increasing and supporting those gains. We are also starting to see a ramping up of defense product production, a result of the massive rise in the Defense Department’s budget.

With mortgage rates up, is the housing market getting hurt? Not so far. The National Association of Home Builders/Wells Fargo Housing Market Index was flat in July but it is at a fairly high level. Still, the index has largely gone nowhere this spring and is down from the winter. The sector no longer looks like it is accelerating.

MARKETS AND FED POLICY IMPLICATIONS: Fed Chair Powell testified in front of Congress today and in his prepared remarks, he made it clear that it’s steady as it goes. As he stated: “With a strong job market, inflation close to our objective, and the risks to the outlook roughly balanced, the FOMC believes that–for now–the best way forward is to keep gradually raising the federal funds rate.” So look for rates to increase in September and December. The Fed is also continuing QT – quantitative tightening – and its balance sheet is slowly shrinking. That process will pick up some steam, though not a huge amount. That will also pressure rates. Rates across the yield curve should rise, though the trade tensions make forecasting the changes more difficult since it affects international capital flows. Today’s numbers point to a strong economy but not one that is accelerating. So, if second quarter GDP does come in at or above 4%, don’t expect that to be repeated in the quarters ahead. Indeed, that is my forecast and most other economists’ forecasts: Growth should be very good but not spectacular in the second half of the year. What all that means for investors is unclear. There seems to be a willingness to look through the trade war statements and dismiss any issues regarding inflation and weak wage growth. But we are in the second half of 2018 and that means investors should be thinking about next year, which is why I keep harping on the idea that “the future ain’t what it used to be” (thanks, Yogi). Six months ago, we were forecasting strong growth six months out and that is likely to be the case. That same forecast for the first half of 2019 is less clear.