KEY DATA: Sales: +0.4%; Ex-Vehicles: +0.4%/ IP: 0%; Manufacturing: +0.4%/ Import Prices: -0.9%; Fuel: -6.5%; Non-Fuel: -0.3%
IN A NUTSHELL: “With consumers consuming and manufacturers manufacturing, the only thing the Fed has to worry about is inflation.”
WHAT IT MEANS: As Fed Chair Powell keeps saying, the economy is at risk. Wrong again, at least when you look at the June economic numbers. First there is the consumer, who seems to be quite willing to spend. Retail sales rose more than expected in June and it wasn’t just vehicle purchases. Most categories, including furniture, building materials and health care, posted solid gains. We ate out and ate in and shopped online. About the only thing we didn’t do was buy electronics and appliances. While total gasoline purchases dropped, that was due to price declines. And it looks like second quarter consumption could be better than forecast as the so-called core sales measure, which tracks the GDP consumption number, was up sharply. This excludes vehicles, gasoline, good services and building materials. In other words, the consumer is alive and well.
Meanwhile, the nation’s manufacturers are expanding output to meet the solid demand. Manufacturing production rose strongly in June as most industries posted gains. Only three of the eleven durable goods industries reduced output, while only two of the eight nondurable sectors were down. As vehicle sales have moved back to very solid levels, the companies have boosted assembly rates sharply over the past two months. There were some weak segments of note. Machinery and electrical equipment and appliances reduced production sharply.
As for inflation, if the costs of imports matter, and they do, it is going nowhere. Import prices fell in June, which hardly surprised anyone given the sharp decline in energy costs. But even excluding fuel, the cost of foreign products was down. Looking at the details, most components were either flat or lower and those that were up rose minimally. Over the year, import prices were off 1.4%. In comparison, between June 2017 and June 2018, the cost of imports was up 1.5%. As for exports, the hurting farm sector got a major reprieve as their prices surged. But if you were a non-farm exporter, you had to sell at a discount.
There were two other indicators released today that also point to solid growth. The National Association of HomeBuilders’ index moved up in July, pointing to a small improvement in construction. CoreLogic reported that in April, the mortgage delinquency rate hit its lowest level in more than twenty years. That indicates household finances are in pretty good shape.
MARKETS AND FED POLICY IMPLICATIONS: Mr. Chicken Little Powell keeps telling us the sky is falling and that the Fed needs to act accordingly. But while growth may be moderating it is not faltering. That is a big difference that should not be difficult to comprehend. But I guess the Fed Chair and his band of economic gurus don’t seem to get the point. It will be interesting to see what the first print of second quarter GDP looks like. It comes out on July 26th, just a few days before the next FOMC meeting, which is on July 30-31. Remember, this number can be revised quite sharply and the government doesn’t have good data for numbers such as trade. We could get a growth rate that is better than expected, though I still am in the 2% range. Indeed, as I asked last week, what does the Fed Chair say if the first estimate is closer to 2.5%? Today’s numbers do not rule out that possibility. The Fed seems committed to reducing rates and some economists are saying a half-point cut is possible. There are Fed members who want a quarter point reduction, if only to take out some insurance. I have no idea what model they are looking at, if they are looking at one at all. My view is that a quarter-point reduction accomplishes nothing. If you are worried about a slowdown, do something about it and cut at least a half-point. Otherwise, stopped playing games. We shall see.