All posts by joel

April Consumer Spending, Income and Construction and May Supply Managers’ Manufacturing Index

KEY DATA: Consumption: 0%; Income: +0.4%/ ISM (Manufacturing): +1.3 points; Orders: +2.3 points; Employment: +3.4 points/ Construction: +2.2%;

IN A NUTSHELL: “Despite continuing consumer cautiousness, the manufacturing sector is pulling out of its winter hibernation.”

WHAT IT MEANS: To spend or not to spend, that seems to be the question that is puzzling households right now. It is not as if they don’t have the money. Disposable (after tax) personal income rose solidly in April, even after adjusting for inflation. On a year-over-year basis, real income has grown by 2.4% or more for the past six months, the best stretch since 2006. In April, that increase was 3.5%, which is pretty decent. I am not saying that income growth is great, but it is no longer weak. The problem, though, is that wage gains have not been spectacular and workers have decided to save much of the gain. The savings rate rose to 5.6% and has averaged 5.4% this year. That is about one percentage point higher than during the expansion in the 2000s, which helps explain the sluggish nature of growth. In April, spending was essentially flat. A sharp drop in durable goods consumption and small decline in nondurable purchases offset a modest rise in services demand. We get May vehicle sales tomorrow so we will know if the sluggishness in that segment of the economy continued or, as expected, has turned around.

One sector that looks to have picked up some steam is manufacturing. The Institute for Supply Management’s May manufacturing index rose nicely and for all the right reasons: Orders rose strongly, hiring picked up solidly and order books started filling again. Production grew at a slower pace, but it is still expanding decently. The increasing demand and backlogs should lead to a rise in output soon. Fourteen of eighteen industries expanded and only one, petroleum and coal, said that orders fell. In other words, we are looking at a broad based improvement.

Another sign that the economic lethargy we saw in the first quarter is fading was a sharp rise in construction activity in April. Public and private, residential and nonresidential, all posted strong increases. It looks like the huge decline in energy sector spending may have ended.

MARKETS AND FED POLICY IMPLICATIONS: Incomes are growing, the manufacturing sector is coming back and construction is on the rise, so why am I not enthused about today’s data? Because we continue to see consumers holding back. Second quarter consumption growth is not off to a great start and we need a major pick up in shopping if growth is to beat expectations. The May vehicle sales numbers will be one sign, but until households get back online and start visiting the malls, economic growth will remain subdued. I still hold out hope we will get stronger growth but I am not sure many others share that belief. Investors have to start realizing that it is a robust economy, even if that means higher interest rates, which will support higher equity prices. I am not sure many share that view either.

Revised First Quarter GDP Growth and Corporate Profits

KEY DATA: GDP: -0.7% (down from +0.2%); Profits: -8.7%

IN A NUTSHELL: “The winter, a dock strike, lower energy prices and a strong dollar combined to hurt growth.”

WHAT IT MEANS: Oh, my, the economy contracted in the first quarter. Get out the towels for all those crocodile tears that I am shedding. Yes, my sarcasm has reached new heights. As it was in 2014, first quarter growth was negative. It wasn’t a big deal last year and it isn’t a big deal now. The biggest reason for the negative number was a widening in the trade deficit that subtracted nearly two percentage points from growth. The ending of the dock strike led to a sharp increase in imports and the strong dollar hurt some sales. The dock strike’s impacts are fading and the dollar seems to have largely peaked. Don’t be surprised if the April trade deficit, which comes out next Wednesday, is much lower than the huge gap recorded in March. The second big problem was business investment in structures. Lower energy prices led to a collapse in oil patch spending on rigs. But the rising energy prices have largely halted that reduction. The recent durable goods orders report points to rising business investment. Finally, the cold restrained consumer spending. That segment of the economy remains somewhat uncertain as the latest retail sales numbers were unimpressive. Those numbers, though, don’t include services, which just happens to account for nearly 40% of the economy. Services demand was solid in the first quarter. Also, the “softness” in vehicle sales is hardly supported by the positive comments coming out of the vehicle makers. May sales come out early next week and I suspect they too will point to improving household demand. Interestingly, the income side of the ledger actually posted a 1.4% rise, so maybe things really weren’t that bad in the first part of this year. Inflation remains in check.

Corporate profits tanked, also not a major surprise. The strong dollar in the first part of the year affected sales and currency translations.

MARKETS AND FED POLICY IMPLICATIONS: There are all sorts of issues with the first quarter GDP numbers that have been highlighted recently. It seems the economy is always weaker to start the year, for whatever reason that may be. It could be seasonal adjustment issues or measurement issues or whatever, but this has been a pattern for quite some time and the Bureau of Economic Affairs is trying to figure out why. That said, the real issue for the Fed, interest rates and the equity markets is where do we go from here. Recent data point to the economy picking up steam and next week we get May vehicle sales and job growth and April consumer spending and trade deficit. Most of those could be pretty good and that would change the thinking about the state of the economy. Basically, if you don’t like the economic numbers, wait a week and they will change. The decline in first quarter activity happened last year and the economy was strong for the final three quarters and I would not be surprised if a similar pattern was repeated this year.

April Durable Goods Orders and May Consumer Confidence

KEY DATA: Orders: -0.5%; Excluding Aircraft: +0.1%; Capital Spending: +1%/ Confidence: +1.1 points: Present Conditions: +3 points: Expectations: -0.2 point

IN A NUTSHELL: “You know how business were supposedly no longer investing? Well forgeddaboutit!”

WHAT IT MEANS: If the Fed is data driven, then it must have been driven crazy by the weak data we got for several months. That is no longer the case. Now I am not saying that conditions have started to boom, but they are getting better. A clear sign that companies are once again moving forward comes from the April durable goods orders report. Yes, overall demand fell, but since aircraft orders are in this number, it is crucial to remove them. Basically, there is a long lag time between when Boeing or other civilian or defense aircraft companies get new orders and production ramps up – if it even does. Excluding aircraft, orders were up, though modestly. The details were somewhat mixed. Demand for metals, machinery and vehicles was up while orders for electrical equipment, computers and communications equipment fell. But the real story was in the capital goods category. Excluding defense and aircraft, the best measure of private sector investment activity, capital spending jumped for the second consecutive month. It appears that businesses are getting more confident about the future.

Problems remain in the oil patch and the Dallas Fed’s manufacturing index declined in May. However, there was a rebound in expectations, which may be following the price of oil. Cut backs in energy companies have been a key factor in the recent slowdown and any turnaround would be good news.

The winter weather and continued disappointing wage increases had put a lid on consumer sentiment, which is why the rise in the Conference Board’s Consumer Confidence Index was nice to see. It wasn’t a large increase, but maybe the decline is over. While views about current conditions improved, there was some slippage in the outlook for the future. With the attitude toward future labor market conditions brightening, that too could reverse itself soon.

MARKETS AND FED POLICY IMPLICATIONS: The foundation for the first Fed rate hike is being built one number at a time and today’s data, be it the capital goods orders, consumer confidence, new home sales or housing prices, all added to the structure. But the base is going up slowly and the Fed members will need a lot more solid reports before we can assume they will move. Next week we get April spending and income data, May supply managers’ numbers, job openings and help wanted reports. And most importantly, the next employment release is Friday, June 5th. A lot can happen in ten days so buckle up. Indeed, I suspect investors will get more and more worried as we approach the jobs numbers. Nothing would change views on when the Fed will hike rates first than a strong report. Right now, I am not sure the markets are prepared for one and given the frequency of large swings in the payroll growth data, that cannot be ruled out.

April New Home Sales and March Housing Prices

KEY DATA: Sales: +6.8%; Median Prices: +8.3%/ Case-Shiller National Prices (Year-over-Year): +4.1%/ FHFA Home Prices (Year-over-Year): +5.2%

IN A NUTSHELL: “Housing market demand is continuing to improve and a lack of supply is helping drive up prices.”

WHAT IT MEANS: The wicked winter’s woes seem to have faded at least when it comes to the housing market. New Home sales rebounded from a strange collapse in March as demand soared in the Midwest and rose solidly in the South. But the improvement was not across the nation as there was a modest downdraft in the West and the Northeast remained in the doldrums. Indeed, while demand for the first four months of the year compared to the same period in 2014 was up by anywhere from 12% to 43% in the rest of the nation, it was down by 24% in the Northeast. I am so glad that is where I live. Prices also increased solidly, but firming sales were only part of the story. Supply is not rising and the inventory of new homes for sale has been largely flat for most of this year. That contributed to a jump in home prices. Hopefully, the higher prices will convince builders to dig a little more. There has been an interesting pattern in the distribution of sales: They seem to be centering more on middle-level homes, those in the $200,000 to $500,000 range. Over 68% of the homes are sold so far this year have been in that range compared to only 63% last year. Most of the increase has come from the lower-priced segment, which is good news for developers.

There are other signs that home prices are rising solidly. The S&P/Case-Shiller Home Price National Index was up solidly in March, as was the more closely-watched 20-City Index. (I prefer the national number as it brings into play a lot of smaller metropolitan areas. And any index that doesn’t include Philadelphia should be dismissed anyway!) More seriously, in March, every one of the twenty cities seasonally adjusted indices was up. A similar result was seen in the Federal Housing Finance Agency’s (FHFA) House Price Index. In March 2014, prices increased solidly. Forty-eight states posted gains over the year in the first quarter.

MARKETS AND FED POLICY IMPLICATIONS: As with the weather, the housing market seems to be heating up. This sector had been pointed to as an indicator of the softening of economic activity, but that is not longer the case. But what we really need to see is the higher prices inducing builders to actually build more homes. That would accelerate growth and provide some comfort to the Fed, which really does want to raise rates. Fed Chair Yellen made that clear last week when she commented that a rate hike this year was still likely. And as I have said before, rising rates could accelerate the recovery in the housing market, at least for a while, as it would force lackadaisical buyers to actually make decisions. Investors will likely see this as pointing to improving but not soaring growth. Keep in mind, new home sales need to nearly double before we get to robust levels, so the sector still has a lot of improvement left in it.

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.