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Today's Case-Shiller report on existing home prices will likely show that August prices were little changed, month-to-month, for the fourth straight month. The slowdown in the pace of price gains since the first quarter, when price gains averaged 1.0% per month, has been startling. In all probability, though, the apparent stalling is a reflection of the quality of the data rather than the underlying reality in the housing market.
Existing home sales peaked last February, and the news since then has been almost unremittingly gloomy.
Today brings more housing market data, in the form of the Case-Shiller home price report for April.
The weather-driven surge in December housing starts, reported last week, is unlikely to be replicated in today's existing home sales numbers for the same month.
The current momentum in house prices partly reflects a dearth of homes offered for sale by existing homeowners. This scarcity reflects a series of constraints, which we think will ease only gradually. Further punchy gains in house prices therefore look sustainable and we expect average prices to rise by about 8% next year.
We're expecting to learn today that existing home sales rose quite sharply in July, perhaps reaching the highest level since early 2018.
We are fundamentally quite bullish on the housing market, given the 100bp drop in mortgage rates over the past six months and the continued strength of the labor market, but today's May new home sales report likely will be unexciting.
Over the past couple of weeks, the number of applications for new mortgages to finance house purchase have reached their highest level since late 2010, when activity was boosted by the impending expiration of a time-limited tax credit for homebuyers.
The level of new home sales is likely to hit new cycle highs over the next few months, with a decent chance that today's July report will show sales at their highest level since late 2007.
If the recovery in existing homes hadn't been interrupted by the taper tantrum, in the spring of 2013, sales by now would likely be running at an annualized rate in excess of 6M. The rising trend in sales from late 2010 through early 2013 was strong and stable, as our first chart shows, but the decline was steep after the Fed signalled it would soon slow the pace of QE, and it was made temporarily worse by the severe late fall and early winter weather.
The sluggishness of existing home sales in recent months, as exemplified by yesterday's report of a small dip in June, is due entirely to a sharp drop in the number of cash buyers.
The recovery in existing home sales appears to have stalled, at best.
The path of new home sales over the past couple of years has followed the mortgage applications numbers quite closely.
In November, existing home sales substantially overshot the pace implied by the pending home sales index.
New home sales have tended to track the path of mortgage applications over the past year or so, with a lag of a few months. The message for today's January sales numbers, show in our next chart, is that sales likely dipped a bit, to about 525K.
New home sales are much more susceptible to weather effects -- in both directions -- than existing home sales. We have lifted our forecast for today's February numbers above the 575K pace implied by the mortgage applications data in recognition of the likely boost from the much warmer-than-usual temperatures.
The monthly new home sales numbers are so volatile that just about anything can happen in any given month.
The information available to date--which is still very incomplete--suggests that new housing construction will decline in the third quarter. This would be the second straight decline, following the 6.1% drop in Q2. We aren't expecting such a large fall in the third quarter, but it is nonetheless curious that housing investment--construction, in other words--is falling at a time when new home sales have risen sharply.
After two big monthly gains in existing home sales, culminating in October's nine-year high of 5.60M, we expect a dip in sales in today's November report. This wouldn't be such a big deal -- data correct after big movements all the time -- were it not for the downward trend in mortgage applications.
In three of the past four months, new home sales have been reported above the 460K top of the range in place since early 2013. Sales dipped below this mark in November, when the weather across the country as a whole was exceptionally cold, relative to normal.
The sustained upturn in mortgage applications since last fall ought to have driven up the pace of new home construction quite sharply. But our first chart shows that single-family building permit issuance--we use permits rather than starts, as they are much less volatile--rose only 8.3% year-over-year in the three months to May, while applications for new mortgages to finance house purchase jumped by 18.8% over the same period.
We are becoming increasingly convinced that momentum is starting to build in the housing market. That might sound odd in the context of the recent trends in both new and existing home sales, shown in our first chart, but what has our attention is upstream activity.
The level of mortgage applications long ago ceased to be a reliable indicator of the level of new home sales, thanks to the fracturing of the mortgage market triggered by the financial crash. But the rates of change of mortgage demand and new home sales are correlated, as our first chart shows, and the current message clearly is positive.
Usually, we forecast existing home sales from the pending sales index, which captures sales at the point contracts are signed.
The number of existing homes for sale continued to fall in September, ensuring that modestly increasing demand is putting renewed upward pressure on prices.
Today brings more housing data, in the form of the May existing home sales numbers.
In the short-term, all the housing data are volatile. But you can be sure that if the recent pace of new home sales is sustained, housing construction will rise.
Chief U.S. Economist Ian Shepherdson on U.S. Home Sales
In one line: Moving sideways, but not for much longer; expect a strong second half.
The reported drop in mortgage applications over the holidays is now reversing, not that it ever mattered.
In recent months we have argued that housing market activity has peaked for this cycle, with rising mortgage rates depressing the flow of mortgage applications.
A very light week for U.S. data concludes today with four economic reports, which likely will be mixed, relative to the consensus forecasts. The recent run of clear upside surprises and robust-looking headline numbers is likely over, for the most part.
Reforms to Stamp Duty Land Tax paid by first-time buyers likely will take centre stage in the Budget. At the Conservatives' party conference, Theresa May pledged another £10B to expand the Help to Buy Scheme, which helps first-time buyers obtain a mortgage which just a 5% deposit.
The weekly mortgage applications numbers have been wild recently, but our first chart shows that the trend underneath the noise is solid.
In one line: A decent month, but much better to come later in the year.
In one line: Expectations are softening as the trade war continues, but housing is the bright spot.
In one line: Disappointing, but the trend is still rising.
In one line: Solid, and new highs likely over the next few months.
In one line: Disappointing, but the trend is turning higher.
In one line: Undershoot compared to mortgage demand; expect a rebound.
In one line: Treading water, but should strengthen markedly soon.
In one line: The clouds over housing are lifting.
In one line: Encouraging.
In one line: Better, and scope for further gains.
In one line: Great, before the virus.
In one line: Both volumes and prices have further to rise.
In one line: A bit disappointing, but expect rising sales over the next few months.
In one line: The rebound from the tax hit continues, fitfully.
In one line: A correction; the trend is rising and new cycle highs are coming.
In one line: Housing was on a tear before the virus.
In one line: Noise not signal; the housing market is strengthening.
In one line: Boosted by mild winter weather, but the underlying trend is rising strongly too.
In one line: Housing still strong, but confidence data point to slowing spending growth.
In one line: Reversal of December's seasonally-afflicted drop; the trend is rising.
In one line: The one bright spot in the economy shines again.
Today's housing market data likely will look soft, but will probably not be representative of the underlying story, which remains quite positive.
In one line: The trend is rising, despite the September dip; new cycle highs likely by year-end.
In one line: The rebound is consolidating; expected steady spring/summer sales.
In one line: The trend in sales is rising, and inventory is falling.
In one line: Great, but March and April, at least, will be grim.
In one line: Housing is the hottest part of the whole economy.
In one line: A correction; the trend is rising
In one line: Recovery continues; further gains ahead.
In one line: Tariff fears strike again?
New home sales performed better during the winter than any other indicator of economic activity. At least, we think they did. The mar gin of error in the monthly numbers is enormous, typically more than +/-15%.
The remarkably strong existing home sales numbers in recent months, relative to the pending home sales index, are hard to explain. In January, total sales reached 5.69M, some 6% higher than the 5.35M implied by December's pending sales index. The gap between the series has widened in recent months, as our first chart shows, and we think the odds now favor a correction in today's February report.
This week brings home sales data for July, which we expect will be mixed. New home sales likely rose a bit, but we are pretty confident that existing home sales will be reported down, following four straight gains. We're still expecting a clear positive contribution to GDP growth from housing construction in the third quarter, but from the Fed's perspective the more immediate threat comes from the rate of increase of housing rents, rather than the pace of home sales.
New home sales surprised to the upside in May, rising 6.7% to 689K, a six-month high.
Another day, another couple of April reports likely to reverse March "weakness", triggered by the early Easter. We look for robust core durable goods and pending home sales reports, with the odds favoring consensus-beating numbers. In both cases, though, the noise-to-signal ratio is quite high, and we can't be certain the Easter seasonal unwind will be the dominant force in the April data.
The recent revival in housing market activity reflects more than just a temporary boost provided by imminent tax changes. The current momentum in market activity and lending likely will fade later this year, but we think this will have more to do with looming interest rate rises than a lull in activity caused by a shift in the timing of home purchases.
Whatever today's report tells us about existing home sales in January, the underlying state of housing demand right now is unclear. The sales numbers lag mortgage applications by a few months, as our first chart shows, so they're usually the best place to start if you're pondering the near-term outlook for sales. But the applications data right now are suffering from two separate distortions, one pushing the numbers up and the other pushing them down. Both distortions should fade by the late spring, but in they meantime we'd hesitate to say we have a good idea what's really happening to demand.
Hot on the heels of yesterday's news that the NAHB index of homebuilders' sentiment and activity dropped by two points this month -- albeit from December's 18-year high -- we expect to learn today that housing starts fell last month.
...The data were all over the map, with existing home sales plunging while consumer confidence rose; Chicago-area manufacturing activity plunged but national durable goods were flat; real consumption rose at a decent clip but pending home sales dipped again. Markets, by contrast, are little changed from the week before the holidays. What to make of it all?
We can't finalize our forecast for residential investment in the second quarter until we see the June home sales reports, due next week, but in the wake of yesterday's housing starts numbers we can be pretty sure that our estimate will be a bit below zero.
The recent increases in single-family housing construction are consistent with the rise in new home sales, triggered by the substantial fall in mortgage rates over the past year.
If the only things that mattered for the housing markets were the obvious factors--the strength of the labor market, and low mortgage rates--the sector would be booming. Activity is picking up, with new and existing home sales up by 23% and 9% year-over-year respectively in the three months to May, but the level of transactions volumes remains hugely depressed. At the peak, new home sales were sustained at an annualized rate of about 1½M, but May sales stood at only 546K. Adjusting for population growth, the long-run data suggests sales ought to be running at close to 1M.
While we were out, most of the core domestic economic data were quite strong, with the exception of the soft July home sales numbers and the Michigan consumer sentiment survey.
New home price growth in China has held up longer than we expected.
China's homes market faces fundamental headwinds.
Mortgage applications have risen, net, over the past couple of months, despite the 70bp surge in 30-year mortgage rates since the election. Indeed, we'd argue that the increase in applications is a result of the spike in rates, because it likely scared would-be homebuyers, triggering a wave of demand from people seeking to lock-in rates, fearing further increases.
Japan's machinery orders boosted by one-off transportation spike. Japanese PPI ticks higher on commodities. China's new home price rises should remain on the tepid side for now .
Chief US Economist Ian Shepherdson comments on disappointing Homebuilder Confidence data
Ian Shepherdson on positive data from U.S. Home-Builders
Chief US Economist Ian Shepherdson on "Remarkable" New Home Sales Data for February
Our bullish view of the housing market is undimmed by yesterday's news that March existing home sales dropped to 5.21M, from 5.48M in February.
The U.S. housing market stumbled into 2015 as a leading indicator of home sales dipped in December
US home prices rose in November from October but the underlying trend continued to point to a slowdown in price gains, according to the S&P/Case-Shiller index released Tuesday
Ian Shepherdson comments on US Home-builders data
At the end of last year, U.S. homebuilders were more optimistic than at any time in the previous 18 years, according to the monthly NAHB survey.
"We know from last year's experience during the polar vortex, when the headline index fell 10 points, that the NAHB survey is extremely susceptible to severe weather, so we can't right now view it as a reliable indicator of the underlying trend in housing market activity," Ian Shepherdson, chief economist for Pantheon Macroeconomics, said in a note to clients.
Chief U.S. Economist Ian Shepherdson on the U.S. Housing Sector
Chief U.S. Economist Ian Shepherdson on NAHB
We have been very encouraged in recent months to see core capital goods orders breaking to the upside, relative to the trend implied by the path of oil prices.
The gaps in the third quarter GDP data are still quite large, with no numbers yet for September international trade or the public sector, but we're now thinking that growth likely was less than 11⁄2%.
If you're looking for points of light in the economy over the next few months, the housing market is a good place to start.
After three days of jaw-dropping actions from President Trump, the position seems to be this: The U.S. will apply 15% tariffs on imported Chinese consumer goods, rather than the previously promised 10%, effective in two stages on September 1 and December 15.
Across all the major economic data, perhaps the biggest weather distortions late last year and in the early part of the year were in the retail sales numbers, specifically, the building materials component. Sales rocketed at a 16.5% annualized rate in the first quarter, the biggest gain since the spring of 2014, following a 10.2% increase in the fourth quarter of last year.
The good news in today's March durable goods report is that a rebound in orders for Boeing aircraft means February's 3.0% drop in headline orders won't be repeated. The company reported orders for 69 aircraft in March, compared to just one in February.
Fed Chair Yellen set out a robust and detailed defense of the orthodox approach to monetary policy in her speech in Amherst, MA, yesterday afternoon. Her core argument could have come straight from the textbook: As the labor market tightens, cost pressures will build. Monetary policy operates with a "substantial" lag, so waiting too long is dangerous; the "...prudent strategy is to begin tightening in a timely fashion and at a gradual pace".
The president was on the warpath with the Fed again yesterday, in an interview with the Wall Street Journal.
A widening core trade deficit is the inevitable consequence of a strengthening currency and faster growth than most of your trading partners. Falling oil prices have limited the headline damage by driving down net oil imports, but the downward trend in core exports since late 2014 has been steep and sustained, as our first chart shows. The deterioration meant that trade subtracted an average of 0.3 percentage points from GDP growth in the past three quarters.
The huge drop in the March Markit services PMI, reported yesterday, and the modest dip in the manufacturing index, are the first national business survey data to capture the impact of the Covid-19 outbreak.
The latest data from container ports around the country are consistent with our view that imports are still correcting after the surge late last year, triggered by the hurricanes.
Neither of the major economic reports due today will be published on schedule.
Today's advance inventory and international trade data for December could change our Q4 GDP forecast significantly.
We have argued over the past couple of years that if you want to know what's likely to happen to U.S. manufacturing over the next few months, you should look at China's PMI, rather than the domestic ISM survey, which is beset by huge seasonal adjustment problems.
The FOMC minutes confirmed that most FOMC members were not swayed by the weak-looking first quarter GDP numbers or the soft March core CPI. Both are considered likely to prove "transitory", and the underlying economic outlook is little changed from March.
The weaker is the economy over the next few months, the more likely it is that Mr. Trump blinks and removes some--perhaps even all--the tariffs on Chinese imports.
The spread of the Covid-19 virus remains the key issue for markets, which were deeply unhappy yesterday at reports of new cases in Austria, Spain and Switzerland, all of which appear to be connected to the cluster in northern Italy.
We see significant upside risk to today's headline durable goods orders numbers for April.
The hefty upward revision to Q3 inventories means we have to lower our working assumption for fourth quarter GDP growth, because the year-end inventory rebound we previously expected is now much less likely to happen. Remember, the GDP contribution from inventories is equal to the change in the pace of inventory accumulation between quarters, and we're struggling to see a faster rate of accumulation in Q4 after the hefty revised $90B third quarter gain. Inventory holdings are in line with the trend in place since the recession of 2001; firms don't need to build inventory now at a faster pace.
A rate hike from the Fed this week would be a gigantic surprise, and Yellen Fed has not, so far, been in the surprise business. It would be more accurate to describe the Fed's modus operandi as one of extreme caution, and raising rates when the fed funds future puts the odds of action at close to zero just does not fit the bill.
House purchase mortgage approvals by the main street banks jumped to 40.1K in January, from 36.1K in December, fully reversing the 4K fall of the previous two months, according to trade body U.K. Finance.
Fed Chair Powell's semi-annual Monetary Policy Testimony yesterday broke no new ground, largely repeating the message of the January 30 press conference.
Sterling has appreciated sharply over the last two weeks and yesterday briefly touched its highest level against the euro since May 2017.
Orders for non-defense capital goods, excluding aircraft, have risen in six of the past seven months. In the fourth quarter, orders rose at a 4.7% annualized rate, in contrast to the 5.3% year-over-year plunge in the first half of the year.
The rate of growth of Covid-19 cases outside China appears to have peaked, for now, but we can't yet have any confidence that this represents a definitive shift in the progress of the epidemic.
New York Fed president Dudley toed the Yellen line yesterday, arguing that the effects of "...a number of temporary, idiosyncratic factors" will fade, so "...inflation will rise and stabilize around the FOMC's 2 percent objective over the medium term.
We're still no nearer to a definitive answer to the question of what went wrong in the manufacturing sector over the summer, when we expected to see things improving on the back of the rebound in activity in the mining sector, rising export orders and an end to the domestic inventory correction. Instead, the August surveys dropped, and September reports so far are, if anything, a bit worse.
In the absence of reliable advance indicators, forecasting the monthly movements in the trade deficit is difficult.
Forecasting the health insurance component of the CPI is a mug's game, so you'll look in vain for hard projections in this note.
We've seen some alarming estimates of the potential impact on inflation of the House Republicans' plans for corporate tax reform, with some forecasts suggesting the CPI would be pushed up as much as 5%. We think the impact will be much smaller, more like 1-to-11⁄2% at most, and it could be much less, depending on what happens to the dollar. But the timing would be terrible, given the Fed's fears over the inflation risk posed by the tightness of the labor market.
I need to ask your indulgence today, because the release of the durable goods and advance international trade reports coincides with my elder daughter's college graduation ceremony.
need to add docMea culpa: We failed to spot the press release from the Commerce Department announcing the delay of the release of the advance December trade and inventory data, due to the government shutdown.
The response of U.K. producers and consumers to lower oil prices could not have been more different to those on the other side of the Atlantic. Counter-intuitively, U.K. oil production has grown strongly over the last year, while investment hasn't collapsed to the same extent as in the U.S., yet. Meanwhile, U.K. households have thrown caution to the wind and already have spent the windfall from the previous drop in oil prices, unlike their more prudent--so far--U.S. counterparts. With the costs still to come but most of the benefits already enjoyed, lower oil prices will be neutral for 2016 U.K. GDP growth, at best.
The consensus for today's first post-apocalypse jobless claims number, 1,500K, looks much too low.
After four straight above-trend increases in the core CPI, you could be forgiven for thinking that something is afoot. It's still too soon, though to rush to judgment. The data show three previous streaks of 0.2%-or-bigger over four-month periods since the crash of 2008, and none of them were sustained.
We would like to be able to argue with confidence that today's December durable goods orders report will show core capital goods orders rebounding after three straight declines, totalling 3.4%.
After three straight 1.3% month-to-month increases in core capital goods orders, we are becoming increasingly confident that the upturn in business investment signalled by the NFIB survey is now materializing.
We were terrified by the plunge in the ISM manufacturing export orders index in August and September, which appeared to point to a 2008-style meltdown in trade flows.
Two key reports today, on January consumer prices and durable goods orders, have the power to move markets substantially. We think both will undershoot market expectations, though we would be deeply reluctant to read too much into either report; both are distorted by temporary factors.
This is the final Monitor before we head out for our spring break, so we have added a page in order to make room to preview the employment report due next Friday, April 4. We expect a solid but unspectacular 175K increase in payrolls, slowing from February's unsustainable 242K, but still robust.
The levelling-off in the industrial surveys in recent months is reflected in the consumer sentiment numbers. Anything can happen in any given month, but we'd now be surprised to see sustained further gains in any of the regular monthly surveys.
The gap between the hard and soft data from the industrial economy appeared to widen still further last week. But we are disinclined to take the data--the official industrial production report for March, and the first survey evidence for April--at face value.
Orders for core capital goods began to fall outright in September last year; we can't blame the severe winter for the 11.1% annualized decline in the fourth quarter of last year. Indeed, the drop in orders in the first quarter will be rather smaller than in the fourth, unless today's March report reveals a catastrophic collapse.
Yesterday's data were mixed, though disappointment over the weakening in the Richmond Fed survey should be tempered by a quick look at the history, shown in our first chart.
Industry estimates for August light vehicle sales suggest that the downshift in sales which began at the turn of the year is over, at least for now.
While we were out last week, market nervousness over the Covid-19 outbreak intensified, though most key indicators of the spread of the infection continued to improve.
The proportion of households' annual incomes absorbed by servicing debt has declined steadily this decade, providing a powerful boost to spending. Indeed, the proportion of annual incomes accounted for by interest payments--mainly on mortgages--edged down a record low of 4.6% in Q1, less than half the share in 2008.
We are a bit troubled by the persistent weakness of the Redbook chain store sales numbers. We aren't ready to sound an alarm, but we are puzzled at the recent declines in the rate of growth of same-store sales to new post-crash lows. On the face of it, the recent performance of the Redbook, shown in our first chart, is terrible. Sales rose only 0.5% in the year to July, during which time we estimate nominal personal incomes rose nearly 3%.
Today's FOMC announcement will be something of a non-event. Rates were never likely to rise immediately after December's hike, and the weakness of global equity markets means the chance of a further tightening today is zero.
Back on May 14, we argued--see here--that the stars were aligned to generate very strong second quarter GDP growth, perhaps even reaching 5%.
Further evidence emerged yesterday in support of our view that mortgage lending conditions are easing. The monthly mortgage origination report from Ellie Mae, Inc., a private mortgage processing firm, shows average credit scores for both successful and unsuccessful loan applications continue to trend downwards--though the latter rose marginally in February--while loans are closing much more quickly than in the recent past.
Yesterday's announcement that the administration plans to imposes tariffs worth about $60B per year -- thatìs 0.3% of GDP -- on an array of imports of consumer goods from China is a serious escalation.
The 17-point leap in the Richmond Fed index for October, reported yesterday, was startlingly large.
If we are right in our view that the lag between shifts in gasoline prices and the response from consumers is about six months--longer than markets seem to think--then the next few months should see spending surge.
With most poll-of-poll measures showing a very narrow margin in the U.K. Brexit referendum, while betting markets show a huge majority for "Remain", today brings a live experiment in the idea that the wisdom of crowds is a better guide to elections than peoples' preferences.
A couple of Fed speakers this week have described the economy as being at "full employment". Looking at the headline unemployment rate, it's easy to see why they would reach that conclusion.
The woes of the manufacturing sector are likely to intensify over the next few months, even if--as we expect--overall economic growth picks up. The core problem is the strong dollar, which is hammering exporters, as our first chart shows. The slowdown in growth in China and other emerging markets is hurting too, but this is part of the reason why the dollar is strong in the first place.
We are intrigued by the idea that the rollover in oil firms' capital spending on equipment might already be over, even as spending on new well-drilling--captured by the still-falling weekly operating rigs data--continues to decline. The evidence to suggest equipment spending has fallen far enough is straightforward.
If, like us, you have been cheered by the upturn in mortgage applications since November, you don't need to worry about the apparent drop in activity in the past couple of weeks. The numbers don't look great: The MBA's index capturing the number of applications for new mortgages to finance house purchase has dropped from a peak of 237.7 in the third week of January--ignoring September's spike, which was triggered by a regulatory change--to 213.3 last week.
You could be forgiven for being alarmed at the 1.5% decline in the stock of outstanding bank commercial and industrial lending in the fourth quarter, the first dip since the second quarter of 2017.
The plunge in capital spending in the oil business appears to be over, at least for now. Orders for non-defense capital goods, excluding aircraft, fell by 8.9% from their September peak to their February low, but they have since rebounded, as our first chart shows. We can't be certain that the sudden drop in core capex orders late last year was triggered by a rollover in oil companies' spending, but it is the most likely explanation, by far.
Consumer confidence in the Eurozone rose marginally at the start of Q4, though it is still down since the start of the year.
Core durable goods orders have not weakened as much as implied by the ISM manufacturing survey, as our first chart shows, but it is risky to assume this situation persists.
A shutdown of the federal government, which could happen as early as this weekend, is a political event rather than a macroeconomic shock. But if it happens--if Congress cannot agree on even a shortterm stop-gap spending measure in order to keep the lights on after the 28th--it would demonstrate yet again that the splits in the House mean that the prospects of a substantial near-term loosening of fiscal policy are now very slim.
Today brings new housing market data, in the form of the weekly applications numbers from the MBA. The weekly data are seasonally adjusted but are still very volatile, especially in the spring.
China's 2018 property market boomlet let out more air last month.
Yesterday's stock market bloodbath stands in contrast to the U.S. economic data, most of which so far show no impact from the Covid-19 outbreak.
The alarming-looking decline in core capital goods orders since late 2014 has been substantially due, in our view, to the rollover in investment in the mining sector. But the 29% jump in the number of oil rigs in operation, since the mid-May low, makes it clear that the collapse is over.
An array of data today will be mostly positive, and even the most likely candidate for a downside surprise--the October advance trade numbers--is very unlikely to change anyone's mind on the Fed's December decision. On the plus side, the first revision to third quarter GDP growth should see the headline number dragged up into almost respectable territory, at 2.4%, from the deeply underwhelming 1.5% initial estimate.
The recent run of grim sales and earnings numbers from major national retailers, including Kohl's, Nordstrom, and Macy's, reflects two major trends. The first is obvious; the rising market share of internet sales is squeezing brick and mortar retailers, as our first chart shows. We have no idea how far this trend has yet to run but it shows no signs yet of peaking.
The third estimate of first quarter GDP growth, due today, will not be the final word. The BEA will revise the data again on July 30, when it will also release its first estimate for the second quarter and the results of its annual revision exercise. Quarterly estimates back to 2012 will be revised. The revisions are of greater interest than usual this year because the new data will incorporate the first results of the BEA's review of the seasonal problems.
This is the last Monitor before we head to the beach, so we want to offer a few thoughts on the upcoming data and the FOMC meeting while we're out. First, a warning about the second quarter GDP number. We think that the data released so far are consistent with growth at about 3%.
After pricing-in the consequences of sterling's depreciation for inflation last year only slowly, markets are at risk of costly inertia again.
It's probably too soon to start looking for second round effects from the drop in gasoline prices in the core CPI. History suggests quite strongly that sharp declines in energy prices feed into the core by depressing the costs of production, distribution and service delivery, but the lags are quite long, a year or more.
It's hard to read the minutes of the April 30/May 1 FOMC meeting as anything other than a statement of the Fed's intent to do nothing for some time yet.
A grim-looking headline durable goods orders number for April seems inevitable today, given the troubles at Boeing.
The minutes of the May 2/3 FOMC meeting today should add some color to policymakers' blunt assertion that "The Committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term."
The nominal value of orders for non-defense capital equipment, excluding aircraft, fell by 3.4% last year. This was less terrible than 2015, when orders plunged by 8.4%, but both years were grim when compared to the average 7.5% increase over the previous five years.
Last week's data added yet more weight to our view that manufacturing is in deep trouble, and that the bottom has not yet been reached.
The seasonal adjustment problems which tend to drive up the national ISM manufacturing survey in late spring and summer are more or less absent from the Chicago PMI, which will be released today. As far as we can tell, the biggest short-term influence on the Chicago number is variations in the order flow for Boeing aircraft; the company moved its headquarters to the city from Seattle in 2001.
The summer usually is a quiet time for business, but seemingly not for CFOs this year. Yesterday's money and credit figures from the Bank of England showed that borrowing by private non-financial corporations has rocketed. Net finance raised by PNFC's from all sources increased by £8.9B in July, compared to an average increase of just £2.5B in the previous 12 months.
Yesterday's relatively good news--we discuss the implications of the August trade data below--will be followed by rather more mixed reports today. We hope to see a partial rebound, at least, in the September Chicago PMI, but we fully expect soft August consumer spending data.
The modest overshoot to consensus in September's core PCE deflator won't trouble any lists of great economic surprises, but it did serve to demonstrate that the PCE can diverge from the CPI, in both the short and medium-term.
Today's wave of economic reports are all likely to be strong. The most important single number is the increase in real consumers' spending in July, the first month of the third quarter.
It's a myth that the 10-ye ar decline in the unemployment rate has not driven up the pace of wage growth.
In yesterday's Monitor we suggested that China's profits surge has been party dependent on developers' risky debt issuance practices.
The biggest surprise in the revisions to first quarter GDP growth, released yesterday, was in the core PCE deflator.
In the wake of April's 0.2% increase in real consumers' spending, and the upward revisions to the first quarter numbers, we now think that second quarter spending is on course to rise at an annualized rate of about 3.5%.
The stage is set for the Fed to ease by 25bp today, but to signal that further reductions in the funds rate would require a meaningful deterioration in the outlook for growth or unexpected downward pressure on inflation.
Capex data by industry are available only on an annual basis, with a very long lag, so we can't directly observe the impact the collapse in the oil sector has had on total equipment spending. But we can make the simple observation that orders for non-defense capital goods were rising strongly and quite steadily-- allowing for the considerable noise in the data--from mid-2013 through mid-2014, before crashing by 9% between their September peak and the February low. It cannot be a coincidence that this followed a 55% plunge in oil prices.
Yesterday's FOMC , announcing a unanimous vote for no change in the funds rate, is almost identical to December's.
In the wake of the robust July data and the upward revisions to June, real personal consumption--which accounts for 69% of GDP--appears set to rise by at least 3% in the third quarter, and 3.5% is within reach. To reach 4%, though, spending would have to rise by 0.3% in both August and September, and that will be a real struggle given July's already-elevated auto sales and, especially, overstretched spending on utility energy.
It's pretty easy to spin a story that the recent core PCE numbers represent a sharp and alarming turn south.
The 0.18% increase in the core PCE deflator in December was at the lower end of the range implied by the core CPI. It left the year-over-year rate at just 1.5%.
Today's FOMC meeting will be the first non-forecast meeting to be followed by a press conference.
The unemployment rate hit its post-1970 low in April 2000, at the peak of the first internet boom, when it nudged down to just 3.8%. The low in the next cycle, first reached in October 2006, was rather higher, at 4.4%.
The U.S. coronavirus outbreak is not slowing. The curve is not bending much, if at all. Confirmed cases continue to increase at a steady rate, averaging 23% per day over the past three days.
The ECB's decision to go all-in and buy sovereign debt has three key consequences for U.S. markets. First, Treasuries will no longer benefit from safe-haven flows, because shorting Eurozone government debt has just become a fantastically risky proposition.
The economy would have ground to a halt last year had households not reduced their saving rate sharply.
Evidence that the U.K. economy has slowed significantly this year is starting to come in thick and fast. Following the Markit/CIPS manufacturing PMI on Monday --which signalled that growth in production declined in March to its lowest rate since July--the construction PMI dropped to 52.2 in March, from 52.5 in February.
We planned to write today about the rebound in housing market activity over the past few months, arguing that it is about to run out of steam in the face of the recent flat trend in mortgage applications. The Mortgage Bankers Associations' purchase applications index rocketed in the spring, but then moved in a narrow range from mid-April through late September. Then, out of the blue, the MBA reported a 27% leap in applications in the week ended October 2, taking the index to its highest level in more than five years.
The Fed today will do nothing to rates and won't materially change the language of the post-meeting statement.
The impending retirement of New York Fed president Dudley creates yet another vacancy on the FOMC.
We expected a consensus-beating ADP employment number for February, but the 298K leap was much better than our forecast, 210K. The error now becomes an input into our payroll model, shifting our estimate for tomorrow's official number to 250K; our initial forecast was 210K.
Britain's housing market appears to be going from bad to worse.
Easing of curbs so far won't slow property decline
We were pretty sure that the underlying trend in jobless claims had bottomed, in the high 230s, before the hurricanes began to distort the data in early September.
Core producer price inflation is falling, and it probably has not yet hit bottom.
We're expecting to learn this morning that productivity rose by a respectable 1.7% in the year to the fourth quarter, the best performance in nearly four years.
All the signs are that ADP will today report a solid increase in February private payrolls; our forecast is 200K, but if you twist our arms we'd probably say the mild weather last month across most of the country points to a bit of upside risk.
August's Markit/CIPS services survey, released today, likely will show that the economy's biggest sector is continuing to slow. We think that the PMI fell to just 53.0--its lowest level since it plunged immediately after the Brexit vote--from 53.8 in July, below the consensus, 53.5.
The simultaneous weakening of the ISM manufacturing and non-manufacturing surveys in recent months is one of the more disconcerting shifts in the recent macro data.
The President's threat to impose tariffs on imported Chinese consumer goods on September 1 might yet come to nothing.
Behind all the talk of slowdowns and Fed pauses, we see no sign that the labor market is loosening beyond a very modest uptick in jobless claims, and even that looks suspicious.
Chile's Imacec index confirmed that economic growth ended the year on a soft note, due mainly to weakness in the mining sector.
Unless Boeing received a huge aircraft order on November 30, we can now be pretty sure that most of October's 4.6% leap in headline durable goods orders reversed last month. Through November 29, Boeing booked orders for 34 aircraft, compared to 85 in October. Moreover, the bulk of the orders were for relatively low value 737s, whereas the October numbers were boosted by a surge in orders for 787s, whose list price is about three times higher.
We were a bit disappointed by the November ADP employment report, though a 190K reading in the 102nd month of a cyclical expansion is hardly a disaster.
According to the official data presented in the JOLTS report, the number of job openings across the U.S. rose gently from 2011-to 13, rocketed in 2014, trended upwards much more slowly from 2015-to-17, and then, finally, unexpectedly jumped to record highs in the spring of this year.
We're fully expecting to see a hit to September payrolls from Hurricane Florence, which struck during the employment survey week.
ADP's report that September private payrolls rose by 135K was slightly better than we expected, but not by enough to change our 150K forecast for tomorrow's official report.
Core durable goods orders in recent months have been much less terrible than implied by both the ISM and Markit manufacturing surveys.
The Fed will soon have to step in to try to put a firebreak in the stock market.
The expectations components of both the Michigan and Conference Board measures of consumers' confidence have risen sharply since gasoline prices rolled over.
The FOMC flagged recent market developments as a source of risk to the U.S. economy yesterday, unsurprisingly, but didn't go overboard: "The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook."
The April international trade numbers were startlingly, and surprisingly, horrible. The deficit in trade in goods leaped by $6.2B -- the biggest one-month jump in two years -- to $67.1B, though the headline damage was limited by a sharp narrowing in the oil deficit, thanks to lower prices, and a rebound in the aircraft surplus.
Today brings a ton of data, as well as an appearance by Fed Chair Powell at the Economic Club of New York, in which we assume he will address the current state of the economy and the Fed's approach to policy.
Media reports suggest that the underlying trends in retailing--rising online sales, declining store sales and mall visits--continued unabated over the Thanksgiving weekend.
We argued in the Monitor yesterday that the very low and declining level of jobless claims is a good indicator that businesses were not much bothered by the slowdown in the pace of economic growth in the first quarter. The numbers also help illustrate another key point when thinking about the current state of the economy and, in particular, the rollover in the oil business.
In contrast to surveys of manufacturing activity and sentiment, the Conference Board's measure of consumer confidence rose sharply in August, hitting an 11-month high. People were more upbeat about both the current state of the economy and the outlook, with the improving job market key to their optimism. The proportion of respondent believing that jobs are "plentiful" rose to 26%, the highest level in nine years.
Figures yesterday from U.K. Finance--the new trade body that has subsumed the British Bankers' Association--showed that the mortgage market recovered over the summer.
Guo Shuqing, head of the newly formed China Banking and Insurance Regulatory Commission, has been named as Party Secretary for the PBoC.
Whichever way you choose to slice the numbers, consumers' spending is growing much more slowly than is implied by an array of confidence surveys.
Yesterday's raft of data had no net impact on our forecast for second quarter GDP growth, which we still think will be about 21⁄4%.
Today's wave of data will bring new information on the industrial sector, consumers, the labor market, and housing, as well as revisions to the third quarter GDP numbers.
We have argued for some time that the revival in nonoil capex represents clear upside risk for GDP growth next year, but it's now time to make this our base case.
The headline durable goods orders number for October, due today, likely will be depressed by falling aircraft orders, both civilian and military. Boeing reported orders for 55 civilian aircraft in September, compared to only three in August, but a hefty adverse swing in the seasonal factor will translate that into a small seasonally adjusted decline.
The durable goods numbers were among the first short-term indicators to warn clearly of the hit to manufacturing from the rollover in oil sector capex, which began last fall. The trend in core capital goods orders was rising strongly before oil firms began to cut back, with the year-over-year rate peaking at 11.9% in September. Leading capex indicators in the small business sector remained quite robust, but just nine months later, core capex orders were down 6.4% year-over-year, following annualized declines of more than 14% in both the fourth quarter of 2014 and the first quarter of this year.
House prices look set for another growth spurt, pushing the house price-to-earnings ratio--the most widely used measure of valuation sustainability--close to levels seen shortly before the late-2000s crash. But we don't place much store by the price-to-earnings ratio. Better, more reliable indicators suggest that a higher level of house prices will prove sustainable.
We have been asked how we can justify raising our growth forecasts but at the same time arguing that the housing market is set to weaken quite dramatically, thanks to the clear downshift in mortgage applications in recent months. Applications peaked back in June, so this is not just a story about the post-election rise in mortgage rates.
Recent export performance has been poor, but the export orders index in the ISM manufacturing survey-- the most reliable short-term leading indicator--strongly suggests that it will be terrible in the fourth quarter.
It doesn'tt matter if third quarter GDP growth is revised up a couple of tenths in today's third estimate of the data, in line with the consensus forecast.
The biggest single driver of the downward revision to first quarter GDP growth, due this morning, will be the foreign trade component. Headline GDP growth likely will be pushed down by a full percentage point, to -0.8% from +0.2%, with trade accounting for about 0.7 percentage points of the revision.
May's E.C. Economic Sentiment survey was a blow to hopes that the six-month stay of execution on Brexit would facilitate a recovery in confidence.
Predictably, the Bank of England's estimate that GDP would plunge by 8% in the first year after a disorderly no-deal, no transition Brexit and that interest rates would need to rise to 5.5% to contain inflation grabbed the headlines yesterday.
We aren't convinced by the idea that consumers' confidence will be depressed as a direct result of the rollover in most of the regular surveys of business sentiment and activity.
While we were out, the data showed that consumers' confidence has risen very sharply since the election, hitting 15-year highs, but actual spending has been less impressive and housing market activity appears poised for a marked slowdown.
The substantial gap between the key manufacturing surveys for the U.S. and China, relative to their long-term relationship, likely narrowed a bit in December.
The agreement between Presidents Trump and Xi at the G20 is a deferment of disaster rather than a fundamental rebuilding of the trading relationship between the U.S. and China.
Yesterday's data don't significantly change our view that first quarter GDP growth will be reported at only about 1%, but the foreign trade and consumer confidence numbers support our contention that the underlying trend in growth is rather stronger than that.
The Eurozone is on the brink of its first exit this week after the ECB refused to offer incremental emergency liquidity to Greek banks, forcing the start of bank holiday through July 7--two days after next weekend's referendum--and beginning today. We have no doubt that if the banks were to open, they would soon be bust; bank runs have a habit of accelerating beyond the point of no return very quickly.
Net foreign trade was a drag on GDP growth in the second quarter, subtracting 0.7 percentage points from the headline number.
The first estimate of Q1 growth will show that the economy struggled in the face of the severe winter and, to a lesser extent, the rollover in capital spending in the oil sector. But the weather hit appears to have been much smaller than last year, when the economy shrank at a 2.1% rate in the first quarter; this time, we think the economy expanded at an annualized rate of 1.1%.
We have been waiting a long time to see signs that business investment spending is becoming less reliant on movements in oil prices.
The terrible scenes from Texas will play out in the economic data over the next few weeks.
The Fed will do nothing to the funds rate or its balance sheet expansion program today.
The third estimate of first quarter GDP growth, due today, will not be the final word on the subject. Indeed, there never will be a final word, because the numbers are revised indefinitely into the future.
The MPC's hawks are framing the interest rate increase they want as a "withdrawal of part of the stimulus that the Committee had injected in August last year", arguing that monetary policy still would be "very supportive" if rates rose to 0.5%, from 0.25%.
The Fed left in place the three key elements of its statement yesterday, repeating that the extent of labor market under-utilization is "diminishing"; that the inflation drop as a result of falling oil prices will be "transitory" and that the Fed can be "patient" before starting to raise rates.
We were wrong about headline durable goods orders in April, because the civilian aircraft component behaved very strangely.
In the wake of the unexpectedly weak September Empire State survey, released Monday, we are now very keen to see what today's Philadelphia Fed survey has to say.
Today brings yet another broad array of data, with new information on housing construction, industrial production, consumer sentiment, and job openings.
Another month, another sluggish performance in the manufacturing sector. Even a third straight big jump in auto output was unable to rescue the May numbers, and aggregate output fell by 0.2%. The trend in output has been broadly flat over the past six months or so, and we see little prospect of any sustained near-term recovery.
We were surprised by the weakness of the April housing starts report; we expected a robust recovery after the March numbers were depressed by the severe snowstorms across a large swathe of the country. Instead, single-family permits rose only trivially and multi-family activity--which is always volatile--fell by 9% month-to-month.
We see downside risk to the housing starts numbers for April, due today. Our core view on housing market activity, both sales and construction activity, is that the next few months, through the summer, will be broadly flat-to-down.
We are not worried about the reported drop in April manufacturing output, which probably will reverse in May.
China's March money and credit data, published last Friday, showed that conditions continue to tighten, posing a threat to GDP growth this year.
The softness of the headline September retail sales numbers hid a decent 0.5% increase in the "control" measure, which is the best guide to consumers' spending on non-durable goods.
Tariffs are a tax on imported goods, and higher taxes depress growth, other things equal.
The "Phase One" China trade deal announced late last week is a step in the right direction, but a small one. With no official text available as we reach our deadline, we're relying on media reporting, but the outline of the agreement is clear.
Yesterday's wave of data suggested that a good part of the strength in final demand in the second quarter was sustained into the first month of this quarter, and perhaps the second too.
The failure of the core CPI to mean-revert in April, after the unexpected March drop, does not mean that the Fed can relax.
Manufacturing is not in recession, yet, despite the reams of gloomy analysis of the sector, including our own.
Don't worry about the weakness of the recent retail sales numbers. The three straight 0.1% month-to- month declines tell us nothing about the underlying state of the consumer.
The story of U.S. retail sales since last summer is mostly a story about the impact of the hurricanes, Harvey in particular.
The New York Times called the China trade agreement reached Friday "half a deal", but that's absurdly generous.
July's retail sales report signalled a good start to the third quarter but also implied that second quarter spending was stronger than previously thought. The upward revisions--totalling 0.5% for total sales and 0.4% for non-auto sales--were the biggest for some time, but we were not unduly surprised.
We are not concerned by the slowdown in retail sales over the past few months.
China's property market looks to be turning the corner, going by the stronger-than-expected March report.
The elevated readings from the ISM manufacturing survey this year have not been followed by rapid growth in output. The headline ISM averaged 55.8 in the second quarter, a solid if unspectacular reading. But output rose by only 1.2% year-over-year, and by 1.4% on a quarterly annualized basis.
The median of FOMC members' estimates of longer run nominal r-star--the rate which would maintain full employment and 2% inflation--nudged up by a tenth in September to 3.0%, implying real r-star of 1%.
Swap rates imply that markets expect RPI inflation to settle within a 3.3% to 3.5% range over the next five years, once the boost from sterling's depreciation has faded.
The first October survey evidence from the industrial economy, in the form of the Empire State report, is remarkably strong.
Manufacturing is in recession, with few signs yet that a floor is near, still less a recovery.
Mortgage applications appear to have recovered from their reported February drop, which was due mostly to a very long-standing seasonal adjustment problem
The slowdown in households' real incomes has taken a swift toll on the housing market this year. Measures of house prices from Nationwide, Halifax, LSL and Rightmove essentially have flatlined since the end of 2016, following four years of rapid growth, as our first chart shows.
In the wake of last week's strong core retail sales numbers for November, the Atlanta Fed's GDPNow model for fourth quarter GDP growth shot up to 3.0% from 2.4%.
Boeing's announcement that it will temporarily cut production of 737MAX aircraft to zero in January, from the current 42 per month pace, will depress first quarter economic growth, though not by much.
The GM strike will make itself felt in the September industrial production data, due today.
The spectacular 1.3% rebound in manufacturing output last month -- the biggest jump in seven years, apart from an Easter-distorted April gain -- does not change our core view that activity in the sector is no longer accelerating.
This week brings the third anniversary of the first rate hike in this cycle, on December 16, 2015.
The November industrial production numbers will be dominated by the rebound in auto production following the end of the GM strike.
Your correspondent is headed to the beach for the next couple of weeks, with publication resuming on Tuesday, September 4.
The rate of growth of real personal incomes is under sustained downward pressure, slowing to 2.1% year-over-year in December from 3.4% in the year to December 2015. In January, we think real income growth will dip below 2%, thanks to the spike in the headline CPI, reported Wednesday. Our first chart shows that the 0.6% increase in the index likely will translate into a 0.5% jump in the PCE deflator, generating the first month-to-month decline in real incomes since January last year.
The Conference Board's index of leading economic indicators appears to signal that the U.S. economy is plunging headlong into recession.
Last week, the MBA's measure of the volume of applications for new mortgages to finance house purchase rose 1.7%.
We have revised up our second quarter consumption forecast to a startling 4.0% in the wake of yesterday's strong June retail sales numbers, which were accompanied by upward revisions to prior data.
The Fed will hike by 25 basis points today, citing the tightening labor market as the key reason to press ahead with the process of policy normalization. We think the case for adding an extra dot to the plot for both this year and next is powerful.
In our Monitor of January 10, we argued that the market turmoil in Q4 was largely driven by the U.S.- China trade war, and that a resolution--which we expect by the spring, at the latest--would trigger a substantial easing of financial conditions.
Survey data have been signalling a stronger German economy in the last few months, and hard data are beginning to confirm this story. Data yesterday showed that industrial production rose 0.4% month-to-month in November, pushing the year-over-year rate up to 2.2%, from an upwardly-revised 1.6% in October. The headline was boosted mainly by a 1.5% month-to-month jump in construction and a 0.9% rise in intermediate goods production.
Fed Chair Yellen today needs to strike a balance between addressing investors' concerns over the state of the stock market and the risks posed by slower growth in Asia, and the tightening domestic labor market.
The softening in payroll growth in November appears mostly to be a story about short-term noise, rather than a sign that tariffs are hurting or that the broader economy is slowing.
The May NFIB survey and the April JOLTS report, both released yesterday, paint a coherent, if not yet definitive, picture of labor market developments which should alarm the Fed. The data suggest that the true labor supply, in the eyes of potential employers, is much smaller than implied by the BLS's measures of broad unemployment.
Since the protests in Hong Kong began, we've become increasingly convinced that China is backing away from a comprehensive trade deal with Mr. Trump.
The next few months, perhaps the whole of the first quarter, are likely to see a clear split in the U.S. economic data, with numbers from the consumer side of the economy looking much better than the industrial numbers.
Demand for new mortgages to finance house purchase has rebounded somewhat in recent weeks, following an alarming dip in the wak e of October's stock market correction. At the low, in the third week in October, the MBA's index of applications volume was at its lowest since mid-February, when the reported numbers are substantially depressed by a long-standing seasonal adjustment problem.
The medium-term trend in the volume of mortgage applications turned up in early 2015, but progress has not been smooth. The trend in the MBA's purchase applications index has risen by about 40% from its late 2014 low, but the increase has been characterized by short bursts of rapid gains followed by periods of stability.
Demand for new mortgages to finance house purchase has rebounded somewhat in recent weeks, following an alarming dip in the wak e of October's stock market correction. At the low, in the third week in October, the MBA's index of applications volume was at its lowest since mid-February, when the reported numbers are substantially depressed by a long-standing seasonal adjustment problem.
The ECB will rest on its laurels today.
The collapse in business activity and consumer confidence since the referendum has sealed the deal on policy easing from the MPC on Thursday. The Committee has cut Bank Rate by 50 basis points when the composite PMI has been near July's level in the past, as our first chart shows.
The underlying U.S. consumer story, hidden behind a good deal of recent noise, is that the rate of growth of spending is reverting to the trend in place before last year's tax cuts temporarily boosted people's cashflow.
Today's September ISM manufacturing survey is one of the most keenly-awaited for some time. Was the unexpected plunge in August a one-time fluke--perhaps due to sampling error, or a temporary reaction to the Gulf Coast floods, or Brexit--or was it evidence of a more sustained downshift, possibly triggered by political uncertainty?
All the regional PMI and Fed business surveys we follow suggest that today's national ISM manufacturing report for November will be weaker than in October
We have few doubts that labor demand remained strong in January, but the chance of a repeat of December's 312K payroll gain is slim.
The obsession of markets and the media with the industrial sector means that today's ISM manufacturing survey will be scrutinized far more closely than is justified by its real importance.
We expect to see a 70K increase in October payrolls today.
Chair Powell broke no new ground in his semi-annual Monetary Policy Testimony yesterday, repeating the Fed's new core view that the current stance of policy is "appropriate".
On the face of it, small business have taken quite a hit over the past few months. The headline index from the NFIB survey of small businesses has dropped to a nine-month low of 95.2 in March from 100.4 in December. As a result, the gap between the NFIB and the ISM manufacturing indexes, which had been narrowing, has widened again.
The first wave of domestic third quarter data crashes ashore this morning.
No matter how you choose to slice-and-dice the recent retail sales numbers, the core data for the past couple of months have been disappointing. Our favorite measure--total sales less autos, gasoline, food and building materials--rose by just 0.1% month-to- month in May but then reversed this minimal gain in June.
The near-term U.S. inflation outlook is benign, but it is not without risk.
Let's be clear: The July retail sales numbers do not mean the consumer is rolling over, and the PPI numbers do not mean that disinflation pressure is intensifying. We argued in the Monitor last Friday, ahead of the sales data, that the 4.2% surge in second quarter consumption--likely to be revised up slightly--could not last, and the relative sluggishness of the July core retail sales numbers is part of the necessary correction. Headline sales were depressed by falling gasoline prices, which subtracted 0.2%.
Falling gas prices will make themselves felt in the November CPI data today, with a likely 4% seasonally adjusted decline enough to subtract 0.2% from the month-to-month change in the headline index. But gas prices plunged by 7.2% in November last year, so in year-over-year terms gas prices will push aggregate headline inflation up. We look for the rate to rise to 0.4%, up from 0.2% in October and zero in September. The same story will play out in January and February too, by which time the headline rate should have risen to 1¼%, assuming a crude oil price of about $35 per barrel.
Wednesday's better-than-expected, but still grim, November retail sales report in Brazil does not change the miserable underlying trend. Sales volumes rose 1.5% month-to-month, much better than expected, and the biggest increase in a year. But the year-over-year rate fell to -7.8% from -5.7% in October. The details underscored our view that the month-to-month jump in sales was due mostly to temporary factors.
February's COPOM meeting minutes again signalled that Brazil's central bank will stick with its cautious approach to monetary policy.
To answer the question: Yes, growth could hit 5% in the second quarter.
The January durable goods numbers, viewed in isolation, were not terrible.
The key piece of evidence supporting our view that housing market activity has peaked for this cycle is the softening trend--until recently--in applications for new mortgages to finance house purchase.
The Board of the Bank of Korea will meet again in less than a week's time for this year's penultimate meeting.
Our forecast for a 0.3% increase in the September core PPI, slightly above the underlying trend, is even more tentative than usual.
Consumers' spending in Brazil weakened at the end of Q4, but we think households will support GDP growth in the first quarter.
Our default position for core durable goods orders over the next few months is that they will fall, sharply.
The 0.242% increase in the January core CPI left the year-over-year rate at 2.3% for the third straight month.
The worst phase of the squeeze on real wages is nearly over; CPI inflation looks set to peak at slightly above 3% in October, before falling back steadily to about 2% by the end of 2018.
Markets usually ignore the monthly import price data, presumably because they are far removed, especially at the headline level, from the consumer price numbers the Fed targets.
The trend in manufacturing output probably is about flat, with no real prospect of any serious improvement in the near term.
The economy is bifurcating. Manufacturing is weak, and likely will remain so for some time, though talk of recession in the sector is overdone. Even more overdone is the idea that the softness of the industrial sector will somehow drag down the rest of the economy, which is more than seven times bigger.
In recent client meetings the first and last topic of conversation has been the market implications of the possible departure of President Trump from office.
The French economy has suffered from weakness in manufacturing this year, alongside the other major EZ economies.
Fed Chair Powell delivered no great surprises in his semi-annual Monetary Policy Testimony yesterday, but he did hint, at least, at the idea that interest rates might at some point have to rise more quickly than shown in the current dot plot: "... the FOMC believes that - for now - the best way forward is to keep gradually raising the federal funds rate [our italics]."
A classic indicator of impending recession is the emergence of excessive levels of inventory across the economy. The pace of businesses inventory accumulation typically lags sales growth, so when activity slows, usually in response to higher interest rates, firms are left with unsold goods.
This is the final U.S. Economic Monitor of 2017, a year which has seen the economy strengthen, the labor market tighten substantially, and the Fed raise rates three times, with zero deleterious effect on growth.
Fed Chair Yellen said in her press conference last week that she has "...been surprised that housing hasn't recovered more robustly than it has. In part I think it reflects very tight credit--continuing tight credit conditions for any borrower that doesn't have really pristine credit... my hope is that that situation will ease over time".
It would be easy to characterize the Fed as quite split at the July meeting.
It's much too soon to have a very firm view on fourth quarter GDP growth, not least because almost half the quarter hasn't happened yet.
Japan's official adjusted surplus rose in October but we think the September figure was an understatement. On our adjustment, the surplus was little unchanged at ¥360B in October.
The startling jump in the Philly Fed index in May, when it rose 11.2 points to a 12-month high, seemed at first sight to be a response to fading tensions over global trade.
So far, the surge in retail spending promised by the plunge in gasoline prices has not materialized. The latest Redbook chain store sales numbers dipped below the gently rising trend last week, perhaps because of severe weather, but the point is that the holiday season burst of spending has not been maintained.
We see no compelling reason to expect a significant revision to the third quarter GDP numbers today, so our base case is that the second estimate, 3.3%, will still stand.
We've had pushback from readers over our take on the likelihood of a trade deal with China in the near future.
We previewed the FOMC meeting in detail yesterday -- see here -- but to recap briefly, we expect a 25bp rate hike, with no significant changes in the statement, and a repeat of the median forecasts of three rate hikes this year.
If the only manufacturing survey you track is the Philadelphia Fed report, you could be forgiven for thinking that the sector is booming.
We have been asked recently why we rarely talk about the signal from the U.S. money supply numbers, in contrast to the emphasis we give to real M1 growth in our forecasts for economic growth in both the Eurozone and China.
We have learned over the years not to become too excited in the face of swings in the jobless claims numbers, even when the movement appears to persist for a month or two.
We're expecting a substantial inventory hit in the fourth quarter, subtracting about 1¼ percentage points from headline GDP growth. Businesses very likely added to their inventories in Q4, in real terms, but the we reckon the increase was only about $30B, annualized, compared to the $85.5B jump in the third quarter. Remember, the contribution to GDP growth is the change in the pace of inventory-building between quarters.
After the strong Philly Fed survey was released last week, we argued that the regional economy likely was outperforming because of its relatively low dependence on exports, making it less vulnerable to the trade war.
Surging soybean exports contributed 0.9 percentage points, gross, to third quarter GDP growth, though the BEA said that this was "mostly" offset by falling inventories of wholesale non-durable goods.
Back-to-back elevated weekly jobless claims numbers prove nothing, but they have grabbed our attention.
The hawks clearly tried hard to persuade their more nervous colleagues to raise rates yesterday. In the end, though, they had to make do with shifting the language of the FOMC statement, which did not read like it had come after a run of weaker data.
It's going to be very hard for Fed Chair Powell's Jackson Hole speech today to satisfy markets, which now expect three further rate cuts by March next year.
The White House budget proposals, which Roll Call says will be released in limited form on March 14, will include forecasts of sustained real GDP growth in a 3-to-3.5% range, according to an array of recent press reports.
Dire warnings that the plunge in s tock prices would depress consumers' confidence and spending have not come to pass. It's too soon to draw a definitive conclusion--the S&P hit its low as recently as the 11th--but peoples' end-February brokerage statements are on track to look less horrific than the end-January numbers, provided the market doesn't swoon again over the next few days.
Core inflation has risen, albeit modestly, in the past two months. The uptick, to 1.8% in March from 1.6% in January, has come as something of a surprise. The narrative in the media and markets remains, as far as we can tell, one of downward pressure on inflation and, still, fear of possible deflation.
Fed policymakers surprised no one with their May 1 statement, which acknowledged the surprisingly "solid " Q1 economic growth--at the time of the March 19-to-20 meeting, the Atlanta Fed's GDPNow model suggested Q1 growth would be just 0.6%--but stuck to its view that low inflation means the FOMC can be "patient".
The renewed slide in oil prices in recent weeks will crimp capital spending, at the margin, but it is not a macroeconomic threat on the scale of the 2014-to-16 hit.
The downshift in the rate of growth of retail sales, which has caused a degree of consternation among investors, likely has further to run. The Redbook chain store sales survey clearly warned at the turn of the year that a slowdown was coming, but forecasters didn't want hear the warning: Five of the seven non-auto retail sales numbers released this year have undershot consensus.
The chance of a zero GDP print for the first quarter diminished--but did not die--last week when the president signed a bill granting full back pay to about 300K government workers currently furloughed.
The closer we look at the Fed's new forecasts, the stranger they seem. The FOMC cut its GDP estimate for this year and now expects the economy to grow by 1.9%--the mid-point of its forecast range--in the year to the fourth quarter. Growth is then expected to pick up to 2.6% next year, before slowing a bit to 2.3% in 2017. Unemployment, however, is expected to fall much less quickly than in the recent past.
Dr. Yellen's Testimony yesterday was largely a cut-and-paste job from the FOMC statement last week and her remarks at the press conference. The Fed's core views have not changed since last week, unsurprisingly, and policymakers still expect to raise rates gradually as inflation returns to the target, but will be guided by the incoming data.
Even the most bullish estate agent in Britain would struggle to put a positive spin on the latest housing market news. The latest levels of the official, Nationwide, and Halifax measures of house prices all are below their peaks.
We pointed out in yesterday's Monitor that Fed Chair Yellen appears to be putting a good deal of faith in the idea that the recent upturn in core inflation is temporary. She argued that "some" of the increase reflects "unusually high readings in categories that tend to be quite volatile without very much significance for inflation over time".
The recent sharp, if not startling, upturn in the regional manufacturing surveys should continue today with the release of the Philadelphia Fed report. The survey is constructed in the same way as the more volatile Empire State, which has rocketed in the past few months, and the headline indexes follow similar trends, as our first chart shows.
The New York Fed tweeted yesterday that "Housing market fundamentals appear strong.
The Fed will leave rates unchanged today.
In light of Mr. Draghi's Sintra speech, we take this opportunity to give an update on the BoJ's stance, ahead of the meeting on Thursday.
Housing rents account for some 41% of the core CPI and 18% of the core PCE, making them hugely important determinants of the core inflation rate.
Japan's adjusted trade balance flipped back to a modest surplus of ¥116B in February, after seven straight months of deficit.
As the impeachment hearings gather momentum, we have been asked to provide a cut-out-and-keep guide to the possible outcomes.
The September NAHB survey, released yesterday, shows, that the housing market took a knock from the hurricanes but the damage, so far at least, appears to be contained.
Rising mortgage rates appear to have triggered the start, perhaps, of a tightening in lending standards, even before Treasury yields spiked this month and stock prices fell.
The closer we look at the data, the more convinced we become that the rollover in CPI physicians' services prices, which has subtracted nearly 0.1% from core CPI inflation since January, is a response to sharply higher Medicare part B premiums, especially for new enrollees.
China is a collection of hugely disparate provinces and cities. Managing all these cities with one interest rate is always difficult but in this cycle it is proving to be nearly impossible.
The declines in headline housing starts and building permits in September don't matter; both were driven by corrections in the volatile multi-family sector.
The imposition of 25% tariffs on $50B-worth of imports from China, announced Friday, had been clearly flagged in media reports over the previous couple of weeks.
Trouble is brewing in the core inflation data, despite the benign-looking 0.17% increase in the June report, released Friday. If you annualize that rate indefinitely, core inflation will reach a steady state of 2.1%, so the Fed never needs to raise rates. Alas this only makes sense if you think that single monthly CPI numbers tell the whole truth, and that the fundamental forces acting on inflation are stable. Neither of these propositions is remotely true.
Today brings the September housing construction report, which likely will show that activity was depressed by the hurricanes.
The next couple of rounds of business surveys will capture firms' responses to the Phase One trade deal agreed last week, though the news came too late to make much, if any, difference to the December Philly Fed report, which will be released today.
The solid numbers for December mean that core inflation remains on track to breach 2?-?% this year, though probably not until the summer. Over the next few months, base effects will help to hold the core rate close to the December pace.
RPI inflation has declined in importance as a measure of U.K. inflation and was stripped of its status as a National Statistic in 2013. Yet it is still used to negotiate most wage settlements, calculate interest payments on index-linked gilts, and revalue excise duties. We have set out our above-consensus view on CPI inflation several times, including in yesterday's Monitor. But the potential for the gap between RPI and CPI inflation to widen over the coming years also threatens the markets' view that the former will remain subdued indefinitely.
While were out over the holidays, the single biggest surprise in the data was yet another drop in imports, reported in the advance trade numbers for November.
We'd be very surprised to see anything other than a 25bp rate cut from the Fed today, alongside a repeat of the key language from July, namely, that the Committee "... will act as appropriate to sustain the expansion".
Construction in the EZ stumbled at the start of the year.
The average FICO credit score for successful mortgage applicants has risen in each of the past four months.
We would like to be able to argue with conviction that the surge in June housing starts and building permits represents the beginning of a renewed strong upward trend, but we think that's unlikely.
If you gave us $100, we'd put $90 on inflation, headline and core, being higher a year from now than it is today. Our view, however, is not universally shared, and some commentators continue to argue that the U.S. faces deflation risks. Exhibit one for this view is our first chart, which shows a high correlation between the PPI for finished goods prices and the CPI inflation rate, ex-shelter.
The media and markets are waking up to the idea that the housing market has peaked in the face of higher mortgage rates and slightly--so far--tighter lending standards.
January's money and credit data provided another warning sign that the economy has started 2017 on a weak footing. For a start, the three-month annualised growth rate of M4, excluding intermediate other financial corporations--the Bank's preferred measure of the broad money supply-- declined to 1.8% in January, from 3.1% in December.
The recent jobless claims numbers have been spectacularly good, with the absolute level dropping unexpectedly in the past two weeks to a 43-year low. The four-week moving average has dropped by a hefty 14K since late August.
The single most important number in the housing construction report is single-family permits, because they lead starts by a month or two but are much less volatile.
China's property market is slowly finding its feet, following a marked and consistent moderation in monthly price gains from mid-2018 to early this year.
As we're writing, the price of U.S. crude oil is only about 50 cents per barrel lower than on Thursday, when markets began to anticipate an OPEC deal to cut production over the weekend. The failure of the Doha talks generated an initial sharp drop in oil prices, but the damage now is very limited, as our first chart shows.
The Fed will do nothing and say little that's new after its meeting today. The data on economic activity have been mixed since the March meeting, when rates were hiked and the economic forecasts were upgraded, largely as a result of the fiscal stimulus.
January's money and credit data broadly support our view that the economy still lacks momentum.
One of the most surprising features of the economic recovery has been that households have not responded to the surge in house prices by releasing housing equity to fund consumption. Housing equity rose to 4.2 times annual disposable incomes in 2015, up from 3.7 in 2012. It has more than doubled over the last two decades.
This week has seen a huge wave of data releases for both January and February, but the calendar today is empty save for the final Michigan consumer sentiment numbers; the preliminary index rose to a very strong 99.9 from 95.7, and we expect no significant change in the final reading.
Under normal circumstances, the 0.23% increase in the core CPI, reported earlier this month, would be enough to ensure a 0.2% print in today's core PCE deflator.
FOMC pronouncements are rarely unambiguous; policymakers like to leave themselves room for maneuver. But when the statement says that "Most judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point" and that only "some" further improvement in labor market conditions is required to trigger action, it makes sense to look through the blizzard of caveats and objections--none of which were new--from the perma-doves.
The 1.2% month-to-month fall in retail sales volumes in March undoubtedly was due mostly to the bad weather.
Further compelling signs that the U.K. has lost its status as one of the fastest growing advanced economies were presented by the Markit/CIPS manufacturing survey, released yesterday. The PMI fell in February to 50.8--its lowest level since April 2013--from 52.9 in January.
The key labor market numbers from today's February NFIB report on small businesses--hiring intentions and the proportion of firms with unfilled job openings--were released last week, as usual, ahead of the official jobs report.
Former Treasury Secretary and thwarted would-be Fed Chair Larry Summers has been arguing for some time that the Fed should not raise rates "...until it sees the whites of inflation's eyes". As part of his campaign to persuade actual Fed Chair Yellen of the error of her intended ways, he argued at the World Economic Forum in September that the strong dollar has played no role in depressing inflation. Never one to miss an opportunity to diss the competition, he wrote that Stanley Fischer's view that the dollar has indeed restrained inflation is "substantially weakened" by the hard evidence. Dr. Summers' view is that inflation is being held down by other, longer-lasting factors, principally the slack in the lab or market, rather than the "transitory" influences favored by the Fed.
On the face of it, Japanese GDP came thumping home in Q1, rising 0.5% quarter-on-quarter, after the 0.4% increase in Q4.
For a central bank already fighting for every decimal in its attempt to convince markets that underlying inflation is slowly edging higher, the recent shift in HICP methodology drives home an increasingly problematic issue.
Sometime very soon, likely in the second quarter of this year, the stock of net housing wealth will exceed the $13.1T peak recorded before the crash, in the fourth quarter of 2005. At the post-crash low, in the first quarter of 2009, net housing equity had fallen by 53%, to just $6.2T. The recovery began in earnest in 2012, and over the past year net housing wealth has been rising at a steady pace just north of 10%. With housing demand rising, credit conditions easing and inventory still very tight, we have to expect home prices to keep rising at a rapid pace.
Most of the time, markets view auto sales as a bellwether indicator of the state of the consumer. Vehicles are the biggest-ticket item for most households, after housing, and most people buy cars and trucks with credit. Auto purchase decisions, therefore, tend not to be taken lightly, and so are a good guide to peoples' underlying confidence and cashflow. We appreciate that things were different at the peak of the boom, when anyone could get a loan and homeowners could tap the rising values of their properties, but that's not the situation today.
Is Japan's pending 15-month anything to write home about?
Chinese residential property prices appear to be staging a comeback, with new home prices rising 1.1% month-on-month in June, faster than the 0.8% increase in May.
The U.K. is one of the smallest winners among advanced economies from the precipitous decline in oil prices. British oil production still fulfils about 55% of the U.K.'s demand, even though it has declined by two-thirds since its 1999 peak. Oil consumption therefore exceeds production by a much smaller margin in the U.K. than in most other European countries. As a result, the boost to the U.K. economy from the $10 decline in oil prices over the last month isn't much to write home about.
Barclays hit the headlines yesterday with an announcement that it is bringing back no-deposit mortgages for first-time buyers and raising its maximum loan-to-income ratio for borrowers with an income of more than £50K to 5.5, from 4.4. With other lenders likely to follow suit and the supply of homes for sale still extremely low, house price inflation likely will remain brisk this year.
The BoJ kept monetary policy unchanged yesterday, as expected, with the signal coming through loud and clear: Japan's central bank will continue its aggressive easing policy until the inflation cows come home...
July's fifth straight undershoot to consensus in the core CPI was very different the previous four. Only one component--lodging away from home--prevented the first 0.2% month-to-month print since February.
In one line: Homebuilders are becoming nervous.
In one line: Tariffs, labor costs, and tight rental home supply pushing up core inflation, plus some noise.
In one line: Starts have further to rise, given the rebound in new home sales.
In one line: Homebuilders still wary, but construction activity will rise over the summer.
The consequences of sterling's sharp depreciation for inflation were brought home yesterday by the news that the iPhone 7 will cost more than its predecessor. The entry-level version is priced at £60 more than its iPhone 6S equivalent. Of course, the new version is more advanced, but the fact that the dollar price held steady, at $649, demonstrates the U.K. price hike entirely is due to the adverse impact of the weaker pound.
China's industrial production growth downtrend worsens. China's retail sales dragged down by autos but boosted as people spend more at home. China's fixed asset investment growth slows despite greater support from infrastructure.
Mexico's economic outlook has dimmed recently, a point driven home by sentiment data released last week. Still, we think GDP growth will slow only marginally in Q4, to about 11⁄2% year-over-year. Consumers' spending likely will remain strong in the near term, thanks mainly to rising remittances from the U.S., driven by fear of policy changes under the Trump administration.
Many observers hoped that the silver lining of a slowdown in house price growth this year would be that more first-time buyers could step onto the first rung of the housing ladder. Instead, purchasing a first home has become even harder for FTBs with modest deposits.
Two fiscal deadlines are on the near-horizon.
Samuel Tombs has more than a decade of experience covering the U.K. economy for investors. At Pantheon, Samuel's research is rigorous, free of dogma and jargon, and unafraid to challenge consensus views. His work focuses on what matters to professional investors: The links between the real economy, monetary policy and asset prices. He has a strong track record of getting the big calls right. The Sunday Times ranked Samuel as the most accurate forecaster of the U.K. economy in both 2014 and 2018. In addition, Bloomberg consistently has ranked Samuel as one of the top three U.K. forecasters, out of pool of 35 economists, throughout 2018 and 2019. His in-depth knowledge of market-moving data and his forensic forecasting approach explain why he consistently beats the consensus. Samuel's work on Brexit goes beyond simply reporting developments and is always analytical and unbiased, enabling investors to see through the noise of the daily headlines. While his analysis points to a particular path that politicians will take, he acknowledges the inherent uncertainty and draws out the economic and financial market implications of all plausible Brexit scenarios. Samuel holds an MSc in Economics from Birkbeck College, University of London and an undergraduate degree in History and Economics from the University of Oxford. Prior to joining Pantheon in 2015, he was Senior U.K. Economist at Capital Economics. In 2011, Samuel won the Society of Business Economists' prestigious Rybczynski Prize for an article on quantitative easing in the UK. He is based in London but frequently visits our other offices. Recent key calls include: 2018 - Correctly forecast that GDP growth would slow and inflation would undershoot the MPC's initial forecast, prompting the Committee to shock investors and almost other economists by waiting until August to raise Bank Rate, rather than pressing ahead in May. 2017 - Argued that the MPC was wrong to expect CPI inflation to stay below 3% following sterling's depreciation. He also highlighted that economic indicators pointed to the Conservatives losing their outright majority in the snap general election.
Chief U.S. Economist Ian Shepherdson on U.S. housing starts
Chief U.K. Economist Samuel Tombs on the latest U.K. Labour Market Data
Chief U.K. Economist Samuel Tombs on U.K. Retail Sales in February
Chief U.K. Economist Samuel Tombs on U.K. House Prices
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