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Second half pace begins
Simply Economics - August 4, 2017
By Mark Pender, Senior Editor



The second-half economy is out of the blocks in good fashion. The July employment report included a solid monthly gain for wages and was headlined by solid payroll growth that included a jump for manufacturing. Yet, however fast employment may be rising, consumer spending has yet to move into gear. Still, there's no doubt about it, employers are definitely hiring.


The economy

July payrolls rose 209,000 and over the 200,000 line for the 5th time this year. The average so far this year is 170,000 per month, well above the roughly 100,000 of minimum growth that's needed to absorb new entrants. The unemployment rate is also signalling strength, down 1 tenth and back at 4.3 percent. This is the best rate in 16 years. The risk for the Fed is that the labor market may be running too hot, that demand for labor will exceed supply and with it -- wages will spike!


But wage push has been very limited this year though there was pressure in July. Average hourly earnings rose a monthly 0.34 percent to $26.36 for the single strongest showing since October. A couple more 0.3 percent gains or even a single 0.4 percent burst would raise alarms that monetary policy has fallen behind the inflation curve, that a wage flashpoint has been hit requiring abrupt and unplanned action to reverse. At least that's the picture the Fed paints.


But as the Fed says: one month of data is only one month of data. A look at the year-on-year rate tells a different story. Average hourly earnings have been trying to hold the 2.5 percent since breaking below in April. At 4.3 percent unemployment, earnings in theory should be much higher, at least above 3 percent where many believe it needs to be before feeding into overall inflation. And overall inflation, tracked here by core PCE prices, hasn't been moving higher either, dipping to the 1.5 percent line.


And given the wage trend, spending hasn't been moving in the right direction either. At only 0.06 percent in June, consumer spending posted its smallest gain since January last year. And we can't blame just one month. The 3-month average, at 0.16 percent, is the lowest since January the year before that and one of the lowest of the cycle. But that's June. Maybe July's wages gave spending a lift? Maybe, but unit vehicle sales in July, the first indication on spending, were little better than flat.


But there's more good news in the week than bad and some of it's centered in factories. Factory payrolls have come alive, posting 3 straight months over the annual zero line as tracked by the blue line of the graph. This doesn't sound like much but for factories it's the best run since 2015 and the first pivot higher since 2013. Why the hiring? Unfilled orders are beginning to build, jumping in June for their first yearly gain in 2 years. Manufacturers need the extra hands to keep shipments moving out the door.


June's factory report also offered good news on new orders and shipments. June's nearly 10 percent yearly rate for new orders is the best in 3 years. The factory sector has emphatically emerged from the depression triggered by the 2014 collapse in oil prices, one that took energy and mining investment down not to mention spillover effects across the sector. Along side of orders are shipments which are rising in the mid-single digits for the first time in 5 years.


Civilian aircraft makes up only a small share of the total factory sector but a rising one. At 2.8 percent of total orders so far this year, aircraft is outdoing last year's 2.3 percent share. But these orders come in big sudden batches and can badly skew short-term readings. Excluding aircraft, order and shipment growth track each other more smoothly, each holding above the 4 percent line. Growth may not be explosive, but the direction is constructive as the factory sector positions itself for a good year.


Housing seemed to be positioned for a good year, rising in the first quarter before fizzling in the second. But more good news comes from pending home sales which, after 3 straight dips, rose to 110.2 for a useful 1.5 percent monthly gain. Pending sales track initial contract signings and the gain points to strength for final resales which have been struggling to get going. Recent data on permits have also been favorable as housing could be swinging around for a second-half push of its own.


The week also included July updates on the service sector. Results are mixed with the services PMI bursting higher but ISM non-manufacturing slowing sharply. They meet just above the 54 line which is a healthy enough outcome on its own. Any reading over 50 indicates that more of the sample members, who number no more than several hundred in any one report, are reporting an increase in monthly activity than a decrease. A general indication and a vague one perhaps, but still a good one.


Markets: Budget impasse and related effects

Controversy in Washington may not be improving the odds for an orderly increase in the nation's debt limit. If there's no deal by the end of next month, payments on Treasuries and entitlements could be at risk. The disruption would presumably be short-lived given what would be the general discontent. And however haywire the T-bill market may become between now and then, demand for long term Treasuries could very well rise as investors look around for something they think is safe. Demand for the 10-year Treasury has been impressively strong this year especially given the prospect that the Fed will soon begin withdrawing its support from the bond market. A separate question is whether a noisy impasse could actually affect next month's FOMC decision? That is, delay tapering. It's wait and see... When demand for bonds goes up, demand for stocks often goes down. But not this time around. The Dow has posted 8 records straight for a year-to-date gain of 11.8 percent.


Markets at a Glance Year-End Week Ended Week Ended Year-To-Date Weekly
2016 28-Jul-17 4-Aug-17 Change Change
DJIA 19,762.60 21,830.31 22,092.81 11.8% 1.2%
S&P 500 2,238.83 2,472.10 2,476.83 10.6% 0.2%
Nasdaq Composite 5,383.12 6,374.68 6,351.56 18.0% -0.4%
Crude Oil, WTI ($/barrel) $53.71 $49.70 $49.22 -8.4% -1.0%
Gold (COMEX) ($/ounce) $1,152.50 $1,275.80 $1,262.00 9.5% -1.1%
Fed Funds Target 0.50 to 0.75% 1.00 to 1.25% 1.00 to 1.25% 50 bp 0 bp
2-Year Treasury Yield 1.21% 1.35% 1.35% 14 bp 0 bp
10-Year Treasury Yield 2.45% 2.29% 2.26% –19 bp –3 bp
Dollar Index 102.26 93.28 93.63 -8.4% 0.4%


The bottom line

The jobs report has raised the odds for the beginning of balance-sheet unwinding at the September FOMC, at least it does if the budget issue doesn't begin to mushroom. The economy started the year slowly with the second quarter proving respectable. There's plenty of questions for the third and fourth quarters especially the lack of inflation and willingness and ability of the consumer to spend. But based on the consistency of job growth and including the upturn in manufacturing and possible help from housing, the second-half economy may be known more for its strengths than weaknesses.


Week of August 7 to August 11

Of all the economic factors this year, only inflation has been lagging. Consumer prices will be posted on Friday and forecasters aren't calling for much traction, either overall or for the core. And little strength is expected for productivity on Wednesday which nevertheless should get a boost from the second quarter's solid GDP performance. Other data to watch will be job openings in Tuesday's JOLTS report and Thursday's jobless claims and producer price data, the latter possibly offering new hints on Friday's CPI.




Labor Market Conditions Index for July

Consensus Forecast: 2.0

Consensus Range: 1.0 to 2.0


Forecasters see the labor market conditions index rising in July to a solid 2.0 vs 1.5 in June. This report tracks 19 separate components including payroll growth and also wage data.

Consumer Credit for June

Consensus Forecast: $16.0 billion

Consensus Range: $14.8 to $16.9 billion


Growth in consumer credit is expected to hold steady and firm with the Econoday consensus calling for a rise of $16.0 billion in June vs $18.4 billion in May. A recent upturn in the revolving credit component of this report is raising new questions whether financial firms are now lending to less qualified borrowers.




Small Business Optimism Index for July

Consensus Forecast: 103.2

Consensus Range: 102.0 to 104.0


The small business optimism index has been edging back from expansion highs but remains very strong on solid economic optimism and aggressive plans for capital outlays and hiring. The Econoday consensus for July is 103.2 vs June's 103.6.


JOLTS: Job Openings for June

Consensus Forecast: 5.600 million

Consensus Range: 5.600 to 5.720 million


Job openings in the JOLTS report moved lower in May to 5.666 million even though hiring moved up to 5.472 million to narrow what has been a stubborn 2-year gap, one suggesting employers are having a hard time finding the right people. But with payroll growth strong, forecasters see job openings continuing to decline, to a consensus 5.600 million.




Nonfarm Productivity, 1st Estimate, 2nd Quarter

Consensus Forecast, Annualized Rate: 0.8%

Consensus Range: -0.3% to 2.0%


Unit Labor Costs

Consensus Forecast, Annualized Rate: 1.4%

Consensus Range: 0.7% to 1.9%


Solid 2.6 percent GDP points to improvement for second-quarter productivity and moderation for labor costs. For the first estimate of the second quarter, forecasters see nonfarm productivity rising 0.8 percent vs no change in the first quarter and unit labor costs at plus 1.4 percent vs the first quarter's 2.2 percent rise.


Wholesale Inventories for June

Consensus Forecast, Month-to-Month Change: 0.6%

Consensus Range: 0.4% to 0.6%


Wholesale trade inventories are expected to rise 0.6 percent and above June's advance estimate from the government for a 0.4 percent build. After keeping inventories down early in the year, wholesalers began to build their inventories back up in April.


Initial Jobless Claims for August 5 week

Consensus Forecast: 241,000

Consensus Range: 235,000 to 245,000


The summer's auto retooling season hasn't disrupted weekly jobless claims which, apparently benefiting from good seasonal adjustments, have held steady. Forecasters sees initial claims rising but only slightly to 241,000 in the August 5 week from 240,000 in the prior week.


PPI-FD for July

Consensus Forecast, Month-to-Month Change: 0.1%

Consensus Range: 0.0% to 0.3%


PPI-FD Less Food & Energy

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.1% to 0.3%


PPI-FD Less Food, Energy, & Trade Services

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.2% to 0.2%


Like other inflationary data, producer prices have been soft and could only manage a 0.1 percent gain overall as well as for the core (less food and energy). With food prices flat in June and energy down, forecasters are calling for another 0.1 percent increase overall but a slightly better 0.2 percent for the core (less food and energy).




Consumer Price Index for July

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.1% to 0.2%


Consumer Price Index

Consensus Forecast, Year-on-Year Change: 1.8%

Consensus Range: 1.7% to 1.8%


CPI Core, Less Food & Energy

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.1% to 0.3%


CPI Core, Less Food & Energy

Consensus Forecast, Year-on-Year Change: 1.8%

Consensus Range: 1.7% to 1.8%


Econoday's consensus isn't calling for much needed strength in consumer prices, at a monthly consensus gain of 0.2 percent in July vs no change in June. The yearly rate is seen slipping to 1.8 percent from 1.9 percent. Less food & energy, the rate is also seen rising a monthly 0.2 percent vs June's gain of 0.1 percent with this closely watched yearly rate also called at 1.8 percent which however would be up from June's 1.6 percent. Though this report has been tipped lower by declines in cell phone services, fundamental prices including housing costs have been slowing.


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