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Economy solid, Washington scrambled
Simply Economics - August 18, 2017
By Mark Pender, Senior Editor



Playing out behind a week of terrorist violence and upheaval in Washington was a run of economic data that includes very good news along, however, with definite disappointments. Housing and manufacturing are uneven and inflation is oddly dormant but on the whole the economy, driven by the consumer, is steady and firm going into what promises to be, or at least hopefully will be, a good second half for the economy.


The economy


The week's best news comes from retail sales which rose an outsized 0.6 percent in July in a report that very importantly included a major upward revision to June, now at 0.3 percent from an initial decline of 0.1 percent. Retail sales, which represent 1/3 of total consumer spending, had been significantly trailing service spending this year but no longer. July's result represents a very fast start for third-quarter GDP following what was a very respectable 2.6 percent rate for second-quarter GDP.


Looking at the annual rate, retail sales pushed back above the very respectable 4 percent growth line to 4.2 percent. This ends what had been a steadily declining trend for this series. The July report is very convincing in its strength showing extending expansion for e-commerce and a second strong month for building materials which points to home renovations. Most importanty, enormous strength in July auto sales along with revisions has turned 2017 from a bad year for Detroit into a good one.


But trouble in Washington, not Detroit, is the increasing feature of the 2017 economy. Whether consumer spending slows in turn may be the next big question and the early indications aren't quite in. Consumer sentiment covered the violence in Virginia but the report conceded that its early August sample included "too few" interviews on the subject. The index did jump yet the current conditions component, as tracked in the graph, posted its sharpest dip in a year, one not favorable for underlying spending.


Housing permits have been a thorn in the economy's side all year, bouncing up occasionally but diving more times than not. Permits were a negative in the week, falling to a 1.223 million annualized rate for a 4.1 percent monthly decline. Permits are a leading indicator for construction and the results are pointing to further flattening for residential spending. Yet there are more pluses than minuses in housing, evident in the yearly rate for permits which, at 4.1 percent, is up as much as July was down.


The week's big negative hit late in the week: the manufacturing component of the industrial production report which sank 0.1 percent in July. Actual production of goods is the litmus test for the factory sector and these results are not favorable. Throw out all the sentiment reports, actual production has been down more times than up with May and March very weak. More recently, production of both construction supplies and business equipment has been in contraction.


However uneven manufacturing and housing have been, the year's biggest issue has been inflation which can't get going. Import prices were flat in July with the yearly rate unchanged at 1.5 percent, which is about where all major inflation readings are sitting. Import prices can be a swing factor for total consumer prices. Declines in 2014, tied to the oil collapse, pulled consumer prices to the zero line before import prices began to improve and with them consumer prices. Now both are edging south again.


But if consumer prices follow import prices, then import prices follow the dollar. And here we have solid good news. The dollar has been down this year which makes foreign goods and services more expensive for us. Yes, this is actually good news at least if you're a Fed policy maker trying to spark price life into the economy. The blue line in the graph isolates prices for imported consumer goods (always in such high demand) against the red line of the dollar.


Good news in the week comes from inventory data as business inventories are up across the board, rising to $599 billion for wholesalers with retailers at $621 billion and manufacturers at $649 billion. These builds are very strong and do exceed, at least slightly, actual increases in sales which would be a negative if it wasn't for the underlying strength of the American consumer. As it is, the builds position industry for a solid second half of the year.


Markets: The Trump effect

Stocks firmed early in the week, reclaiming prior losses as tensions settled with North Korea and showing little reaction to terrorism in Virginia and President Trump's defense of Confederate symbols. Thursday was a different story as Republican moderates began to question the president's leadership and all but put to rest, it would seem, Trump's 2017 plans for tax cuts and fiscal stimulus. Despite jitters and Thursday's rout, the Dow's loss on week was only 0.8 percent.


Though stocks are having a good year, gold and bonds are also having a good one. While stocks offer a gauge of optimism, gold and bonds offer a counter-gauge of pessimism or at least caution. Both were up at mid-week though demand settled back by week's end. If the economic outlook turns higher, will there be a washout in gold and bonds? Or if the outlook turns lower will there be a washout for stocks? Gold is up 12.2 percent this year with the 10-year Treasury yield down a sizable 26 basis points.


Markets at a Glance Year-End Week Ended Week Ended Year-To-Date Weekly
2016 11-Aug-17 18-Aug-17 Change Change
DJIA 19,762.60 21,858.32 21,674.51 9.7% -0.8%
S&P 500 2,238.83 2,441.32 2,425.55 8.3% -0.6%
Nasdaq Composite 5,383.12 6,256.56 6,216.53 15.5% -0.6%
Crude Oil, WTI ($/barrel) $53.71 $48.79 $48.62 -9.5% -0.3%
Gold (COMEX) ($/ounce) $1,152.50 $1,296.70 $1,292.70 12.2% -0.3%
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% 1.28% 1.31% 10 bp 3 bp
10-Year Treasury Yield 2.45% 2.19% 2.19% –26 bp 0 bp
Dollar Index 102.26 93.07 93.41 -8.7% 0.4%


The bottom line

The greatest uncertainty right now is the outlook for President Trump and whether he can improve confidence in his leadership. There's less uncertainty with the economy where strength in consumer spending is offsetting other concerns except over the lack of inflation. Perhaps the most certain of all the factors is the Federal Reserve with its steady and thoughtful approach, characteristics that make it an important center of stability right now for the overall outlook.


Week of August 21 to August 25

Janet Yellen, speaking at the Jackson Hole Economic Policy Symposium, will be the week's most important event. Whether the Fed begins balance-sheet unwinding at the September FOMC or the December meeting is the central question for economic policy. Shortly before her Friday speech, durable goods orders will be released in what are expected to show tangible strength behind sharp headline weakness. Housing, which has been struggling higher, will be the week's sector theme beginning on Tuesday with FHFA house prices followed on Wednesday and Thursday with new and existing home sales. Consensus forecasts are pointing to moderate strength for the week's housing numbers.




National Activity Index for July

Consensus Forecast: 0.22

Consensus Range: -0.13 to 0.25


July was a strong month for payroll growth and an especially solid one for retail sales, both of which are certain to give a lift to the national activity index. Housing permits, however, will be a key negative and are holding down the consensus, which calls for 0.22 vs June's 0.13.




FHFA House Price Index for June

Consensus Forecast, Month-to-Month Change: 0.5%

Consensus Range: 0.3% to 0.6%


The FHFA house price index has been posting solid rates of growth with 0.5 percent the consensus for June which would compare with 0.4 percent in May. The year-on-year rate in May, at 6.9 percent, was a 3-1/2 year high.


Richmond Fed Manufacturing Index for August

Consensus Forecast: 11

Consensus Range: 9 to 12


Like other regional surveys, Richmond Fed's manufacturing index has been unusually strong, rising to 14 in July with forecasters calling for only a slight give back in August to 11.  Back in March and April, this index posted its first back-to-back showings over 20 since 1994.




New Home Sales for July

Consensus Forecast, Annualized Rate: 610,000

Consensus Range:  590,000 to 622,000


New home sales entered the Spring on the downturn before popping higher to a 600,000 plus annualized rate in both May and June. Prices came down in June while supply improved which could be positives for July sales. Yet forecasters are calling for no change in July at 610,000.




Initial Jobless Claims for August 19 week

Consensus Forecast: 236,000

Consensus Range: 234,000 to 240,000


Seasonal adjustments have been on the mark and the summer's auto retooling season has yet to be a factor in weekly jobless claims which have held rock steady at historic low levels. Forecasters sees initial claims coming in at 236,000 in the August 19 week vs 232,000 in the August 12 week.


PMI Composite for August, Flash

Consensus Forecast: 54.3

Consensus Range: 53.6 to 55.0


PMI Manufacturing for August, Flash

Consensus Forecast: 53.2

Consensus Range: 52.9 to 55.0


PMI Services for August, Flash

Consensus Forecast: 54.8

Consensus Range: 53.8 to 55.7


Markit Economics' set of U..S. indicators is expected to show moderate but still constructive growth with services continuing to outpace manufacturing. The consensus for the PMI composite August flash is 54.3 with PMI manufacturing at 53.2 and PMI services at 54.8, all little or no changed from recent readings.


Existing Home Sales for July

Consensus Forecast, Annualized Rate: 5.570 million

Consensus Range: 5.490 to 5.650 million


Existing home sales are expected to move higher in July to a 5.570 million annualized rate from June's 5.520 million. Expectations are based on a strong rise in the pending home sales index which tracks contract signings and more times than not correctly signals changes for final sales. Prices in the June existing homes report, in contrast to the new homes report, were on the climb and could limit July's sales results.




Durable Goods Orders for July

Consensus Forecast, Month-to-Month Change: -5.7%

Consensus Range: -8.3% to -1.9%


Durable Goods Orders, Ex-Transportation

Consensus Forecast: 0.4%

Consensus Range: -0.1% to 0.8%


Durable Goods Orders, Core Capital Goods (Nondefense Ex-Aircraft)

Consensus Forecast: 0.5%

Consensus Range: 0.2% to 0.5%


A striking monthly decline of 5.7 percent is the call for July durable goods orders in a plunge, however, that would not completely reverse June's aircraft-boosted gain of 6.5 percent. And underneath the headline solid strength is expected with ex-transportation orders up 0.4 percent and with core capital goods (nondefense ex-aircraft) predicted to show new life with a 0.5 percent gain. If this report meets expectations, the dip in July manufacturing production would be forgotten and expectations would build for second-half factory momentum.