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Core CPI modest though caution the call
Simply Economics - October 13, 2017
By Mark Pender, Senior Editor



It was a week of soaring economic headlines that, however, were the results of hurricanes. Behind the headlines were mostly softer details whether for inflation or consumer spending. Yet even at the core levels, there lurks the prior week's September employment report and its echoes of full employment and wage increases.


The economy

Core inflation has been coming alive but slowly with a 0.1 percent gain in September, well actually 0.13 percent looking at 2 decimal places which is common for this reading given its importance for Fed policy. The core came alive in August with a 0.25 percent gain on an uptick in housing which is the biggest component of consumer prices. The 3-month average is 0.16 percent which, in a small plus, is the best since February. The core excludes energy which spiked on hurricane effects driving up total prices by a distorted 0.5 percent.


Turning to year-on-year rates, the core isn't living up to its monthly progress. The Fed's stated target for total prices is 2 percent which the overall CPI, at 2.2 percent, managed to breach for the 1st time in 5 months. But without energy effects, which may prove one-time effects tied to Harvey's strike on Texas, prices wouldn't have made it over. In fact the core rate didn't accelerate at all, holding at the 1.7 percent line for the 5th month in a row. Note the Fed's target is tied to its own inflation index, not the CPI, but let's not quibble.


Housing makes up more than 40 percent of the CPI and though it popped higher in August, it didn't keep up in September with the yearly rate edging down 1 tenth to 2.8 percent. The most closely watched subcomponent is owners' equivalent rent (a measure that tracks what renters think it would cost to own their own home), but this slowed after an August uptick. Medical costs, which are nearly 10 percent of consumer costs, have been also been holding down prices, here sliding prescription costs are a key factor.


Moderating costs keep money in our pockets which may be one reason why retail sales proved strong in September, jumping 1.6 percent for the biggest gain in 2-1/2 years. The main reason though is hurricane effects: replacement demand for autos and price-inflated sales at gasoline stations. Yet even with September's spike, growth in total retail sales has been no better than flat over the past year, trending at the 0.4 percent monthly line. Yet 0.4 percent over 12 months makes for a nearly 5 percent annual rate.


But when stripping out autos and gasoline sales, 2 components that can distort the underlying picture, retail sales don't come in at the 5 percent line at all but just below 4 percent as tracked in the blue line of the graph and the red trend line. The graph's columns track monthly change which did come in at a very solid 0.5 percent in September. Restaurant sales were a key plus though the strength here follows a run of weakness in prior months. Trends for most subcomponents are in fact flat at moderate rates of growth.


Clearly not flat is the consumer's sense of well being which, in contrast to retail sales, has been unusually strong this year. The consumer sentiment index spiked 6 points in mid-October to 101.1 for the best score in 13 years. But the trend for sentiment has been running well behind another reading, the consumer confidence index which has been at 16 year highs all year. Confidence in income is behind all the strength reflecting full employment, low inflation, stock gains, and now perhaps even wage acceleration.


Lack of wage punch has been a big issue but maybe not so much anymore. Those 0.5 percent gains in average hourly earnings from the prior week's employment report (a new one in September and an upward revision for August) are worth returning to. They apparently didn't spill over into September's consumer prices but they do help explain the gains in confidence and do hint at what FOMC hawks fear most: a wage burst tied to full employment. And full employment is the story of the week's job data including the JOLTs report.


August Job openings held steady at 6.082 million while hirings remained far behind, at 5.430 million. This gap appeared 2-1/2 years ago signaling that employers are either not offering enough pay to fill empty slots and/or can't find applicants with the right skills. For comparison, the number of job seekers actively pounding the pavement is 6.911 million which is very near the total number of available openings. And the spread between openings and hirings, at 652,000, is one of the widest on record.


Jobless claims are also pointing to full employment. Hurricanes did push initial claims sharply higher though the effect, given easing in Texas and Florida, has almost entirely faded. Never showing any effect are continuing claims which have moved lower all along and with the latest reading, for the September 30 week, at a new 44-year low of 1.889 million. And this low is at a time when the U.S. workforce numbers 161 million, nearly twice as large as the 90 million back in 1973. Are we at full employment? This series says yes!


But a time bomb's ticking and that's Peurto Rico. Washington had been estimating claims after Maria but now that the territory's San Juan unemployment office has reopened there aren't any claims to report, barely over 100. Why? Because the unemployed, due to the devastation, can't get to the office and make their claims. What will happen when they do? Anybody's guess. Claims in the Virgin Islands, also hit by Maria and home to about 100,000, have surged 10 fold to 1,000 plus. Puerto Rico's population: 3.5 million.


Markets: When immoderate gains enter into the debate

The Fed's focus is keeping employment high and inflation at a constructive level. But there's in fact a quiet 3rd focus – and that's stability of the financial markets. Will rising stock values, always a hush-hush topic at the Fed, enter into the open debate at the coming FOMC meetings? GDP this year, at 1.2 and 3.1 percent in the 1st and 2nd quarters and probably somewhere between for the 3rd quarter, has really been no better than moderate. The year-to-date gain for the Dow is a less-than-moderate 15.7 percent.


Markets at a Glance Year-End Week Ended Week Ended Year-To-Date Weekly
2016 6-Oct-17 13-Oct-17 Change Change
DJIA 19,762.60 22,773.67 22,871.72 15.7% 0.4%
S&P 500 2,238.83 2,549.33 2,553.17 14.0% 0.2%
Nasdaq Composite 5,383.12 6,590.18 6,605.80 22.7% 0.2%
Crude Oil, WTI ($/barrel) $53.71 $49.32 $51.36 -4.4% 4.1%
Gold (COMEX) ($/ounce) $1,152.50 $1,277.40 $1,305.90 13.3% 2.2%
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% 1.53% 1.51% 30 bp –2 bp
10-Year Treasury Yield 2.45% 2.37% 2.28% –17 bp –9 bp
Dollar Index 102.26 93.81 93.08 -9.0% -0.8%


The bottom line

"As informed by incoming data" is how guidance has ended in each of the last 15 FOMC statements, a refrain that helps us to assess recent economic data and order it in importance. The lack of punch in the core CPI does reinforce this year's overall trend of weak inflation. But the indications of full employment, more emphatic than ever and led by the 16-year low for the unemployment rate at 4.2 percent, together with the pop higher for average hourly earnings, may be pointing to a Fed that will become increasingly more concerned with the risk of inflation.


Week of October 16 to October 20

Manufacturing is a major theme of the week with Empire State on Monday and Philly Fed on Thursday, a tandem of reports running at record strength and which will offer early assessments of October's activity. On Tuesday, the Federal Reserve will release the industrial production report which will offer definitive data on manufacturing activity during the hurricane-stricken month of September. Housing is also front and center with the housing market index on Wednesday, which slowed in the prior report, preceding Thursday's housing starts report that generally has been slowing. Clearly slowing has been existing home sales which will wind up on the week on Friday. Yet there are two other stand-out reports in week: the Beige Book on Wednesday in which wage pressure assessments will be closely watched going into the month-end FOMC and jobless claims on Thursday where a Puerto Rican effect may or may not emerge. The week winds up on Friday with Janet Yellen who, however, will be delivering a dinner speech to the National Economists Club after markets have closed.




Empire State Index for October

Consensus Forecast: 20.0

Consensus Range: 18.0 to 24.1


Overheating is the signal from Empire State's respondents who have been reporting sharply accelerating activity from already highly elevated levels. New orders are at 8-year highs while delivery delays are at record levels and consistent, aside from possible hurricane-related delivery delays that may be hitting the Northeast, with unsustainable activity that is clogging the supply chain. The index has far surpassed expectations at 24.4 and 25.2 the last 2 reports with forecasters seeing the October index coming in at 20.0.


Treasury Budget for September

Consensus Forecast: $3.0 billion

Consensus Range: -$3.0 to $48.0 billion


Ten months into fiscal year 2017, the government's deficit in July was tracking 10.6 percent above fiscal year 2016. The spending side is where the red ink lies with increases in Social Security payments and net interest. Higher receipts, led by individual income taxes, are only a partial offset to the rise in spending. The Econoday consensus for August is calling for a $3.0 billion surplus. Note the exact day of this release is still undetermined.




Import Prices for September

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

Consensus Range: 0.2% to 0.8%


Export Prices

Consensus Forecast, Month-to-Month Change: 0.4%

Consensus Range: -0.1% to 0.5%


September's import prices are not expected to cool much from August, the result of hurricane-inflated energy prices. Econoday's consensus is a 0.5 percent gain vs August's 0.6 percent surge while export prices, which also rose 0.6 percent in August on the back of petroleum-related price strength in industrial supplies, are expected to increase 0.4 percent. Outside of one-time factors, however, there were indications of fundamental price increases in August as finished goods posted rare and wide increases.


Industrial Production for September

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

Consensus Range: -0.9% to 0.8%


Manufacturing Production

Consensus Forecast,  Month-to-Month Change: 0.3%

Consensus Range: 0.0% to 0.6%


Capacity Utilization Rate

Consensus Forecast: 76.2%

Consensus Range: 75.4% to 76.5%


However much diffusion reports like Empire State have been recording strength, the Federal Reserve's industrial production report has been showing weakness for manufacturing: a 0.3 percent decline for the component in August, no change in July, a 0.2 percent gain in June, and a 0.5 percent drop in May. But the weakness in August was tied at least in part to one-time effects from Hurricanes Harvey and Irma and forecasters are calling for a 0.3 percent September gain. But the outlook for the total industrial production, the result of uncertainties over hurricane effects on mining and utility demand, is very wide, from minus 0.9 percent to plus 0.8 percent with the consensus at plus 0.1 percent. Capacity utilization is seen at 76.2 percent vs 76.1 in August.


Housing Market Index for October

Consensus Forecast: 64

Consensus Range: 63 to 66


Optimism among home builders eased noticeably in September though hurricane effects were hard to identify. Current sales dipped as did traffic which has been stubbornly weak through the whole expansion and reflecting lack of interest among first-time buyers. Forecasters see the housing market index holding unchanged at 64 in October.




Housing Starts for September

Consensus Forecast, Adjusted Annualized Rate: 1.170 million

Consensus Range: 1.150 to 1.210 million


Building Permits

Consensus Forecast: 1.230 million

Consensus Range: 1.190 to 1.280 million


Housing starts in August showed some effects from Hurricane Harvey with weakness in the South pulling down the annualized rate to 1.180 million though further details did show general strength for the key single-family component against sharp weakness for multi-family units. Permits, where weather effects are marginal, rose sharply to a 1.272 million rate where however contributions from single-family and mulita-family units were turned around, with the former soft and the latter strong. The Econoday consensus for total housing starts in September is 1.170 million for what would be a small decline with permits at 1.230 million and a more sizable decline.


Beige Book

Prepared for the October 31 & November 1 FOMC Meeting


"Modest-to-moderate" has unfortunately been the general economic refrain in the Beige Book all year, accompanied however by consistent warnings of labor market tightness and isolated wage pressures. If wage observations increase in intensity, expectations for Federal Reserve rate hikes could be heightened. The prior report cited the effects of Hurricanes Harvey and Irma that included general economic disruptions and specific trouble for oil and natural gas production. Weakness in auto sales was one observation of the last report which, given the giant replacement spike in September, is likely to be reversed in the latest edition.




Initial Jobless Claims for October 14 week

Consensus Forecast: 240,000

Consensus Range: 235,000 to 250,000


Effects from Hurricanes Harvey and Irma have been clearly fading in jobless claims which came in at 243,000 in the October 7 week and only slightly above late August levels. But the effects of Hurricane Maria remain as a major wildcard as Puerto Rico where claims, which are no longer being estimated, have been dribbling in not due presumably to lack of joblessness in the territory but to lack of access to San Juan's unemployment office. Any effect, however, isn't the call among forecasters who see initial jobless claims coming in little changed at 243,000 in the October 14 week.


Philadelphia Fed Manufacturing Index for October

Consensus Forecast: 20.2

Consensus Range: 15.0 to 25.8


There are no words left to describe the intensity of strength being report by respondents to the Philly Fed manufacturing report. The headline, at 23.8 in September and well beyond Econoday's high estimate, only scratched the surface as new orders poured in at one of the strongest rates of the expansion with backlog orders and shipments among the very strongest in the 50-year history of this report. The consensus for the October index is 20.2.




Index of Leading Economic Indicators for September

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

Consensus Range: 0.1% to 0.3%


Low short-term interest rates, high consumer expectations, and ISM manufacturing orders have been underpinning the index of leading economic indicators which rose 0.4 percent in August. But the hurricane-related spike in initial jobless claims will hold down September's results were the Econoday consensus is for only a 0.1 percent gain.


Existing Home Sales for September

Consensus Forecast, Annualized Rate: 5.300 million

Consensus Range: 5.100 to 5.400 million


Weakness in the Harvey-hit region of the South pulled down existing home sales by 1.7 percent to a 5.350 million annualized rate though sales in the West were also weak. Price strength has been slowing though supply of available homes on the market has remained very tight. The National Association of Realtors warned in the last report that hurricane effects could slow resales through the remainder of the year. Forecasters see September's results, a month hit by Hurricane Irma's strike on Florida, coming in a bit lower at 5.300 million.