Fed hawks got support from some but not all of today's US economic data -- and even the supportive data were not particularly strong. So, I don't think these data change the odds of a Fed rate hike in September.
Strong Durable Goods Orders -- Strong
1. The underlying components of July Durable Goods Orders rose -- Ex Transportation +1.5% m/m and Nondefense Capital Goods Ex Civilian Aircraft +1.6% (2nd m/m increase in a row, as it followed +0.5% in June). The latter (known as Core Durables) is a leading indicator of capital spending.
2. The m/m gains support the hawk's contention that capital spending will pick up in H216.
3. But, by themselves, the data do not suggest a strong pickup.
a. The levels of these orders were above their respective Q216 averages, but they remained below those of Q116 and Q415.
b. Moreover, Core Durable Shipments were -0.4% m/m in July, continuing their downtrend. These are used by Commerce to construction Business Equipment Spending in GDP, so their decline shows that a pickup in equipment spending is yet to happen.
4. Manufacturers' Durable Goods Inventories -- a small portion of Business Inventories -- rose 0.3% m/m, after declining over Q216. This supports the idea that a bounce-back in Nonfarm Inventory Investment will boost Q316 GDP. But, the question remains whether this bounce-back will be one-off and thus not a sustainable boost to GDP growth.
5. These data are for July, which has seen stronger data print for many series. It remains to be seen whether July is the start of a trend or whether August data will pull back. The key August data are released next week.
Unemployment Claims Fall -- Strong
1. Initial Claims dipped 1k w/w to 361k. Continuing Claims fell 30k to 2.145 Mn. They suggest little change in labor market conditions in August, but are not good predictors of speedups/slowdowns in Payrolls or m/m change in the Unemployment Rate.
2. Initial remains slightly above the 258k July average.
3. Continuing is back to its average level since April, after popping up in the prior two weeks.
4. Continuing is for the August Payroll Survey Week. They are slightly above the 2.139 Mn in the July Survey Week.
5. Consensus for August Payrolls is now +164k (versus +217k in July). Consensus for the August Unemployment Rate is 4.8% (versus 4.9% in July).
August Markit Services PMI Falls -- Weak
1. The Market-IHS Services PMI fell to 50.9 from 51.4 in July. It is down to its lowest level since February.
2. The decline raises the risk that next week's August Non-Mfg ISM will fall, as well. Both moved in the same direction in 6 of 7 months this year.
Thursday, August 25, 2016
Sunday, August 21, 2016
Fedspeak is Getting More Confusing -- Yellen's Jackson Hole Speech To Resolve? September Rate Hike?
Fedspeak is getting more confusing, with some Fed officials making both dovish and hawkish comments. But, there is a chance the confusion will be resolved to some extent by Yellen's speech at the Fed's Jackson Hole conference this coming Friday.
Yellen's Speech
Yellen's speech is on the Fed's Monetary Policy Toolkit. It would seem from its title to focus on how the Fed can respond to negative shocks when the funds rate is close to zero. By citing other policy tools besides the funds rate, she would counter the hawks' argument for the need to have more room to cut the funds rate in the event of a negative shock to the economy.
It does not appear as if the speech should contain any specific hint regarding the September 20-21 FOMC Meeting. Its absence would be appropriate, particularly since key August US economic data will not be available until the following week. But, as there is no guarantee that this "no comment" will be the case, the markets are likely to trade cautiously ahead of the speech. Stocks could maintain their modest positive bias, nonetheless, as the consensus believes stocks respond well to Yellen's speeches/testimonies.
a. Fear of a hike still may weigh on the markets up until the September 20-21 FOMC meeting -- unless upcoming US economic data turn decidedly soft. I continue to think the odds are low for a rate hike at this meeting.
Fedspeak Confusion
Until recently, Fedspeak confusion stemmed from contradictory messages sent by the hawks and doves of Fed officials. Now, this confusion has been complicated by Fed officials speaking from both sides. Last week saw San Francisco President John Williams, a hawk, argue one day for near-zero Fed funds rates in the long run and then another day for a potential September hike. The week also saw NY Fed President Bill Dudley, a centrist, spend most of a speech providing reasons why the Fed should not hike rates only to conclude that further monetary policy tightening this year cannot be ruled out. Some Fed officials are clearly anxious to tighten.
Why Fed Hawks Want to Tighten
The Fed hawks tend to cite two main reasons for hiking the funds rate -- /1/ the need for room to cut the rate in the event the economy suffers a negative shock, and /2/ above-trend growth when the economy is at full employment.
Sufficiently High Funds Rate: Without enough room above the zero level, the Fed may not be able to cut the rate sufficiently to offset the impact of a negative shock to the economy. There are some counter arguments, however:
1. A hike in the funds rate could be the negative shock, itself.
2. There are some negative shocks for which a rate cut is not appropriate. This was the case in 2008, when a loss of confidence in banks' balance sheets led to a freeze-up of financial markets. The main effect of Bernanke's aggressive cutting of the funds rate then was to boost oil prices to $140/bbl, which pushed the consumer over the cliff. A Fed/Treasury guarantee of banks' liabilities, similar to what ECB President Draghi did in Europe, would have been a more successful policy action.
3. The Fed has other tools with which to conduct monetary policy, which Yellen could address in her speech.
Above-Trend Growth When Economy at Full Employment: A continuation of above-trend growth in this situation will eventually lift inflation. But, there is a counter argument here, too:
1. Fed hawks in the past, like Larry Meyer in the late 1990s, made the same argument. The problem with this argument in the late 1990s, and likely now, is that other factors offset the tightness of the labor market and held down inflation. As a result, inflation then stayed low while the unemployment rate fell to around 4.0%. Inflation is currently stable and below the Fed's 2% target, suggesting more is going on with inflation than just a tighter labor market -- which should permit the unemployment rate to fall further without being inflationary.
A Rate Hike at the September FOMC Meeting?
The hawks, and Dudley, have emphasized that a rate hike is on the table at the September FOMC Meeting. The recent strengthening in some US economic data -- which highlighted the risk of above-trend growth -- is likely a major factor behind their view. This strengthening may not persist, however, as I mentioned in my prior blog. Here is more evidence suggesting caution in reading too much into the recently strong economic data:
1. The latest Unemployment Claims data hint that a near-term slowing may indeed be in the cards. Besides Initial Claims staying above 260k in the latest week, Continuing Claims have climbed in the latest 4 weeks and reached their highest level since May. These data suggest the pace of layoffs remains steady, while the re-hiring rate has weakened. Although there is not a reliable relationship between Initial/Continuing Claims and the m/m change in Payrolls, the Claims data raise the possibility that August Payrolls will slow to below 200k m/m.
2. The July Fed Senior Loan Officer Survey provides a reason for a near-term slowdown. Banks, on balance, tightened lending standards on C&I and Commercial Real Estate Loans. This could help explain why hiring may be slowing.
a. Note that commentators do not seem to have focused much, if at all, on these survey results.
b. The last time I looked at Lending Standards on C&I Loans, I found a clear inverse relationship with the funds rate -- the tighter the lending standards, the lower the funds rate. The relationship suggests that a near-zero funds rate is appropriate currently.
Yellen's Speech
Yellen's speech is on the Fed's Monetary Policy Toolkit. It would seem from its title to focus on how the Fed can respond to negative shocks when the funds rate is close to zero. By citing other policy tools besides the funds rate, she would counter the hawks' argument for the need to have more room to cut the funds rate in the event of a negative shock to the economy.
It does not appear as if the speech should contain any specific hint regarding the September 20-21 FOMC Meeting. Its absence would be appropriate, particularly since key August US economic data will not be available until the following week. But, as there is no guarantee that this "no comment" will be the case, the markets are likely to trade cautiously ahead of the speech. Stocks could maintain their modest positive bias, nonetheless, as the consensus believes stocks respond well to Yellen's speeches/testimonies.
a. Fear of a hike still may weigh on the markets up until the September 20-21 FOMC meeting -- unless upcoming US economic data turn decidedly soft. I continue to think the odds are low for a rate hike at this meeting.
Fedspeak Confusion
Until recently, Fedspeak confusion stemmed from contradictory messages sent by the hawks and doves of Fed officials. Now, this confusion has been complicated by Fed officials speaking from both sides. Last week saw San Francisco President John Williams, a hawk, argue one day for near-zero Fed funds rates in the long run and then another day for a potential September hike. The week also saw NY Fed President Bill Dudley, a centrist, spend most of a speech providing reasons why the Fed should not hike rates only to conclude that further monetary policy tightening this year cannot be ruled out. Some Fed officials are clearly anxious to tighten.
Why Fed Hawks Want to Tighten
The Fed hawks tend to cite two main reasons for hiking the funds rate -- /1/ the need for room to cut the rate in the event the economy suffers a negative shock, and /2/ above-trend growth when the economy is at full employment.
Sufficiently High Funds Rate: Without enough room above the zero level, the Fed may not be able to cut the rate sufficiently to offset the impact of a negative shock to the economy. There are some counter arguments, however:
1. A hike in the funds rate could be the negative shock, itself.
2. There are some negative shocks for which a rate cut is not appropriate. This was the case in 2008, when a loss of confidence in banks' balance sheets led to a freeze-up of financial markets. The main effect of Bernanke's aggressive cutting of the funds rate then was to boost oil prices to $140/bbl, which pushed the consumer over the cliff. A Fed/Treasury guarantee of banks' liabilities, similar to what ECB President Draghi did in Europe, would have been a more successful policy action.
3. The Fed has other tools with which to conduct monetary policy, which Yellen could address in her speech.
Above-Trend Growth When Economy at Full Employment: A continuation of above-trend growth in this situation will eventually lift inflation. But, there is a counter argument here, too:
1. Fed hawks in the past, like Larry Meyer in the late 1990s, made the same argument. The problem with this argument in the late 1990s, and likely now, is that other factors offset the tightness of the labor market and held down inflation. As a result, inflation then stayed low while the unemployment rate fell to around 4.0%. Inflation is currently stable and below the Fed's 2% target, suggesting more is going on with inflation than just a tighter labor market -- which should permit the unemployment rate to fall further without being inflationary.
A Rate Hike at the September FOMC Meeting?
The hawks, and Dudley, have emphasized that a rate hike is on the table at the September FOMC Meeting. The recent strengthening in some US economic data -- which highlighted the risk of above-trend growth -- is likely a major factor behind their view. This strengthening may not persist, however, as I mentioned in my prior blog. Here is more evidence suggesting caution in reading too much into the recently strong economic data:
1. The latest Unemployment Claims data hint that a near-term slowing may indeed be in the cards. Besides Initial Claims staying above 260k in the latest week, Continuing Claims have climbed in the latest 4 weeks and reached their highest level since May. These data suggest the pace of layoffs remains steady, while the re-hiring rate has weakened. Although there is not a reliable relationship between Initial/Continuing Claims and the m/m change in Payrolls, the Claims data raise the possibility that August Payrolls will slow to below 200k m/m.
2. The July Fed Senior Loan Officer Survey provides a reason for a near-term slowdown. Banks, on balance, tightened lending standards on C&I and Commercial Real Estate Loans. This could help explain why hiring may be slowing.
a. Note that commentators do not seem to have focused much, if at all, on these survey results.
b. The last time I looked at Lending Standards on C&I Loans, I found a clear inverse relationship with the funds rate -- the tighter the lending standards, the lower the funds rate. The relationship suggests that a near-zero funds rate is appropriate currently.
Monday, August 15, 2016
Early Evidence on Q316 Real GDP -- Good News for Stocks?
The early projections of the Atlanta and NY Fed models call for a speedup in Q316 Real GDP Growth to 2.4-3.5% (q/q, saar) from 1.2% in Q216. They belie some commentators' assertion that US economic growth is weak. And, they help explain the continuing uptrend in stocks during the summer.
But, in truth, very little data regarding Q316 GDP have been released as yet. With the higher frequency US economic data released so far still mixed, the risk is that these model forecasts will come down as we move through the quarter. Moreover, some of the projected speedup stems from a bounce-back in Non-farm Inventory Investment, after it fell in Q216, which could be one-off. As a result, the ultimate strength of Q316 GDP or its sustainability should remain uncertain. So, the odds remain low that the Fed will hike rates at the September FOMC Meeting -- a positive for both stocks and Treasuries.
The two prominent pieces of US economic data for July were mixed -- a strong Employment Report but soft Retail Sales. There may be less than meets the eye for both. The strength of the Employment Report could have resulted from a further catch-up after the weak May jobs report. The weakness in Retail Sales could have been just volatility after a strong June. Even if department store sales are depressed in August, as demand for fall clothing is hurt by the hot weather in parts of the country, Q316 Consumption should be boosted by spending on air conditioning. And, apparel demand should rebound as the weather returns to normal in September and October.
The broadest high-frequency measure of US economic activity -- Initial Unemployment Claims -- hint at a moderation in economic growth in August after a speedup in June-July. They bottomed in the first half of July (to be sure, a period of difficult seasonal adjustment because of summer plant shutdowns), and are back to June levels in the first week of August:
Initial Unemployment Claims (level, 000s, monthly average)
August -- First Week 266
July 259 (weekly low of 252)
June 267
May 277
April 260
The ECRI Leading Index also suggests a moderation of growth in August, as it has come off its highs in the latest 2-3 weeks:
But, in truth, very little data regarding Q316 GDP have been released as yet. With the higher frequency US economic data released so far still mixed, the risk is that these model forecasts will come down as we move through the quarter. Moreover, some of the projected speedup stems from a bounce-back in Non-farm Inventory Investment, after it fell in Q216, which could be one-off. As a result, the ultimate strength of Q316 GDP or its sustainability should remain uncertain. So, the odds remain low that the Fed will hike rates at the September FOMC Meeting -- a positive for both stocks and Treasuries.
The two prominent pieces of US economic data for July were mixed -- a strong Employment Report but soft Retail Sales. There may be less than meets the eye for both. The strength of the Employment Report could have resulted from a further catch-up after the weak May jobs report. The weakness in Retail Sales could have been just volatility after a strong June. Even if department store sales are depressed in August, as demand for fall clothing is hurt by the hot weather in parts of the country, Q316 Consumption should be boosted by spending on air conditioning. And, apparel demand should rebound as the weather returns to normal in September and October.
The broadest high-frequency measure of US economic activity -- Initial Unemployment Claims -- hint at a moderation in economic growth in August after a speedup in June-July. They bottomed in the first half of July (to be sure, a period of difficult seasonal adjustment because of summer plant shutdowns), and are back to June levels in the first week of August:
Initial Unemployment Claims (level, 000s, monthly average)
August -- First Week 266
July 259 (weekly low of 252)
June 267
May 277
April 260
The ECRI Leading Index also suggests a moderation of growth in August, as it has come off its highs in the latest 2-3 weeks:
Friday, August 5, 2016
July Employment Report Continues the String of Strong July US Economic Data
The July Employment Report extended the string of strong July US economic data. Stocks should move up for at least a couple of weeks, possibly making new highs, as the post-Q2 GDP sell-off earlier this week looks to have been misguided. Treasuries should remain under pressure, as the possibility of a September Fed rate hike comes back into focus on the screens.
Here are a few points about the Employment Report:
1. The +255k increase in Nonfarm Payrolls looks to have been widespread, although most of the gain was in the low-productivity business services and health care. So, the gain may not translate into strong Q316 GDP Growth.
a. The cyclical sectors -- manufacturing, construction and retail -- posted modest job gains. Interestingly, much of the gain in manufacturing was in the motor vehicle sector -- joining the strength in July Motor Vehicle Sales in undermining the fears of weakness stemming from the Ford earnings miss a week ago. Also interestingly, jobs in new residential construction was flattish, joining the weakness in June Construction Spending in raising doubts about the strength of this interest-sensitive sector.
b. To be sure, some of the July Payroll strength could be a continuation of the catch-up from May that was evident in the jump in June Payrolls. So, today's report is far from being the final word on Q316 economic activity and labor market.
2. The uptick in the Nonfarm Workweek to 34.5 Hours from 34.4 Hours adds to the strong implications of the Payroll gain regarding a pickup in economic activity at the start of Q316.
3. The Unemployment Rate raises questions about whether the Payroll strength will translate into a sharp pickup in Q316 Real GDP Growth, however.
a. The Rate was steady at 4.9%, keeping it equal to the Q216 average -- suggesting near-trend GDP Growth (sub-2.0%).
b. The unrounded Rate was 4.88%, up slightly from the 4.86% Q216 average.
c. U-6, the broadest published measure of un-/under-employment edged up to 9.7% from 9.6% in June, putting it back to the April-May level.
4. The 0.3% m/m jump in July Average Hourly Earnings likely overstates the trend in wage inflation.
a. The jump is an offset to the soft 0.1% m/m increase in June.
b. Calendar considerations could have been responsible for the high print, as they pointed to a 0.3% m/m gain.
c. The y/y was steady at 2.6%.
Here are a few points about the Employment Report:
1. The +255k increase in Nonfarm Payrolls looks to have been widespread, although most of the gain was in the low-productivity business services and health care. So, the gain may not translate into strong Q316 GDP Growth.
a. The cyclical sectors -- manufacturing, construction and retail -- posted modest job gains. Interestingly, much of the gain in manufacturing was in the motor vehicle sector -- joining the strength in July Motor Vehicle Sales in undermining the fears of weakness stemming from the Ford earnings miss a week ago. Also interestingly, jobs in new residential construction was flattish, joining the weakness in June Construction Spending in raising doubts about the strength of this interest-sensitive sector.
b. To be sure, some of the July Payroll strength could be a continuation of the catch-up from May that was evident in the jump in June Payrolls. So, today's report is far from being the final word on Q316 economic activity and labor market.
2. The uptick in the Nonfarm Workweek to 34.5 Hours from 34.4 Hours adds to the strong implications of the Payroll gain regarding a pickup in economic activity at the start of Q316.
3. The Unemployment Rate raises questions about whether the Payroll strength will translate into a sharp pickup in Q316 Real GDP Growth, however.
a. The Rate was steady at 4.9%, keeping it equal to the Q216 average -- suggesting near-trend GDP Growth (sub-2.0%).
b. The unrounded Rate was 4.88%, up slightly from the 4.86% Q216 average.
c. U-6, the broadest published measure of un-/under-employment edged up to 9.7% from 9.6% in June, putting it back to the April-May level.
4. The 0.3% m/m jump in July Average Hourly Earnings likely overstates the trend in wage inflation.
a. The jump is an offset to the soft 0.1% m/m increase in June.
b. Calendar considerations could have been responsible for the high print, as they pointed to a 0.3% m/m gain.
c. The y/y was steady at 2.6%.
Wednesday, August 3, 2016
July US Economic Data So Far Not Weak
While Friday's shockingly weak Q216 Real GDP print threw into doubt the underlying pace of US economic growth, this week's US economic data for July still suggest a pickup in Q316 growth.
This suggests that the latest stock market sell-off is overdone, as commentators attribute some of it to what was deemed weak US economic data this week.
a. Some of the stock market weakness may be what is typically been seen in August, as many market participants go on vacation.
The increase in Treasury yields yesterday was more consistent with the data.
a. Market participants attributed the increase in yields to an increase in Japanese yields. The latter may have been a reaction to the Japanese shift to a more aggressive fiscal policy. It underscores that perhaps the biggest threat to the US Treasury is a shift to more expansive fiscal policy with the new administration -- whether it be Clinton or Trump.
This week's US economic data:
1. While the Mfg ISM slipped to 52.6 in July from 53.1 in June, it remains above the 51.8 Q216 average.
a. The composition of the July Mfg ISM was strong. It shows New Orders and Production remaining at high levels.
2. July Motor Vehicle Sales surged to 17.9 Mn Units (saar) -- well above expectations and a new high for the move up.
a. Although Ford and GM sales fell y/y and were below expectations, these clearly were not a signal of widespread consumer weakness. Shifts in market share, difficult y/y comparisons (as their sales may have been very strong in July 2015), or y/y shifts in seasonal factors (which means that the standard y/y comparison is distorted) could have been responsible for their sales declines.
3. The +179k m/m July ADP Estimate is above the +149k m/m Q216 average for Nonfarm Payrolls.
a. To be sure, the ADP Estimate risks being too high relative to this coming Friday's July Payroll print. It is possible that the jump in June Payrolls lifted the July ADP Estimate, as the prior month's actual is an input into the current month's ADP Estimate.
This suggests that the latest stock market sell-off is overdone, as commentators attribute some of it to what was deemed weak US economic data this week.
a. Some of the stock market weakness may be what is typically been seen in August, as many market participants go on vacation.
The increase in Treasury yields yesterday was more consistent with the data.
a. Market participants attributed the increase in yields to an increase in Japanese yields. The latter may have been a reaction to the Japanese shift to a more aggressive fiscal policy. It underscores that perhaps the biggest threat to the US Treasury is a shift to more expansive fiscal policy with the new administration -- whether it be Clinton or Trump.
This week's US economic data:
1. While the Mfg ISM slipped to 52.6 in July from 53.1 in June, it remains above the 51.8 Q216 average.
a. The composition of the July Mfg ISM was strong. It shows New Orders and Production remaining at high levels.
2. July Motor Vehicle Sales surged to 17.9 Mn Units (saar) -- well above expectations and a new high for the move up.
a. Although Ford and GM sales fell y/y and were below expectations, these clearly were not a signal of widespread consumer weakness. Shifts in market share, difficult y/y comparisons (as their sales may have been very strong in July 2015), or y/y shifts in seasonal factors (which means that the standard y/y comparison is distorted) could have been responsible for their sales declines.
3. The +179k m/m July ADP Estimate is above the +149k m/m Q216 average for Nonfarm Payrolls.
a. To be sure, the ADP Estimate risks being too high relative to this coming Friday's July Payroll print. It is possible that the jump in June Payrolls lifted the July ADP Estimate, as the prior month's actual is an input into the current month's ADP Estimate.
Friday, July 29, 2016
Q2 Real GDP Shockingly Weak
Today's shockingly weak Q216 GDP print underscores that US economic growth slowed sharply since last fall. It argues against a September Fed rate hike.
a. The shockingly low 1.2% (q/q, saar) increase in Q216, after a downward-revised 0.8% in Q116, is the 3rd quarter in a row that Real GDP Growth was under 1.5%. Real GDP Growth averaged a meager 1.0% over the Q415-Q216 period.
b. Prior to this, Real GDP Growth averaged 2.2% over the first 3 quarters of 2015 and 2.5% over 2014.
Much of the weakness since Q415 has been in business investment -- capital spending, oil drilling and, in Q216, inventory investment. Besides the drag from the oil sector, businesses look to have been quite cautious about the outlook.
a. Some of the caution may have been in response to weak growth abroad and uncertainty about the upcoming Presidential election. However, it also could have been in response to fears of Fed tightening ahead and to the implications of some of Obama's executive orders or agency rulings on items like net neutrality of the internet. In any case, the slowdown coincided with both the Fed tightening through forward guidance and Obama's actions.
While some Street economists may argue that the Q2 GDP composition -- particularly the weak inventory investment -- bodes well for Q316 GDP, the reasons behind the Q216 weakness still exist. Moreover, the strength of Consumer Spending in Q216 will probably not repeat itself in Q316. So, another sub-2.0% GDP Growth Rate in Q316 may be in the cards.
The inflation side of the GDP report was benign and also argues against a September Fed rate hike.
a. The Core PCE Deflator slowed to 1.7% (q/q, saar) in Q216 from 2.1% in Q116.
b. The Market-Based Core PCE Deflator slowed to 1.6% from 1.8%.
c. While the Total PCE Deflator sped up to 1.9% from 0.3%, this was due to the jump in oil prices -- which have subsequently fallen sharply.
Even more disturbing than the below-expected print for Q2 Real GDP is the possibility that the near-1.0% pace may be near the potential growth rate. This does not bode well for an improving trend in US standard of living.
a. The 1.0% average pace since Q416 has been associated with an essentially steady Unemployment Rate of around 5.0%.
The low Q216 print was a bad miss for the Fed's Nowcasting GDP Models.
a. These models had projected 2.2-2.4%, although the Atlanta Fed's model lowered its forecast to 1.8% yesterday after the Commerce Department released preliminary data for the June Trade Balance and Business Inventories.
b. One reason for the high estimates may be a problem with at least one of the proxies the models use for missing data. In particular, the Atlanta Fed uses the Mfg ISM (total index and inventory component) to estimate Nonfarm Inventory Investment. I have never found the Mfg ISM to be a reliable predictor of q/q changes in GDP or Nonfarm Inventory Investment.
a. The shockingly low 1.2% (q/q, saar) increase in Q216, after a downward-revised 0.8% in Q116, is the 3rd quarter in a row that Real GDP Growth was under 1.5%. Real GDP Growth averaged a meager 1.0% over the Q415-Q216 period.
b. Prior to this, Real GDP Growth averaged 2.2% over the first 3 quarters of 2015 and 2.5% over 2014.
Much of the weakness since Q415 has been in business investment -- capital spending, oil drilling and, in Q216, inventory investment. Besides the drag from the oil sector, businesses look to have been quite cautious about the outlook.
a. Some of the caution may have been in response to weak growth abroad and uncertainty about the upcoming Presidential election. However, it also could have been in response to fears of Fed tightening ahead and to the implications of some of Obama's executive orders or agency rulings on items like net neutrality of the internet. In any case, the slowdown coincided with both the Fed tightening through forward guidance and Obama's actions.
While some Street economists may argue that the Q2 GDP composition -- particularly the weak inventory investment -- bodes well for Q316 GDP, the reasons behind the Q216 weakness still exist. Moreover, the strength of Consumer Spending in Q216 will probably not repeat itself in Q316. So, another sub-2.0% GDP Growth Rate in Q316 may be in the cards.
The inflation side of the GDP report was benign and also argues against a September Fed rate hike.
a. The Core PCE Deflator slowed to 1.7% (q/q, saar) in Q216 from 2.1% in Q116.
b. The Market-Based Core PCE Deflator slowed to 1.6% from 1.8%.
c. While the Total PCE Deflator sped up to 1.9% from 0.3%, this was due to the jump in oil prices -- which have subsequently fallen sharply.
Even more disturbing than the below-expected print for Q2 Real GDP is the possibility that the near-1.0% pace may be near the potential growth rate. This does not bode well for an improving trend in US standard of living.
a. The 1.0% average pace since Q416 has been associated with an essentially steady Unemployment Rate of around 5.0%.
The low Q216 print was a bad miss for the Fed's Nowcasting GDP Models.
a. These models had projected 2.2-2.4%, although the Atlanta Fed's model lowered its forecast to 1.8% yesterday after the Commerce Department released preliminary data for the June Trade Balance and Business Inventories.
b. One reason for the high estimates may be a problem with at least one of the proxies the models use for missing data. In particular, the Atlanta Fed uses the Mfg ISM (total index and inventory component) to estimate Nonfarm Inventory Investment. I have never found the Mfg ISM to be a reliable predictor of q/q changes in GDP or Nonfarm Inventory Investment.
Wednesday, July 27, 2016
June Durable Goods Orders Disappoint
June Durable Goods Orders were disappointing, as they failed to catch up to the strength seen in recent manufacturing surveys. They could be showing that companies are not investing in new capital equipment, despite some improvement in sentiment. Or, they could be showing that demand from abroad for US durable goods continues to be hurt by the stronger dollar or weakness in non-US economies. In either case, the data are likely to reinforce the cautious view of some Fed officials. Today's FOMC Statement is likely to repeat that "business fixed investment has been soft."
The weakness in Durables argues against a Fed rate hike in September. As such, it is a positive for both stocks and Treasuries.
Here are a few key points:
1. While the underlying Core Durable Goods Orders (Non-defense Capital Goods Excluding Civilian Aircraft) edged up 0.2% m/m, they remain below the Q216 average as well as the averages of the prior two quarters. They do not bode well for capital spending in Q316.
2. Core Durable Goods Shipments fell for the 2nd month in a row, and Durable Goods Inventories fell, too. These are inputs into Q2 GDP and work to hold down the latter. The Fed model estimates are likely to remain at 2.2-2.4% (q/q, saar). Possibly, the NY Fed's early projection of Q316 GDP could be revised down from the the 2.6% estimate.
3. To be sure, the 4.0% drop in Total Durable Goods Orders exaggerates weakness, as it was depressed by declines in volatile civilian aircraft orders (hurt by seasonal factors, as well) and defense orders.
The weakness in Durables argues against a Fed rate hike in September. As such, it is a positive for both stocks and Treasuries.
Here are a few key points:
1. While the underlying Core Durable Goods Orders (Non-defense Capital Goods Excluding Civilian Aircraft) edged up 0.2% m/m, they remain below the Q216 average as well as the averages of the prior two quarters. They do not bode well for capital spending in Q316.
2. Core Durable Goods Shipments fell for the 2nd month in a row, and Durable Goods Inventories fell, too. These are inputs into Q2 GDP and work to hold down the latter. The Fed model estimates are likely to remain at 2.2-2.4% (q/q, saar). Possibly, the NY Fed's early projection of Q316 GDP could be revised down from the the 2.6% estimate.
3. To be sure, the 4.0% drop in Total Durable Goods Orders exaggerates weakness, as it was depressed by declines in volatile civilian aircraft orders (hurt by seasonal factors, as well) and defense orders.
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