Economic Notes: September 22, 2014


Written by: Jon McGraw

  • Aside from the FOMC meeting—where language was scrutinized but little actually changed—the economic week was mixed. Several regional economic indexes came in with positive results, inflation was virtually unchanged and housing results were a bit disappointing relative to expectations.
  • Equity markets were higher in the U.S. with a lack of hawkish surprise from the Fed and a few other geopolitical risks (notably Scotland) easing, and outperformed foreign markets. Bonds were slightly higher on rates that initially rose and then retreated.

(+) The NY Empire Manufacturing Index for September rose more than expected, from +14.7 last month to +27.5 (consensus expectations called for +16.0)—the strongest figure in five years. The details underneath were a bit weaker than the headline, however, with modest rises in new orders and shipments, and a sizeable decline of 10 points in employment to a barely positive +3.

(0) The Philadelphia Fed index for September were decent and in line with expectations, although falling from the prior month’s +28 to +22.5. The details under the hood were also decent, as employment, shipments and new orders all moved higher. Forward-looking expectations for business activity fell a bit overall, but specific plans for cap-ex rose and hiring plans rose to a 30-year high (!).

(-) Industrial production for August came in weaker than expected overall, falling -0.1% compared to an expected gain of +0.3%. It appears more ‘normal’ results in auto manufacturing after a strong prior month was the culprit, as a -8% drop was registered. Both electric utilities and mining also rose to help close the gap.   Manufacturing production also fell, by -0.4%, which underwhelmed the expectations of a minor tenth-of-a-percent increase. Capacity utilization for August came in at 78.8%, which was a half-percent below the level expected.

(0) The producer price index for August was flat on a headline level, with the core version (without food/energy) rose just under +0.1%, when rounded up by a small fraction. Both were about in line with expectations, and there was little volatility from underlying components on the month. For the trailing twelve months, both headline and core PPI measures were +1.8% higher.

(0) The consumer price index fell -0.2% on a headline level for August, while the core index was flat—both were a tick or two below expectations. The energy components in the index were the primary drivers (-3%), as gasoline, natural gas and related products fell in price during the month; airline ticket prices also were a downward drag (due to the effect of some changes in how these are tracked). Food and shelter prices rose, albeit at a lower rate, offsetting a bit of this and creating the net flat result. Year-over-year, both the headline and core CPI measures rose +1.7%, while a few housing components—owners’ equivalent rent and urban consumer rent—rose +2.7-3.2% for the full year, contributing on the higher side.   As the overall CPI number is roughly a half-percent below the Fed’s target for where the implied level should be, this may buy some time for those hoping for additional time in the accommodative mode.

(-) Housing starts for August fell -14.4% to a level of 956k, which was far weaker than the expected -5.2% decline. Much of the weakness was focused on the more volatile multi-family sector (which fell -32%), but single-family starts were also down -2%. Building permits also dropped for the month, by -5.6%, underperforming a forecasted decline of -1.6%, and was also highlighted by weakness in multi-family.   While a volatile series in the short-term, which makes difficult to put these month-over-month increases/decreases in context, the trend remains upward with total production roughly double that from the recession’s trough. Multi-family remains in a stronger trajectory than does single-family, as noted visually below.

(+) The NAHB homebuilders’ index rose to 59 for September, representing a new high for the recovery (56 was expected). Present sales, future sales expectations and prospective buyer traffic all rose several points, pointing to a balanced reading. This is a positive sign, considering its correlation to builder activity for months following.

The interesting and troubling part about recent housing stats is continued tempered performance—noted by economists and the Fed as a persistent soft spot in the current recovery.   Like many other facets of the economy, including overall spending and employment, there are a multitude of factors at play, including low levels of household formation (younger workers staying at home in parents’ basements or renting, but certainly not buying), demographic trends (retiring boomers downsizing from larger homes/moving), tighter mortgage credit (attractive low rates, but much more stringent credit conditions and loan-to-value requirements) as well as revitalized urban residential areas taking demand from traditional suburbia. Surveys have also alluded to a tapering of interest in homeownership, as weak employment market and mobility concerns, not to mention a bursting of the ‘never-lose’ house-as-an-investment-asset idea, have led to greater skepticism in buying. Then again, some of these factors are cyclical, and increasing strength in employment and comfort in the economy may improve things.

(+) Initial jobless claims for the Sep. 13 ending week fell to 280k, far below the 305k estimate (and, interesting to note, the second lowest report since 2000). Continuing claims for the Sept. 6 week fell to 2,429k, below the forecasted 2,466k.   No special factors appeared to color the initial claims data, although some Labor Day effects could have carried over from the prior week, as is typical.

The FOMC completed their meeting this week, and per the more timely note mid-week, tapering continued and while the post-meeting statement contained little change, the summary of projections released afterward showed tempered real GDP outlooks along the same or lower lines than previous (2.1% for this year, and an average of 2-3% for the next few years), while interest rate projections (the ‘dot plots’) were bumped higher for the next several years, with a projected fed funds rate of just under 3% by the end of 2016 and 3.75% by 2017 (as a median of the various member expectations). The interesting dissents from this last meeting were in line with outside assessments of the situation: (1) it could be problematic to assign a timeframe to continued easy monetary policy and (2) perhaps conditions are strong enough to no longer require such policy at this point.

Market Notes

U.S. stocks gained over a percent on the week, led by early speculation (later validated) that the Fed would keep an accommodative tone in their post-meeting statement. In news abroad, sentiment was perhaps validated by the People’s Bank of China lending a significant amount ($81 billion) to the five largest banks to ease the slowdown, although that may have helped U.S. sentiment more than it did foreign.   From a sector standpoint, health care and materials gained over a percent, while consumer discretionary and energy barely gained on the week.

The US dollar gained again on Wednesday following the Fed meeting, on the order of almost a percent. As we discussed last week, currency values can generally fluctuate for a number of reasons—in this case, a planned end of QE as well as higher interest rate projections for coming years, which remove some inflation risk.

Foreign markets were a mixed bag last week, with developed markets generally flat and emerging market names weaker. The U.K, was one of the better-performing larger nations, naturally due to the defeat of the Scottish independence referendum. Russian stocks were the worst performing, not due to the Ukraine, but by internal money laundering probe at a major firm.

In U.S. fixed income, after initially higher yields during the week due to increased Fed projections for rates in coming, these came back to earth resulting in a decent week for bond prices. Long treasuries led, followed by high yield debt as liquidity and supply/demand dynamics improved in that market (the new issue calendar has tended to pick up after summer). Despite strength in the dollar across the board, foreign bonds were mixed, with the European periphery stronger and emerging markets weaker due to ratings deterioration in Latin America.

U.S. retail REITs led, with a half-percent gain, while most other domestic categories as well as Asia/Europe fell back.

Commodities experienced another poor week on average, in no doubt harmed by a stronger U.S. dollar, on pace to their worst quarter in two years.   Cocoa prices shot up +5% on fears surrounding harvest areas in West Africa affected by Ebola, while natural gas prices rose on cooler weather (as usual). Crude oil prices weakened again, dropping down towards $91, a key technical support point of the last two years. Sugar and cotton were the worst performers on the week, dropping along the lines of -5%.

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