Economic Notes


Written by: Jon McGraw

Economic Notes

This week, a few indicators again surfaced that investors took as counter to the trend that the U.S. economy is in an extended soft patch.

Retail sales turned out being much better than expected in July, up +0.8% versus a forecast of +0.3%. Non-core and core sales were roughly similar; pointing to across the board strength, but the best performances came from non-store (Internet) retail, sporting goods, furniture, and health/personal care items.

Industrial production was up solidly in July—by +0.6%, just a bit above the expected figure. This was largely driven by manufacturing, much of which was due to an over-3% rise in vehicle production. Mining and utilities output also gained.

From a regional side, the New York Fed’s Empire manufacturing survey weakened by -5.9 in August, which ran counter to expectations for a flat reading. New orders and shipments declined, while inventories improved and employment index held steady. The Philadelphia Fed index did improve, but not by as much as expected for August and remains negative. Here, shipments fell, employment was flat and new orders improved a bit, however.

The Conference Board Index of Leading Economic Indicators increased in July by +0.4% to 95.8, which reversed a decline by the same amount for June. Large contributions came from housing permits and unemployment claims. The coincident economic index, which measures current conditions, increased a similar +0.3% in July to 105.1, and the lagging indicator was also positive. The six-month growth rate for both appears to be stabilizing a bit.

The University of Michigan consumer sentiment survey improved in the August report, and at a higher rate than expected (from July’s 72.3 to 73.6—consensus had called for no change). The report was highlighted by better ‘current’ conditions while ‘expectations’ fell a bit. Long-term inflation expectations rose on both the 1-year and 5-10 year look-ahead measures—from 3.0% to 3.6% on the former and from 2.7% to 3.0% on the latter. No doubt, higher commodity prices recently have contributed to this and tend to rise to the front of consumers’ minds.

Speaking of inflation, the Producer Price Index came in at +0.3% for July, just a shade above forecast. The core PPI was up a greater-than expected +0.4% (to a +2.6% year-over-year increase), but some of this increase was due to higher prices for cars and tobacco. The Consumer Price Index for July was flat, which was less than expected (taking the year-over-year gain to +1.4%), while the Core CPI figure that excludes food energy prices gained +0.1% (+2.1% year-over-year). In the general index, price weakness in public transportation, vehicles and lodging (hotel) offset strength in owners’ equivalent rent. In coming months, a bounceback in energy prices and food price increases due to widespread American drought conditions may be something to watch for in upcoming CPI figures.

Housing offered some interesting numbers last week. Housing starts fell in July by -1.1% down to 746k units, which was largely in line with an expected 756k or so. The composition is still a little skewed, as single-family starts fell -6.5% and multi-family (apartments) gained +12.4%. Building permits were up +6.8%, though, on the month, which was much larger than expected and can be taken as a small positive. The NAHB homebuilder sentiment index rose from 35 in July to 37 in August, which was better than consensus calls for no change. This is now at its highest level since early 2007, and reflects improvements in current and expected sales as well as prospective buyer traffic.

There continues to be underbuilding in the housing market overall, as apartments have taken the place of a buying a home for many. This isn’t entirely surprising, considering the depths of the burst housing bubble and aftermath in tightened credit requirements, but does take time to unwind and correct. Construction of single-family homes remains almost 50% below the long-term trend and 40% below the approximately 1.25 million units needed annually to keep up with demographic growth. At the same time, multi-family dwellings are 15% below trend. While there is some slack to make up for here, continued demand with ongoing reduced supply (especially if demand rises for any reason) may result in some inflationary pressures on the housing front, which translates into CPI.

Initial jobless claims rose a few thousand to 366k for the week ended Aug. 11, which was within 1k of forecast, and the four-week moving average fell. Small numbers, though, so well within the margin error (which is quite surprisingly large). Continuing claims fell 31k to 3305k for the Aug. 4 week, largely as expected.

The Eurozone economies contracted by -0.2% for the 2nd quarter, which was a slight decline from the roughly flat reading from the 1st quarter of this year. The story is, of course, mixed, as Germany’s economy rose by 0.3% and France’s was flat. These numbers were slightly better than expected, even if not by much, which boosted markets in response to some extent.

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