MARKET WATCH JUNE 30, 2016
Markets plunged after Britain’s surprise vote to exit the European Union, but surged at the end of June to regain much of their losses. For the second quarter, the S&P gained 1.2%, the DOW gained 1.7% and the NASDAQ shed 0.5%. For the month of June, the DOW gained 0.3% to close at 17,930, the NASDAQ lost 1.8% to close at 4,843 and the S&P, the index most closely followed by economists, fell fractionally to close at 2,099.
CONSUMER CONFIDENCE RISES TO 98.0
The New-York based Conference Board’s Consumer Confidence Index rose to 98.0 in June after falling to a slightly downwardly revised 92.4 in May. The Present Situation Index increased to 118.3 from an upwardly revised 113.2 in May and was at the highest level it has been since September 2015. The Expectations Index rose to 84.5 in June from a downwardly revised 78.5. The Conference Board said that consumers remain cautiously optimistic about economic growth. Economists say a level of 90 indicates that the economy is on solid footing and a level of 100 or more indicates growth. Analysts caution that the real driver behind consumer spending is income growth and that labor market trends are a more accurate predictor of consumer behavior. The Consumer Confidence survey closed well before the Brexit vote disrupted the global economy.
CONSUMER SPENDING RISES 0.4%
Consumer spending rose 0.4% in May after rising an upwardly revised 1.1% in April. Incomes rose a solid 0.4% after rising by the same amount in March. Core consumer spending rose a solid 0.3% in May after rising an upwardly revised 0.8% in April. Personal income rose 0.2% after climbing 0.5% in April. The personal savings rate fell slightly to 5.3% from 5.4% in April, the lowest level in a year and well below the near-term peak of 6% reached in March. Core PCE (personal consumption expenditures) prices, the Federal Reserve’s preferred inflation measure, rose 0.2% in May after rising 0.3% in April and were up 1.6% year over year, still below the Fed’s target of 2%. Consumer spending is closely watched by economists because it accounts for 70% of U.S. economic activity.
CONSUMER PRICES RISE 0.2%
The Consumer Price Index (CPI) rose 0.2% in May after rising 0.4% in April, making for three consecutive months of increases. In the 12 months through May the CPI increased 1.0%. Core prices, which strip out volatile food and energy costs, rose 0.2% in May after rising by the same amount in April. In the 12 months through May core inflation was up 2.2%, the sixth consecutive month of growth of 2.0% or more. The increase in core prices was primarily due to rapidly rising shelter prices, which increased 3.4% in April from April 2015, the largest annual gain for the category since September 2007.
UNEMPLOYMENT RISES TO 4.9%
The unemployment rate rose to 4.9% in June after falling 4.7% in May and the economy added 287,000 new jobs. Job gains were well ahead of economists’ expectations and a big improvement from the downwardly revised 11,000 jobs added in May. The increase in the unemployment rate was regarded as a good sign, as it indicates more people are looking for work. Wage growth picked up to 2.6%. That's still below the 3.5% or so the Fed would like to see, but it's a healthy bump from earlier in the year when wage growth was barely above 2%. The unexpected jump in jobs relieved concerns that the economic recovery was stalling out. Some of the big gains were due to striking workers at Verizon returning to work. In addition, there were substantial jobs gains in retail and healthcare; employment in many other sectors, including construction, was little changed.
DURABLE GOODS ORDERS FALL 2.2%
New orders for durable goods fell 2.2% in May after rising 3.4% in April. The drop was larger than economists anticipated, and was led by a 34.1% decline in military aircraft orders. However, orders were generally down across almost every category. Orders for non-defense capital goods excluding aircraft, a category that serves as a proxy for business investment spending, fell 0.7% in May after falling 0.8% in April. Orders in this category were down 3.5% through the first five months of this year compared to the same time period last year. Shipments of core capital goods, which factor into GDP calculations for business spending, rose 1.2% in May after increasing 0.3% in April. The durable goods report is often both volatile and subject to sharp revisions. Oxford Economics expects that the headwinds that are constraining growth, including the strong dollar, weak foreign demand, bloated inventories and low oil prices, will remain for much of the year and limit real GDP growth this year.
CHICAGO PMI JUMPS TO 56.8
The Chicago PMI jumped 7.5 points to 56.8 in June after falling below 50 in May. The rebound offset the previous two months of weakness and left the PMI broadly unchanged over the quarter at an average of 52.2 in Q2 compared with 52.3 in Q1. New Orders increased sharply to the highest level since October 2014, and Order Backlogs broke a 16-month stretch of below-50 readings to rise to the highest level since March 2011. Production also rose to the highest level since January. Firms have been drawing down inventory since last November, but in June inventory increased in the double-digits, ending seven months of contraction. Companies remain cautious about the future, with 46% of respondents anticipating that orders will rise in the third quarter compared to 57% of respondents who thought orders would rise in the third quarter of last year.
WHOLESALE PRICES RISE 0.4%
The Producer Price Index (PPI) rose 0.4% in May after rising 0.2% in April and was down 0.1% from May 2015. The core PPI, which excludes food, energy and trade services, rose 1.2% after rising 0.9% in April and was up 0.8% from May 2015. Economists had expected a 0.3% increase. Energy goods and trade services accounted for much of the increase. The PPI for inputs to construction rose 0.5% in May after rising 0.3% in April but was down 2.1% from May 2015.
Q1 GDP REVISED UP TO 1.1%
GDP grew an upwardly revised 1.1% in the first quarter, up from the 0.5% growth first reported as well as the second reading of 0.8%. Compared with the second report, exports rose 0.3% instead of falling 2% as first reported, and corporate profits grew 3.3%, up from the initially reported gain of 1.9%. Companies spent more than initially reported on software and research and development in Q1. Consumer spending, which accounts for about 70% of economic activity, was revised down to 1.5% growth for the quarter from the 1.9% first reported, which was the weakest showing in a year. However, second quarter data thus far would indicate a pick up in consumer spending. Nonresidential fixed investment dropped 4.5%, rather than the 6.2% drop first reported. Inflation was revised down, with the PCE (personal consumption expenditures) index rising at a 0.2% annual pace rather than the 0.3% pace previously reported. Since the recovery began nearly seven years ago, GDP has been weak in the first quarter of each year, averaging 0.8%, and has then rebounded in the spring, with second quarter growth averaging 3.1%. Economists are expecting a similar pattern this year, forecasting second quarter growth between 2.3% and 2.8%.
JOB OPENINGS RISE SLIGHTLY
The number of job openings rose slightly to 5.8 million in April, according to the Job Openings and Labor Turnover Survey, or JOLTS report. The number of openings matched an all-time high reached in the summer of 2015. The hiring rate fell to 3.5% and hires edged down to 5.1 million while separations were little changed at 5.0 million. Within separations, the quits rate was 2.0%, and the layoffs and discharges rate was 1.1%. Quits rose slightly and layoffs continued to fall. Quits are typically voluntary separations, and an increase in quits generally indicates that people are more confident about their ability to find another job. The JOLTS report is one of Fed Chair Janet Yellen’s preferred economic indicators.
CONSTRUCTION JOBS GO UNFILLED
NAHB reported that 200,000 construction jobs went unfilled in April. That was down from 215,000 in March, which was the highest since the recession. Despite a May industry employment bump of 3.4% from a year ago, the decrease in job openings could mean a labor shortage might be "reaching the point where [it] undermines the sector's growth," according to AGC. The NAHB’s Chief Economist, Robert Dietz, said the number of open construction jobs has been going up since the recession, and a January NAHB survey found that 76% of builders anticipate that filling skilled labor positions will be their greatest challenge in 2016.
NO INTEREST RATE INCREASE FOR NOW
As widely expected, the Fed declined to raise short-term interest rates at the mid-June meeting of the Open Market Committee. The decision leaves the federal funds rate at 0.25% to 0.50%. The median forecast of the 17 members of the FOMC expects no more than two more 25-basis-point interest rate hikes this year, however the number of officials who believe there will be just one increase rose from one in the March forecast to six in June. The Fed notes stated that they are confident that labor conditions will strengthen and expects unemployment to average 4.6% both this year and in 2017. Projections now show that the Fed expects rates to rise to just 2.4% by the end of 2018, down from the 3.2% most recent forecast. Economists note that the Fed appears increasingly open to acknowledging a basic shift in economic dynamics that would allow rates to remain low for long periods of time without heating up the economy. Brexit made a rate increase any time soon even less likely.
FED REVISED GDP FORECASTS
The U.S. economy is on track to grow by a 2.8% annualized rate in the second quarter, according to the latest forecast model from the Atlanta Federal Reserve’s GDPNow forecast model. The increase in GDP came on the heels of a stronger-than-forecast rise in retail sales that caused the Fed to raise the forecast for personal consumption expenditures for the second quarter to 3.9% from 3.5%. However, the Fed revised its real GDP growth forecast for 2016 overall down from 2.2% to 2.0%. The committee also noted that inflation continues to run below its 2.0% target, but expects to hit that target by 2018.
IMF CUTS U.S. GDP FORECAST
The International Monetary Fund cut its forecast for U.S. growth this year from 2.4% to 2.2%. However, IMF Managing Director Christine Lagarde said the U.S. economy is in good shape, despite some recent setbacks.
IMPACT OF BREXIT ON U.S. ECONOMY
Great Britain’s unexpected decision to leave the European Union threw global markets into broad declines in the first few days after the historic vote, and sent the dollar up and the pound and euro down. The appreciation of the dollar is not good news for the U.S. economy as it makes U.S. goods pricier for other countries to buy. Britain’s exit from the EU will not actually start until the secession process is triggered when Prime Minister Cameron’s successor takes over in October, which gives Great Britain and the E.U. three months to start working out the process. Beginning in October the U.K. will have two years to renegotiate relations with the members of the E.U. No nation has exited the E.U., so the impact and the process itself is still to be determined. Analysts in the U.S. expect little long-term effect on the U.S. economy, but uncertainty may cause the stock market to tread water in the coming months and shave a few tenths of a percent from GDP. However, international publications have pointed out that when European Union negotiators sit down to talk trade deals, they will no longer be able to claim they represent the world’s largest economy, as Brexit will put the U.S. economy back on top.
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