Market Watch October 31,2017
All three indexes posted gains for October on strong quarterly earnings. It was the seventh consecutive month of gains for the market. The DOW rose 4.3% to close at 23,377, the tech-heavy NASDAQ rose 3.6% to close at 6,728 and the S&P, the index most closely followed by economists, rose 2.2% to close at 2,575.
Consumer Confidence Rises to 125.9
The New York-based Conference Board’s Consumer Confidence Index rose to 125.9 in October after being upwardly revised to 120.6 in September. It was the highest level of consumer confidence in almost 17 years. The Present Situation Index increased to 151.1 in October from 146.9 in September and the Expectations Index rose to 109.1 from 103. The Conference Board noted that confidence remains high among consumers, and their expectations suggest the economy will continue expanding at a solid pace for the remainder of the year. Wells Fargo noted that the 24.9% rise in the index over the past year means consumers are more broadly optimistic about the economy. Wells Fargo compared it to 1997, when consumer confidence surged despite an unusually slow economic recovery that eventually became the longest and one of the strongest expansions on record. 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.
Consumer Spending Rises 1.0%
Consumer spending jumped 1.0% in September after rising 0.1% in August. It was the biggest increase in consumer spending in more than eight years and ahead of expectations of a 0.8% increase. Core consumer spending rose 0.6% in September after slipping 0.1% in August. Consumer spending got a boost from a 3.2% increase in spending on durable goods like automobiles, which was attributed in part to consumers in Texas and Florida replacing automobiles damaged by the hurricanes. The personal consumption expenditures index (PCE) rose 1.1% in September and 1.3% year over year after rising by the same percentage in August. The PCE has been under the Fed’s target of 2.0% for more than five years. Personal incomes rose 0.4% in September after increasing 0.2% in August. Savings fell to $441.9 billion, the lowest level since August 2008. The low savings rate could constrain consumer spending in the months ahead. Consumer spending is closely watched by economists because it accounts for 70% of U.S. economic activity.
Consumer Prices Rise 0.5%
The Consumer Price Index (CPI) rose 0.5% in September after rising 0.4% in August. The CPI was up 2.2% from September 2016. Core inflation, which excludes food and energy, rose just 0.1% in September after rising 0.2% in August and was up 1.7% year over year. Core inflation has consistently been below the Fed’s target of 2%. Most of the rise in prices came from a 6.1% increase in energy prices, led by a big 13.1% jump in the cost of gasoline, most likely due to supply shortages and delivery problems caused by Hurricanes Harvey and Irma. Analysts believe that the Fed will hold off increasing interest rates for now, and will want to see what impact the hurricanes as well as the wildfires in California have on the overall economy before considering raising rates.
Unemployment Drops to 4.1%
The unemployment rate dropped to 4.1% in October and the economy added 261,000 new jobs. Unemployment was at the lowest rate since December 2000. Jobs for September were revised from a loss of 33,000 to a gain of 18,000. With the revisions, the economy has now added jobs for 85 consecutive months, the longest streak on record. Wages grew only 2.4% in October compared with a year earlier, behind September's number. The absence of better wage growth and inflation is one of the biggest mysteries in the economy. The job gains for October were across the board, although employment in retail dropped by 8,000. More than 700,000 Americans left the labor market in October. Although the Labor Department didn't give a reason, analysts say it could be because Baby Boomers keep retiring. That would mean that the unemployment rate dropped for what economists think of as the wrong reason - a shrinking labor force, not just more hiring. The economy needs to create just under 100,000 jobs each month to keep up with growth in the working-age population, according to Fed Chair Janet Yellen.
Durable Goods Orders Rise 2.2%
Durable goods orders rose 2.2% in September after rising an upwardly revised 2.0% in August. The biggest gain in three months was due to a big surge in orders for commercial aircraft and was double the increase analysts were expecting. Excluding the volatile transportation category durable goods orders increased by 0.7% in September, matching the August increase. Orders for non-defense capital goods excluding aircraft, a closely watched indicator of business spending, rose by 1.3% in September after rising an upwardly revised 1.3% in August. Shipments in the same category, which factor into GDP, rose 0.7% in September after jumping an upwardly revised 1.2% in August. Shipments of core capital goods have now risen for eight consecutive months. Orders for machinery, primary metals, computers, electronic products and transportation equipment all increased. The durable goods report is often both volatile and subject to sharp revisions.
Chicago PMI Climbs to 66.2
The Chicago Purchasing Managers’ Index (PMI) rose to 66.2 in October after rising to 65.2 in September. It was the highest level for the index since March 2011. The New Orders component rose to the highest level since June and Production reached the highest level since August 2014. Order Backlogs have been trending up since the start of the second quarter, and reached a level not seen in more than 43 years in October. Both Supplier Deliveries and Inventories softened as storms disrupted deliveries. For the fourth time this year the Employment Indicator slipped below 50 into contraction territory. Firms have repeatedly reported a shortage of skilled and trained workers and have taken to paying overtime or hiring temps. There was also some evidence that firms were losing skilled workers to other firms offering higher wages. Prices Paid softened, giving back more than half of last month’s sizable gain. This reflected a partial stabilization in material prices and a lessening of input shortages, although plastic and metal prices remained high.
Wholesale Prices Rise 0.4%
The Producer Price Index (PPI) rose 0.4% in September after rising 0.2% in August and was up 2.6% over the past twelve months, the biggest annual increase since 2012. Core inflation, which excludes volatile food, energy and trade services prices, rose 0.2% in September after rising 0.1% in August. The PCE index, the Fed’s preferred inflation gauge, rose 1.4% in August, well below the Fed’s target of 2%. The PPI for inputs to construction was up 3.8% year over year.
Q3 GDP Rises 3.0%
GDP grew 3.0% in the third quarter, down slightly from 3.1% growth in the second quarter. Growth exceeded economists’ expectations of 2.5%. Growth in consumer spending slowed to 2.4% for the quarter, but is expected to rebound. Rising business inventories accounted for 0.7% of growth, which could be a sign that companies think consumer demand will strengthen. Business investment rose a very healthy 3.9% and exports increased by 2.3%, adding to growth. The price index for personal consumption expenditures (PCE), which is the Fed’s preferred measure of inflation, rose at a 1.5% annual rate in the third quarter, up from the second quarter increase of 0.3%. The Commerce Department said that hurricanes likely suppressed business activities such as oil and gas extraction and agricultural production but likely boosted other types of activities, such as emergency services and repair efforts. Repairs and rebuilding could boost economic growth in coming quarters, particularly in building sectors.
Job Openings Fall Slightly
The number of job openings fell slightly in August from July’s record high of 6.2 million, according to the latest Jobs Openings and Labor Turnover Survey (JOLTS). Hires dropped slightly to 5.4 million. Total separations in August was relatively unchanged at 5.2 million. Total quits for August was 3.1 million with a quits rate of 2.1%. There were 1.7 million layoffs and discharges in August, little changed from July. The ratio of available workers per available job remains low, with managers now having about 1.1 candidates per job opening, making competition fierce for talent. Economists warn that the record level of job openings could negatively impact economic growth. The JOLTS report is one of Fed Chair Janet Yellen’s preferred economic indicators.
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