All three indexes recorded record highs in November after the DOW initially dropped more than 900 points in after-hours trading when the results of the presidential election became known. The recovery began almost immediately and continued throughout the rest of the month as markets reacted to good economic news and President-elect Trump’s promise to go on a building boom and cut corporate taxes and capital gains. The DOW gained 5.4% for the month and closed above 19,000 for the first time, the NASDAQ gained 2.6% to close at 5,324 and the S&P, the index most closely followed by economists, rose 3.4% to close at 2,199.
CONSUMER CONFIDENCE RISES
The New-York based Conference Board’s Consumer Confidence Index rebounded strongly in November, rising to 107.1 from an upwardly revised 100.8 in October. The Present Situation Index rose to 130.3 from an upwardly revised 123.1. The Expectations Index rose to 91.7 from an upwardly revised 86.0. The Conference Board said that while the majority of respondents were surveyed prior to the results of the presidential election, those surveyed afterwards did not appear to be affected by the outcome. A more optimistic consumer should be good news for holiday spending. Overall, the sentiment is that the economy will continue to expand in the near-term, but at a moderate pace. 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 0.3%
Consumer spending rose 0.3% in October after rising an upwardly revised 0.7% in September, slightly below economists’ expectations. Core consumer spending, which is adjusted for inflation, increased 0.1% in October after rising 0.5% in September. Overall consumer spending in October was lifted by a 1.0% increase in purchases of long-lasting manufactured goods such as automobiles. Spending on services fell 0.2%. Personal income rose 0.6% last month after increasing 0.4% in September. Wages and salaries advanced 0.5% for the second consecutive month. Savings increased to $860.2 billion from $814.1 billion in September, the highest level since March of this year. The personal consumption expenditures (PCE) price index rose 0.2% after a similar increase in September. In the 12 months through October the PCE price index rose 1.4%, the biggest year-over-year gain since October 2014. Excluding food and energy, the core PCE price index gained 0.1% after rising by the same amount in both September and August. That left the year-over-year increase in the core PCE, the Fed’s preferred measure of inflation, at 1.7% in October. Consumer spending is closely watched by economists because it accounts for 70% of U.S. economic activity.
CONSUMER PRICES RISE 0.4%
The Consumer Price Index (CPI) rose 0.4% in October after rising 0.3% in September and was up 1.6% from October 2015. Core prices, which strip out volatile food and energy costs, rose 0.1% in October after rising 0.1% in September and were up 2.1% from October 2015. Core inflation has been in a range between 2.1% and 2.3% since December of last year. More than half of the increase in prices came from a 7% hike in gasoline prices.
UNEMPLOYMENT FALLS TO 4.6%
The unemployment rate dropped to 4.6% in November, a nine-year low and the economy added 178,000 new jobs. However, job gains for September and October were revised down to show a total of 2,000 fewer jobs were created than previously reported. Economists had forecast that payrolls would rise by 175,000 jobs and the unemployment rate would remain at 4.9%. Wage growth slowed, with average hourly earnings falling three cents. The drop lowered the year-over-year gain in wages to 2.5% in November from October's big 2.8% increase, which was the largest rise in nearly 7-1/2 years. As the labor market nears full employment, job gains have slowed from an average of 229,000 per month in 2015 to an average of 180,000 this year. Fed Chair Janet Yellen has said the economy needs to create just under 100,000 jobs a month to keep up with growth in the working-age population. Construction employment increased by 19,000 jobs in November after rising by 14,000 in October. Retail payrolls dropped for the second consecutive month, falling by 8,300. The job report contained nothing that would cause the Fed to delay an expected increase in interest rates in December.
DURABLE GOODS ORDERS JUMP 4.8%
New orders for durable goods jumped 4.8% in October to a seasonally adjusted $239.4 billion after rising an upwardly revised 0.4% in September. October’s gain was the fastest pace in a year. The increase exceeded analysts’ expectations of a 2.7% gain. Orders for non-defense capital goods excluding aircraft, a category that serves as a proxy for business investment spending, rose 0.4% in October after rising a slightly downwardly revised 1.4% in September. The durable goods report is often both volatile and subject to sharp revisions.
CHICAGO PMI RISES TO 57.6
The Chicago PMI rose 7 points to 57.6 in November from 50.6 in October. It was the lowest level for the index since January 2015. Four of the five barometer components increased, with only Employment falling. New Orders contributed much of the increase, rising 10.7 points to 63.2. Production also rose and recovered virtually all of October’s decline. Order Backlogs moved into positive territory and Supplier Deliveries made small gains. Prices Paid fell to 56.8, but remained above the 12-month average of 52.2. Demand for labor fell, with employment slipping back into contraction. The special question asked of the panel in November was how they expected business activity to fare in 2017. Most respondents expected business to grow, but expected growth rates of less than 5%. The November reading marked the sixth month of expansionary business activity in the U.S.
WHOLESALE PRICES UNCHANGED
The Producer Price Index (PPI) was essentially flat in October after rising 0.3% in September and was up 0.8% from October 2015. Analysts had expected the PPI to rise 0.3%. The core PPI, which excludes food, energy and trade services, fell 0.2% in October after rising 0.3% in September and was up 1.2% in the 12 months through October. The PPI for inputs to construction was down 0.2% for the month of October and up 0.8% since October 2015.
Q3 GDP RISES 3.2%
GDP grew an upwardly revised 3.2% in the third quarter, faster than the 2.9% growth first reported and the largest gain in two years. Growth was up significantly from 0.8% in the first quarter and 1.4% in the second quarter. The increase exceeded economists’ expectations. Consumer spending for the quarter increased 2.8%, up from the 2.1% first reported. Consumer spending accounts for 70% of economic activity. Business investment in plants and equipment remained virtually flat, edging up just 0.1%. Steep cutbacks in spending by energy companies have really held back this category. Q3 consumer prices remained subdued, with overall prices rising 1.4% and core PCE prices up 1.7%, still below the Fed’s target of a 2% increase. The personal savings rate remained at 5.7%. Analysts say the data suggests the economy is unlikely to beat 2015’s growth of 2.6%, which was the best annual growth since the economy began expanding. The economy has not grown more than 3% since 2005. The nonpartisan Congressional Budget Office projects GDP will grow about 2% annually through 2026. The Atlanta Fed, which produces the GDP Now forecast, upgraded its view, saying that the economy is now on track to grow at a 3.6% annualized pace in the fourth quarter, due to expected stronger consumer spending, upbeat durable goods orders and equipment investments, as well as a smaller trade gap.
JOB OPENINGS EDGE UP
Job openings edged up to 5.49 million in September from a revised 5.45 million in August, according to the Labor Department’s monthly Job Openings and Labor Turnover Survey, or JOLTS. Hiring declined to 5.08 million from 5.27 million and the hiring rate dropped to a four-month low of 3.5%. Around 3.07 million Americans quit their jobs, which was little changed from 3 million quits in August. The quits rate remained at 2.1%. Layoffs dropped to 1.47 million from 1.69 million. Analysts noted that the report shows that companies are neither posting a lot of jobs nor letting people go. The 1% rate of dismissals is the lowest in records going back to December 2000. The hiring figures are consistent with the slowdown in hiring this year as the labor market approaches what economists regard as full employment. Analysts generally concurred that the employment picture supports the Fed's anticipated increase in benchmark rates at their December meeting. 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.
The number of unfilled jobs in the overall construction sector increased to 221,000 in September after hitting a cycle high of 225,000 in July, which was the highest monthly count of open, unfilled jobs since February 2007. The overall trend for open construction jobs has been increasing since the end of the Great Recession. This is consistent with survey data indicating that access to labor remains a top business challenge for builders. Residential construction employment was 2.6 million, with 737,000 builders and 1.9 million residential specialty trade contractors. Over the last 12 months home builders and remodelers have added 140,000 jobs on a net basis. Since the low point of industry employment following the Great Recession, residential construction has gained 632,000 positions. In October, the unemployment rate for construction workers stood at 6.5% on a seasonally adjusted basis. The unemployment rate for the construction occupation has been on a general decline since reaching a peak rate of 22% in February 2010.
FED RATE HIKE EXPECTED IN DECEMBER
The Federal Reserve left interest rates unchanged at their meeting in early November but the post-meeting statement hinted that the Fed will edge rates up at the December meeting. Fed Chairman Janet Yellen stated that an interest rate hike could come “relatively soon” in mid-November. The Fed raised its benchmark interest rate from zero to 0.25% at the end of last year, the first increase since the Great Recession. Officials initially anticipated raising rates as many as four more times this year but gradually lowered their expectations as turmoil overseas in China and Britain rocked the global economy. While inflation is still lower than the central bank’s 2% target, it is slowly picking up, and there are indications that the Fed may be satisfied with a lower pace of inflation. In addition, a steady uptick in consumer prices along with President-elect Donald Trump’s plans to cut taxes and increase infrastructure spending mean that inflation risks have gone up.
WHAT ECONOMISTS EXPECT FROM THE TRUMP ECONOMY
The average forecasts for 2017 and 2018 from the Wall Street Journal’s survey of economists conducted after the election showed that in general economists have a favorable view of the impact of President-elect Trump’s economic policies. They expect the economy to run close to full employment, with unemployment falling to 4.6% by the end of 2017 and inching up to 4.7% by the end of 2018. GDP forecasts were raised to 2.2% for 2017 and 2.3% for 2018, higher than before the election but still low by historic standards. Economists see inflation rising to 2.2% in 2017 and 2.4% in 2018, which would be the first sustained inflation above 2% since before the 2007-2008 recession. Interest rates on 10-year Treasury bonds may rise, which would cause mortgage rates to creep up as well. Home prices are expected to increase 4.3% in 2017, with housing starts rising to 1.3 million, still well below bubble highs of 2.3 million before the big housing crash. Forecasters believe the odds of a recession are about 19% in the next 12 months, lower than they were over the summer. The last recession was more than seven years ago, historically a long time to go, but not unheard of. Trump’s proposed tax cuts for business and the middle class along with plans to boost infrastructure spending are generally being viewed as favorable to economic growth.
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