Market Watch November 30, 2017
All three indexes posted strong gains for November, driven by good economic news and hopes for a tax cut. It was the eighth consecutive month of gains for the market, the longest streak of monthly gains for the DOW in more than 20 years and the first time the DOW closed over 24,000. The DOW rose 3.8% to close at 24,272, the tech-heavy NASDAQ rose 2.2% to close at 6,874 and the S&P, the index most closely followed by economists, rose 2.8% to close at 2,648.
Consumer Confidence Rises to 129.5
The New York-based Conference Board’s Consumer Confidence Index rose to 129.5 in November after rising to 125.9 in October. It was the highest level of consumer confidence in almost 17 years and marked the fifth consecutive month of increases for the index. The Present Situation Index increased to 153.9 in November after rising to an upwardly revised 151.1 in October and the Expectations Index rose to 113.3 after rising to 109.1 in October. The Conference Board noted that confidence remains high among consumers, and they are generally more upbeat. 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 a downwardly revised 0.9% in September. The September gain was the largest increase since August 2009, lifted by consumers in Texas and Florida replacing automobiles destroyed by hurricanes Harvey and Irma. Core consumer spending rose 0.1% in October after rising 0.5% in September. Personal incomes rose 0.4% in October after rising by the same percentage in September. Wages rose 0.3% and the savings rate increased to 3.2% after falling to 3.0% in September, the lowest level since December 2007. The Fed’s preferred measure of inflation, the personal consumption expenditures (PCE) price index excluding food and energy, rose 0.2% in October after a similar increase in September. The core PCE was up 1.4% in the 12 months through October. The core PCE has been below the Fed’s target of 2.0% for more than five years. Consumer spending is closely watched by economists because it accounts for 70% of U.S. economic activity.
Consumer Prices Rise 0.1%
The Consumer Price Index (CPI) rose 0.1% in October after rising 0.5% in September. The CPI was up 2.0% from October 2016. Core inflation, which excludes food and energy, rose 0.2% in October after rising 0.1% in September and was up 1.8% year over year. Core inflation has consistently been below the Fed’s target of 2%. Most of the rise in prices came from a 0.3% increase in the shelter index, as the energy index fell because declining gasoline prices outweighed increases in other energy components.
Unemployment Remains at 4.1%
The unemployment rate remained at a 17-year low of 4.1% and the economy added 228,000 new jobs in November. Job gains were widespread, with manufacturing adding 31,000 jobs and construction adding 24,000. Even sectors where employment has been falling, such as retail, did well, with retailers adding 18,700 beyond typical seasonal hiring, the best month for retail since January. Average weekly paychecks have increased by 3.1% over the last 12-months, the first time that reading has topped 3% in nearly seven years. However, much of that gain came from Americans working longer hours. Average hourly pay increased 2.5%. Economists note that wages should be going up more because there is a record number of unfilled job openings and employers consistently report that finding workers is difficult. Ten years ago, before the start of the Great Recession, the average hourly wage was rising more than 3% annually.
Durable Goods Orders Fall 1.2%
Durable goods orders fell 1.2% in October after rising 2.2% in September. It was the first decline in durable goods orders since July. Much of the decline was driven by an 18.6% plunge in orders for commercial planes, a typically volatile category. Excluding the volatile transportation category durable goods orders increased by 0.4% in October after rising 0.7% in September. Orders for non-defense capital goods excluding aircraft, a closely watched indicator of business spending, fell 0.5% after rising 1.3% in September. It was the biggest drop in that category since September 2016. Shipments in the same category, which factor into GDP, rose 0.4% in October after rising an upwardly revised 1.2% in September. Shipments of core capital goods have now risen for nine consecutive months. The durable goods report is often both volatile and subject to sharp revisions.
Chicago PMI Falls to 63.9
The Chicago Purchasing Managers’ Index (PMI) fell to 63.9 in November after rising to 66.2 in October. It was the lowest level for the index in three months. The New Orders component retreated after reaching the highest level since June but remained at a healthy level. Order Backlogs was the only other component to lose ground during the month after reaching a 43-year high in October. The jump in recent gains was attributed to a carryover of orders after the recent storms. Prices Paid reached the third-highest level this year, with firms reporting that a wide range of input prices did not drop as expected after rising during the hurricanes. Companies faced longer supplier lead times in November, and MNI Indicators said that the longer lead times and solid demand led to companies stockpiling goods. The question posed of respondents in November was the effect of anticipated increases in interest rates on their activities. A total of 75% of respondents thought an increase in rates would have no material impact; 23% thought it would harm their business.
Wholesale Prices Rise 0.4%
The Producer Price Index (PPI) rose 0.4% in October after rising 0.4% in September and was up 2.8% 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 for the third consecutive month and was up a record high 2.3% year over year. The PPI for inputs to construction was up 3.9% year over year. The PPI shows that inflation is building in the pipeline and a stronger dollar and better global growth could cause core PPI to rise in coming months, according to economists.
Q3 GDP Grows 3.3%
GDP grew 3.3% in the third quarter, up from the 3.0% growth first reported and 3.1% growth in the second quarter. It was the fastest pace of growth in three years. The improvement was led by stronger business investment, with spending on equipment, especially in transportation-related areas, rising 10.4% instead of the 8.6% first reported. Public spending also contributed to stronger GDP, with government spending revised from a small decline to a modest increase. Consumer spending was revised down slightly, from 2.4% to 2.3%, but was still solid. 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’s increase of 0.3%. Repairs and rebuilding could boost economic growth in coming quarters, particularly in building sectors.
Job Openings Near Record High
There were 6.09 million jobs available at the end of September, little changed from August and close to the record high of 6.14 million reached in July, according to the latest Job Openings and Labor Turnover Survey, or JOLTS. Job openings for the third quarter were up 7% from third quarter 2016. The lack of growth in open jobs was attributed to a drop in the number of jobs for restaurants and hotels, due to widespread damage in the wake of Hurricanes Harvey and Irma, which struck many vacation spots in Texas, Florida and other southeastern states. Overall, thousands of businesses were closed, which likely held back hiring. Total hires fell 2.7% to 5.27 million in September, the lowest level in five months. Employers have a dwindling pool of those out of work to choose from. There were just 1.12 unemployed people, on average, for every open job in September. During the 2008-2009 Great Recession, that figure reached 6 unemployed people for every available job. There were nearly 3.2 million quits in September, near the post-recession peak reached in May. The pace of quits has been fairly steady for the past 18 months. 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.
Fed Leaves Rates Unchanged
The Federal Reserve left interest rates unchanged but offered an optimistic view of the US economy that could lay the groundwork for a widely anticipated quarter-point rate increase in December. The central bank's rate-setting committee said its preferred benchmark for inflation "remained soft" but the labor market is getting stronger and economic activity is steadily picking up. It would be the third rate increase in 2017.
Powell Nominated to Lead the Fed
President Donald Trump nominated Federal Reserve Governor Jerome Powell, a former private equity executive, to be the central bank's next chairman, passing over current chair Janet Yellen, reportedly because Trump said he wanted to “put his own stamp” on the Fed. Powell favors a cautious approach to raising interest rates and has been a loyal supporter of the current chair, Janet Yellen, so his appointment isn't expected to bring any significant changes to the Fed's policies.
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