US Economy September 2016
It was a relatively quiet month for the markets, which managed to hang on to most of the gains made in July. The DOW shed 0.2% to close at 18,401, the NASDAQ gained 1.0% to close at 5,213 and the S&P, the index most closely followed by economists, shed three points to close statistically flat for the month at 2,171.
CONSUMER CONFIDENCE RISES TO 101.1
The New-York based Conference Board’s Consumer Confidence Index rose to 101.1 in August after rising to a downwardly revised reading of 96.7 in July. It was the highest level of confidence in nearly a year. The Present Situation Index rose to 123.0 after rising to 118.8 in July. The Expectations Index improved to 86.4 after dropping to a downwardly revised 82.0 in July. The Conference Board said that consumers were generally more positive about current conditions, the outlook for the labor market and the near-term prospects for the economy and business conditions. 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 GROWS 0.3%
Consumer spending grew 0.3% in July after rising 0.4% in June. Personal income, including wages and salaries, went up 0.4%, after rising an upwardly revised 0.3% in June. Income has been rising slowly but steadily over the year. The personal saving rate rose to 5.7% in July from an upwardly revised 5.5% in June. The personal consumption expenditures price index (PCE), the inflation measure preferred by the Federal Reserve, rose 0.1% in July after rising by the same amount in June. The index rose 0.8% over the past year, but is still well below the Fed's 2% target. The price index excluding the volatile categories of food and energy also increased 0.1% in July after rising 0.1% in June, and was up 1.6% from a year ago. Economists said the report was “solid” and strengthened the likelihood the Fed will raise rates sometime this year. Consumer spending is closely watched by economists because it accounts for 70% of U.S. economic activity.
CONSUMER PRICES UNCHANGED
The Consumer Price Index (CPI) was unchanged in July after rising 0.2% in June, ending four consecutive months of increases. Prices were pulled down by falling energy prices, with gasoline dropping nearly 5%. In the 12 months through July the CPI increased 0.8%. Core prices, which strip out volatile food and energy costs, rose 0.1% in July after rising 0.2% in June. In the 12 months through June core inflation was up 2.2%, the eighth consecutive month of growth of 2.0% or more.
UNEMPLOYMENT REMAINS AT 4.9%
The unemployment rate remained at 4.9% in August, but the economy added just 157,000 new jobs, fewer than the 180,000 jobs economists were expecting. Average hourly earnings also slowed down, increasing just 0.1% in August after rising 0.3% in July. Many of the job gains came from government hiring. The private sector added just 126,000 jobs in August. The manufacturing sector lost 14,000 jobs and construction shed 6,000 jobs. It was a disappointing report that could indicate the economy is slowing down and make it less likely the Fed will raise interest rates in September.
DURABLE GOODS ORDERS RISE 4.4%
New orders for durable goods rose 4.4% in July after dropping 4.0% in June. It was the biggest increase since last October. Orders for non-defense capital goods excluding aircraft, a category that serves as a proxy for business investment spending, rose 1.6% in July after rising 0.2% in June. Economists noted that back-to-back increases in this category are an encouraging sign that business capital investment activity might be on the verge of a long-awaited rebound. A sharp rise in core orders and a modest gain in inventories suggests that business investment will provide a modest boost to the economic recovery. However, core orders are still down 4.3% over the first seven months of this year, compared to the first seven months of 2015. July’s increase was led by growing demand for transportation equipment, with a big boost from the volatile category of civilian aircraft. Shipments of core capital goods, which factor into GDP calculations for business spending, rose 0.2% in July after falling 1.3% in June. The durable goods report is often both volatile and subject to sharp revisions.
CHICAGO PMI FALLS
The Chicago PMI fell 4.3 points to 51.5 in August from 55.8 in July, led by a big setback in Order Backlogs and a slowdown in New Orders. Four of the five components fell in August. Only Employment increased, hitting a 16-month high. The PMI overall as well as the New Orders and Production components was at the slowest pace since May, when they all slipped below 50. Order Backlogs fell 14.5 points to 41.7, moving back into contraction territory and falling to the lowest level since April. Inflationary pressures eased slightly for the fourth consecutive month, leaving Prices Paid at the lowest level since March 2016.
WHOLESALE PRICES FALL 0.4%
The Producer Price Index (PPI) fell 0.4% in July after rising 0.5% in June and was up 0.2% from July 2015. It was the biggest drop in wholesale prices since last September. The core PPI, which excludes food, energy and trade services, dropped 0.3% in July after rising an upwardly revised 0.4% in June and was up 0.7% in the 12 months through July. The decline was led by a 1% drop in energy prices and a 1.1% drop in food prices. Inputs to construction were basically unchanged in July, and were down 0.2% year-over-year. Excluding food, energy and trade services, the most volatile components of the PPI, producer prices were little changed.
Q2 GDP GREW 1.1%
GDP grew 1.1% in the second quarter, down slightly from the 1.2% growth first reported but in line with economists’ expectations. The economy grew 0.8% in the first quarter. Consumer spending was revised to show an increase of 4.4%, up from the 4.2% growth first reported. Consumer spending accounts for 70% of economic activity. Business inventories sliced 1.26% from GDP growth, the biggest drag in more than two years, and up from 1.16% in the first estimate. It was the fifth straight quarter that inventories weighed on output. Corporate profits fell 1.2% after rising 3.4% during the first quarter, and were down 4.9% from a year earlier. A weakening profit picture could spell trouble for already slow business investment and possibly cut into hiring, which has been strong so far this year. Government spending fell 1.5%, more than the 0.9% first reported. To get a better sense of demand in the U.S., economists track final sales to domestic purchasers, which is essentially GDP excluding inventories and net exports. That measure rose 2.2% during the second quarter, up slightly from the 2.1% first reported.
JOB OPENINGS RISE
There were 5.6 million job openings in June, up from 5.5 million in May, according to the June Job Openings and Labor Turnover Summary (JOLTS) report. On a three-month moving average basis, job openings are up 5.3% over the past year compared to a 16% jump over the same time period last year. The retail sector has seen the biggest jump in openings over the past year, and openings among durable goods manufacturers are at a 12-month high. There were 4.8 million hires in the private sector and 4.9 million total separations, including 2.7 million quits. The number of job openings has consistently exceeded the number of hires. 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.
YELLEN ON INTEREST RATE INCREASE
Fed Chair Janet Yellen said the case for a rate hike has strengthened in recent months, but gave no date for an increase in rates. She reiterated previous statements that interest rate increases would be gradual and the Fed expects inflation to eventually reach its target of 2%. The Fed next meets on September 20. Many economists believe the Fed will not act until after the presidential election in November. Federal Reserve policymakers continue to project a rate increase to 0.9% by the end of this year, 1.6% by the end of 2017 and 2.4% by the end of 2018.
ECONOMIC GROWTH TO PICK UP
The U.S. economy is on track to grow at a 3.7% annualized rate in the third quarter, up from 1.1% growth in the second quarter. The annual forecast is down from the 3.8% growth forecast in mid-August by the Atlanta Federal Reserve’s GDP Now forecast model. The change in the forecast is based on the latest data on wholesale inventories, which shows that inventories for June rose 0.3% after having been initially estimated as unchanged and inventories for May were adjusted higher to show a 0.2% rise instead of the previously reported 0.1% gain. The unexpected increase caused the Fed to lower the estimated contribution to GDP from inventory investment.
DIGITAL PRICE INDEX MIXED
Adobe reported that its sixth monthly Digital Price Index (DPI) shows continued deflation in the vast majority of the goods and services the DPI tracks, with essentials such as groceries showing firmer prices than discretionary purchases such as toys, electronics and sporting goods. Online grocery sales were up 66% year-over-year. The share of groceries purchased online and picked up in-store rose from 18% in January 2015 to a record 45% in July 2016; 55% of orders were delivered to the customer's home. One of the few categories to show increasing prices was non-prescription drugs. Adobe reports that the DPI tracks $7.50 out of every $10 spent online with the top 500 U.S. retailers.
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