Market Watch August 31, 2017
All three indexes posted modest gains in August, the fifth consecutive month of gains. The markets once again shrugged off the latest rounds of upheaval in the Trump administration as well as concerns over North Korea, focusing instead on good economic news and upwardly revised GDP. The DOW rose 0.3% in August to close at 21,952, the tech-heavy NASDAQ rose 1.3% to close at 6,429 and the S&P, the index most closely followed by economists, gained two points for the month to close at 2,472.
Consumer Confidence rises to 122.9
The New York-based Conference Board's Consumer Confidence Index rose to 122.9 in August after rising to a downwardly revised 120.0 in July. The Present Situation Index continued to climb, increasing to 151.2 after rising to a downwardly revised 145.4 in July. The Expectations Index rose to 104.0 from a slightly downwardly revised 103.0 in July. The Expectations Index is typically the most volatile of all the components. The Conference Board said that consumers’ more optimistic views of the current situation was the big driver behind the boost in confidence. 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 July after rising an upwardly revised 0.2% in June. The personal consumption expenditures index (PCE) rose just 0.1% in July after being flat in June and dropping 0.1% in May and was up 1.4% year over year. Inflation is continuing to fall farther from the Fed’s target of 2%. Incomes grew 0.4%, the best showing since February. The strength came from a strong 0.5% increase in wages and salaries. Analysts said the report shows that consumer spending is solid. There was a strong 0.6% increase in purchases of durable goods such as autos and a solid 0.5% rise in demand for non-durable goods such as food and clothing. Spending on services rose 0.2%. The personal savings rate slipped to 3.8% of after-tax income, down from 3.9% in June. 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) inched up 0.1% in July after being unchanged in June. The CPI was up 1.7% from July 2016, the fourth consecutive month in which year-over-year gains have eased. Core inflation, which excludes food and energy, rose 0.1% for the fourth consecutive month and was up 1.7% year over year. Core inflation has consistently been below the Fed’s target of 2%. Fed Chairman Janet Yellen told Congress that the Fed believes that the recent lower readings on inflation are partly the result of a few unusual reductions in certain categories of prices. However, analysts believe that the Fed will hold off increasing interest rates for now, and may not raise them again until December at the earliest.
Unemployment rises to 4.4%
The unemployment rate rose to 4.4% in August after falling to 4.3% in July. The economy added 156,000 new jobs in August, the 83rd consecutive month of job gains. Job growth in June and July was revised down by a combined 41,000, leaving an average monthly gain this year of a solid 176,000 jobs. Average hourly pay has risen 2.5% percent over the 12 months ending in August. Pay raises typically average 3.5% to 4% when the unemployment rate is this low. The leading source of job growth was in manufacturing, which added 36,000 jobs. Construction added 28,000 jobs in August and has averaged a gain of 13,000 jobs over the past three months. Fed Chair Janet Yellen has said that the economy needs to create just under 100,000 jobs each month to keep up with growth in the working-age population.
Durable Goods Orders fall 6.8%
Durable goods orders fell 6.8% in July after jumping 6.5% in June. The big decline was primarily due to a steep drop in orders for transportation equipment, with orders for non-defense aircraft falling 70.7% after jumping 129.3% in June. The decrease was primarily due to a big drop in orders at Boeing. Excluding the volatile transportation category durable goods orders increased by 0.5% in July. Orders for non-defense capital goods excluding aircraft, a closely watched indicator of business spending, rose by 0.4% in July after being unchanged in June. Shipments in the same category, which factor into GDP, rose 2.0% in July after June orders were revised upwards. Economists said the steep drop in headline durable goods orders is nothing to worry about, since it was almost entirely due to a pullback in the volatile aircraft category, and the strong increases in non-defense capital goods orders and shipments support continued growth. The durable goods report is often both volatile and subject to sharp revisions.
Chicago PMI Unchanged
The Chicago Purchasing Managers’ Index (PMI) remained stable at July’s level of 58.9, which was the lowest level since April. Despite the retreat, all components remained above their respective 12-month averages. New Orders increased slightly after falling 11.6 points in July to 60.3, the lowest level since February. Production also increased slightly after falling 6.9 points to 60.8 in July. Order Backlogs fell for the second consecutive month after reaching a 23-year high in June. MNI Indicators said that key indicators remain high and point to robust business confidence. Each month a panel of respondents are asked a single special question. Only 26.2% of PMI panelists answering the month’s special question reported that their inventory levels were currently too high. When answering the same question in November 2015, 44.2% of firms said inventories were too high.
Wholesale Prices Fall 0.1%
The Producer Price Index (PPI) fell 0.1% in July after rising 0.1% in June and was up 1.9% over the past twelve months. It was the first decline in wholesale prices in 11 months and reflected the third consecutive monthly decline in energy prices. Core inflation, which excludes volatile food, energy and trade services prices, fell 0.1% in July after rising 0.2% in June and was up 1.8% from July 2016. The PPI for inputs to construction was up 0.3% in July and 3.0% year over year. Eight of 11 key input prices rose in July. For the past five years of the recovery inflation has been below the Federal Reserve’s target for annual price gains of around 2%. Analysts note that prices further back in the pipeline are mixed, and expect inflation to remain tame for the foreseeable future.
Q2 GDP rises 3.0%
GDP grew an upwardly revised 3.0% in the second quarter, well ahead of expectations and up from the 2.6% growth initially reported. It was the best growth since the first quarter of 2015. Consumer spending grew 3.3% in the quarter, up from the initial reading of 2.8% and a big improvement from 1.9% in the first quarter. Consumers spent more on motor vehicles, cellphones, housing and utilities than originally estimated. The saving rate slipped to 3.7% from the 3.8% first reported and 3.9% in the first quarter. Despite robust spending, inflation remained tame, with the Fed’s preferred inflation measure, the personal consumption expenditures (PCE) price index excluding food and energy, increasing at 0.9%, unrevised from the first reading. Spending on business equipment jumped 8.8%, the fastest growth in two years, and up from the 8.2% spending first reported. Investment on nonresidential structures was revised up from 4.9% to 6.2%. Inventory remained neutral and trade added two-tenths of a percent to growth. However, housing was a big drag in growth, with the investment in homebuilding at a seven-year low.
Job openings Hit Record High
The number of job openings increased by 461,000 in June to a seasonally adjusted record high of 6.2 million according to the latest Jobs Openings and Labor Turnover Survey (JOLTS). It was the highest level of job openings since JOLTS started in December 2000 and pushed the job openings rate up to a near one-year high of 4%. Construction had 69,000 unfilled positions. There were 179,000 vacancies in the professional and business services industries. Job openings in June were concentrated in the Midwest and West regions; the Northeast was the only region with no new net job openings. The ratio of available workers per available job sank to its lowest level ever, with managers now having about 1.1 candidates per job opening, making competition fierce for talent. About 1.3 million Americans quit their jobs in June, down from 3.2 million in May, sending the quits rate down to 2.1% from 2.2% in May. Layoff rates are historically very low, but layoffs rose by 28,000 in June to 1.7 million. 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.
President disbands advisory councils
President Donald Trump disbanded two business advisory councils and abandoned plans to form the Advisory Council on Infrastructure to advise him on his planned $1 trillion infrastructure investment. Several CEOs quit both the American Manufacturing Council and the Strategic and Policy Forum in protest over Trump’s remarks that appeared to confer legitimacy on white supremacists following a violent rally August 12 in Charlottesville, Virginia. Walmart’s CEO Doug McMillon had issued a statement to employees before the council was disbanded stating that he felt that the President had missed a major opportunity to bring people together by denouncing white supremacy, but planned to stay on the council in hopes of being able to bring about change.
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