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SIMPLY ECONOMICS

Mixed activity and low inflation
Econoday Simply Economics 2/27/15
By R. Mark Rogers, Senior U.S. Economist

  

The economy continues to grow but not consistently.  The bright spot continues to be the consumer due in part to healthy optimism from declining inflation.   But the Fed expects weak inflation to be transitory.


 

Recap of US Markets


 

STOCKS

Stocks ended this past week mixed with small to moderate changes.  Big caps ended down along with the broad market.  Techs and small caps posted small gains.

 

After little change Monday, equities advanced on new signals from Fed Chair Janet Yellen that the Federal Reserve is unlikely to begin rising interest rates before June and news that Greece's creditors approved another bailout.   Wednesday was little changed as Yellen's second day of testimony before Congress added little information that was not made known the day before.


 

Economic news on Thursday was mixed as jobless claims were up, durables gained but followed two declines, and CPI inflation was soft.  Traders mainly focused on the inflation report, concluding that it would preclude an early increase in policy rates by the Fed. 

 

Stocks declined Friday on disappointing economic news as fourth quarter GDP was revised down and the Chicago PMI fell sharply.

 

While this past week was mixed, February posted the largest monthly percentage gains in more than two years.


 

Equities were mixed this past week. The Dow was flat (a few points negative); the S&P 500, down 0.3 percent; the Nasdaq, up 0.2 percent; the Russell 2000, up 0.1 percent; and the Wilshire 5000, down 0.3 percent.

 

Equities were up for the month of February. The Dow was up 5.6 percent; the S&P 500, up 5.5 percent; the Nasdaq, up 7.1 percent; the Russell 2000, up 5.8 percent; and the Wilshire 5000, up 5.5 percent.

 

For the year-to-date, major indexes are up as follows: the Dow, up 1.7 percent; the S&P 500, up 2.2 percent; the Nasdaq, up 4.8 percent; the Russell 2000, up 2.4 percent; and the Wilshire 5000, up 2.4 percent.


 

Markets at a Glance

Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.


 

BONDS

Treasury yields ended the week down notably.


 

Rates dipped Monday on a disappointing report on existing home sales.  Yields continued down on Tuesday after Fed Chair Yellen set a timetable for the removal of the word "patient" from the central bank's policy statement.  Also, she emphasized that the first rate hike would not take place sooner than June.

 

After little change Wednesday, rates rose on a stronger-than-expected core CPI number and on durables orders that topped expectations.  Friday, yields eased on a disappointing downward GDP revision.

 

For this past week Treasury rates were down as follows: the 2-year note, down 1 basis point; the 5-year note, down 9 basis points; the 7-year note, down 11 basis points; the 10-year note, down 12 basis points; and the 30-year bond, down 13 basis points.  The 3-month T-bill was unchanged.


 

OIL PRICES

The spot price of West Texas Intermediate was essentially unchanged this past week.  The only two notable daily swings were on Monday and Friday. Crude fell a dollar a barrel Monday on concerns about supply.  Friday, WTI rose a dollar a barrel on news of a slowing in the pace of the decline in rig counts.

 

Net for the week, the spot price for West Texas Intermediate slipped 58 cents per barrel to settle at $49.76


 

The Economy

While the fourth quarter got a downgrade, current quarter growth for monthly data are mixed but net moderately positive. Meanwhile, the Fed confirmed that the first rate hike would be no sooner than June.


 

GDP growth for Q4 downgraded but not as disappointing as headline

The detail in the latest GDP report makes a big difference in interpreting whether the numbers are disappointing or not.

 

Fourth quarter GDP growth was revised down but the good news is that the softer growth was mainly due to a lower estimate for inventory investment.  The economy grew 2.2 percent in the fourth quarter compared to the advance estimate of 2.6 percent.  Expectations were for 2.1 percent.

 

Final sales of domestic product were revised up to 2.1 percent from the initial estimate of 1.8 percent.  Final sales to domestic purchasers were revised up to 3.2 percent from 2.8 percent.

 

With the second estimate for the fourth quarter, inventory growth was revised down to $88.4 billion from the advance estimate of $113.1 billion.  Turning to components of final sales, the two slightly notable revisions were for net exports and nonresidential fixed investment.  Net exports were revised down to minus $476.4 billion from minus $471 billion.  Both exports and imports were revised up but imports more so.  The upward revision in nonresidential investment largely was in intellectual property but there also were higher estimates for structures and equipment.

 

On the price front, the chain-weighted price index was revised up marginally to 0.1 percent annualized, compared to the advance estimate of no change.  The core chain index, excluding food and energy, was unrevised from the initial estimate of 0.7 percent. 

 

Overall, the GDP revision was more favorable than the headline number suggests since the downward revision was largely in inventories while final sales were revised up.  Basically, the revisions show improvement in demand and businesses have leaner inventories.  The lower inventory growth may be a positive for manufacturing which has been sluggish.


 

New home sales hold steady after December surge

Sales of new homes in January, at a better-than-expected 481,000 annual pace and edging down only 0.2 percent, managed to hold onto December's big surge when sales jumped 8.1 percent to 482,000 (revised). January's strength was centered in what is by far the largest region, the South, where sales rose 2.2 percent. Sales slipped 0.8 percent in the West which is second, and a very distant second, in size to the South.

 

Price concessions may have helped sales as the median fell 2.6 percent to $294,000. The dip is minor, however.

 

Inventory has been on the thin side for the last 5 years but, at 218,000 units now on the market, was the highest since March 2010. But relative to sales, inventory still looks thin at 5.4 months which should encourage builders to step up activity.


 

Existing home sales unexpectedly drop

The housing market is not gaining traction—at least in terms of sales of existing homes. Despite a strong jobs market and low mortgage rates, demand for housing, whether for existing or new homes, remains flat. Sales of existing homes in January fell a very steep 4.9 percent to an annual rate of 4.82 million which is the lowest rate since April last year.

 

All regions showed single-digit declines with the West the deepest, at minus 7.1 percent. Declines hit both single-family homes, at minus 5.1 percent, and condos, at minus 3.5 percent.

 

Price concessions didn't help the month's sales with the median down 4.1 percent to $199,600. This is the first reading below $200,000 since March last year. The drop in sales made for a sizable rise in inventory relative to sales, to 4.7 months vs December's 4.4 months.

 

The lack of sales punch has the National Association of Realtors wondering. The NAR says it's "puzzled" that homeowners are now staying in their homes 10 years on average versus the long term average of 7 years, saying that homeowners may be happy with their mortgage rates and are perhaps doubtful that housing will rebound.


 

Pending home sales offer modest glimmer of hope

Existing home sales may turn back up in coming months or at least hold steady.

 

Pending home sales rose 1.7 percent in January to 104.2, pointing to moderate strength ahead for final sales of existing homes.

 

The regional breakdown shows gains in the two most closely watched regions, the South at 3.2 percent and the West at 2.2 percent. The Northeast is little changed at plus 0.1 percent while the Midwest fell slightly, down 0.7 percent.


 

Case-Shiller home prices continue recent uptrend

Sales of existing homes may be slow but price traction is appearing, at least it did in December as Case-Shiller's adjusted 20-city index shows a sharp month-on-month gain of 0.9 percent. This is the strongest monthly gain since March last year. Year-on-year growth, which had been slowing from the low double digits this time last year, is now leveling, at plus 4.5 percent vs November's 4.3 percent which is the first gain for this reading since way back in November 2013.

 

Unadjusted data, which are tracked closely in this report, tell the same story with the year-on-year rates exactly the same as the adjusted data, at 4.5 percent for December and 4.3 percent for November. Note that strong adjustment effects are at play in housing data this time of year, a fact that does cloud the adjusted readings.


 

FHFA house prices continue to advance

House prices continue to rise. FHFA house prices gained 0.8 percent in December, following a 0.7 percent boost in November. Market expectations were for a 0.5 percent gain in December. The year-ago rate posted at 5.4 percent from 5.2 percent in November.

 

Housing appreciation is the one facet of housing that in recent months has been consistently on an uptrend.

 

This report along with the Case-Shiller report trended higher going into year-end, perhaps offering some explanation for the January spike in consumer confidence. It is important to remember that price data in the existing home sales and new home sales reports, which unlike Case-Shiller and FHFA, are not based on repeat transactions for individual homes. 


 

Durable goods orders show relatively small bounce

Generally, the latest monthly number should be interpreted in the context of earlier recent numbers.  This is especially true for durables.  By itself, the January number looks strong.  But in the context of November and December, it is not so great.

 

Durables orders rebounded 2.8 percent in January after dropping 3.7 percent in December and falling 2.2 percent in November. Excluding transportation, the core edged up 0.3 percent after slipping 0.9 percent in December.

 

Transportation rebounded 9.1 percent, following a monthly plunge of 10.1 percent the prior month. Motor vehicles declined 2.9 percent, nondefense aircraft surged a monthly 128.5 percent, and defense aircraft decreased 6.5 percent.

 

Outside of the core, orders were mixed. Industries that advanced were machinery, computers & electronics, and "other." Declines were seen in primary metals and electrical equipment.

 

Nondefense capital goods orders excluding aircraft rebounded 0.6 percent after declining 0.7 percent in December. Shipments of this series slipped 0.3 percent in January after dipping 0.3 percent the previous month.

 

Overall, manufacturing is still soft, taking into account averages for the data over recent months.  Businesses do not appear to be eager to invest in equipment with softness in orders for nondefense capital goods excluding aircraft.


 

Consumer confidence slips but remains healthy

February's consumer confidence index fell 7.4 points to 96.4 from a revised 103.8 in January which was a 7-1/2 year high.

 

The dip was centered in the expectations component which fell a very steep 9.8 points to 87.2. The second main component, present situation, also dipped but less severely, down 2.7 points to 110.2. Here, a closely watched sub-component, jobs currently hard to get, rose 1.6 percentage points to 26.2 percent which is mild indication of weakness for the monthly employment report.

 

The decline in expectations is worth taking note, specifically reflecting not a rise in the number of pessimists but a decline in the number of optimists. The reason for the lack of optimism is impossible to pin point though weather through much of the country has been severe and may be freezing spirits, at least for now.


 

Consumer sentiment gains in second half February

Consumer sentiment improved sharply the last two weeks in February as the month's final index of 95.4 is up 1.8 points from the mid-month reading. The final reading points to a roughly 97 pace for the last two weeks which doesn't show that much slowing from January's final reading of 98.1.

 

The sharpest moves are in the current conditions component which rose to 106.9 from 103.1 at mid-month. This puts the pace for the last two weeks in the 109 area which is little changed from January's final reading of 109.3. This component points to steady rates of consumer activity for February compared to January.

 

The expectations component rose 1.5 points from mid-month to 88.0, pointing to a nearly 90 pace over the last two weeks. The final reading for January was 91.0. Note that expectations typically hinge on the outlooks for employment and income.

 

February readings on consumer spirits had been on the decline before this report, one that underscores consumer strength, strength derived from the strong jobs market.


 

Consumer prices remain soft

The negative trend at the headline level continues-thanks to the drop in energy. Overall consumer price inflation fell a sharp 0.7 after declining 0.3 percent in December. The January number was slightly below the consensus figure of down 0.6 percent. Energy plunged 9.7 percent after dropping 4.7 percent in December. Gasoline plummeted 18.7 percent, following a 9.2 percent fall in December. Food posted at unchanged, following a rise of 0.2 percent in the previous month. Excluding food and energy, consumer price inflation firmed to a 0.2 percent after a modest 0.1 percent rise December. Analysts forecast a 0.1 percent gain.

 

The shelter index rose 0.3 percent, and the indexes for personal care, for apparel, and for recreation increased as well. The medical care index was unchanged, while an array of indexes declined in January, including those for household furnishings and operations, alcoholic beverages, new vehicles, used cars and trucks, airline fares, and tobacco.


 

On a seasonally adjusted basis, the headline CPI was down 0.2 percent on a year-ago basis versus 0.7 percent in December. Excluding food and energy, the year-ago rate was 1.6 percent, matching the previous month.

 

The January report-with the energy based drop at the headline level-fits into Fed chair Janet Yellen description of headline inflation as transitory. But for now, the consumer is gaining more discretionary income and businesses with lower costs.


 

Fed chair testifies before Congress

Fed Chair Janet Yellen this past week gave her semi-annual testimony before Congress this past week.  She told Senate and House committees that the central bank remains "patient" in deciding when to start increasing the fed funds rate. She noted that many Americans remain either under employed or unemployed, wage growth remains sluggish and inflation is running below the Fed's 2 percent target.  Ms. Yellen's testimony supports the view that a rate increase is not likely before June or even later this year. The Fed has kept its benchmark rate near zero since 2008.


 

The bottom line

Recent trends by sector continue.  Both manufacturing and housing are only mildly positive.  The consumer sector is the bright spot with confidence still high.  Inflation is low—too low for the Fed.  While there is the expectation of a Fed rate hike later this year, it is not likely unless inflation picks up.


 

Looking Ahead: Week of March 2 through 6 

The consumer sector has been carrying the load for the economy.  We get personal income at the first of the week which includes personal spending.  We'll have to decipher gasoline price effects on the spending total.  The Fed will be interested in the direction of inflation in the report.  At the end of the week, the employment report is posted.  Payroll gains have been moderately healthy—will that trend continue'  The Fed will likely be paying special attention to wage growth.  The unemployment rate nudged up in December but has been on a downward trend but how much is due to the labor force participation rate.


 

Monday 

Personal income grew 0.3 percent in December after advancing 0.3 percent in November. The wages & salaries component increased a modest 0.1 percent, but followed a jump of 0.6 percent the prior month.  Personal spending decreased 0.3 percent, following a boost of 0.5 percent in November. PCE inflation remained weak-largely due to lower energy costs. Headline inflation decreased 0.2 percent on a monthly basis, following a drop of 0.2 percent in November. Core PCE inflation was flat in both December and November.  On a year-ago basis, headline PCE inflation decelerated to 0.7 percent in December from 1.2 percent the prior month. Year-ago core inflation posted at 1.3 percent in December compared to 1.4 percent in November. Both series remain below the Fed goal of 2 percent year-ago inflation.

 

Personal income Consensus Forecast for January 15: +0.4 percent

Range: +0.2 to +0.5 percent

 

Personal consumption expenditures Consensus Forecast for January 15: +0.0 percent

Range: -0.2 to +0.5 percent

 

PCE price index Consensus Forecast for January 15: -0.4 percent

Range: -0.7 to -0.1 percent

 

Core PCE price index Consensus Forecast for January 15: +0.1 percent

Range: +0.1 to +0.2 percent


 

The Markit PMI manufacturing flash index finished January at 53.9 versus 53.7 at mid-month. December's readings were the same: 53.9 for final December and 53.7 at mid-month.  On the strong side were output volumes and employment, the latter is a special plus, while on the soft side was new business growth which is being held down by weakness in export orders. Here, the strong dollar and slowing foreign markets are a concern.

 

Markit PMI manufacturing index (final) Consensus Forecast for February 15: 54.0

Range: 53.0 to 54.4


 

The composite index from the ISM manufacturing survey posted a January composite score of 53.5 compared with a revised 55.1 in December and 57.6 in November. October was the fourth quarter's peak at 57.9.  New orders slowed substantially in January, to 52.9 from 57.8. In contrast, order growth during November and October was in the low 60s.

 

ISM manufacturing composite index Consensus Forecast for February 15: 53.0

Range: 52.0 to 54.1


 

Construction spending rebounded 0.4 percent in December after dipping 0.2 percent the month before.  December's increase was led by public outlays which rebounded 1.1 percent after dropping 1.8 percent in November.  Private residential spending rose 0.3 percent after edging up 0.1 percent in November.  Private nonresidential construction spending eased 0.2 percent in December after a 0.8 percent rise the month before.

 

Construction spending Consensus Forecast for January 15: +0.3 percent

Range: -0.3 to +0.6 percent


 

Tuesday

Sales of total light motor vehicles fell 1.2 percent in January to a 16.7 million annual rate versus 16.9 million in December. Weakness is centered in foreign-made vehicles where sales fell 8.8 percent to a 3.1 million rate. Sales of North American-made vehicles fell 0.7 percent to a 13.5 million rate.

 

Motor vehicle domestic sales Consensus Forecast for February 15: 13.4 million-unit rate

Range: 13.1 to 13.8 million-unit rate

 

Motor vehicle total sales Consensus Forecast for February 15: 16.7 million-unit rate

Range: 16.4 to 16.8 million-unit rate


 

Wednesday

ADP private payroll employment showed slowing in job growth for January, to a lower-than-expected 213,000 for private payrolls.  The BLS estimate for January private payrolls posted at 267,000.

 

ADP private payrolls Consensus Forecast for February 15: 220,000

Range: 200,000 to 245,000


 

The Markit PMI services flash index for February rose to a 4-month high of 57.0. This compares with 54.2 in final January at 54.0 in the January flash.  Hiring was up for month in the sample as were backlogs.

 

Markit PMI services index (final) Consensus Forecast for February 15: 56.8

Range: 54.0 to 57.0


 

The composite index from the ISM non-manufacturing survey held steady and solid, at 56.7 in January versus a revised 56.5 in December. This index peaked in August last year at 59.6 and has averaged 57.2 over the past 4 months.  New orders, at 59.5, were very solid and point to sustainable and strong rates of overall growth in the months ahead. Employment, however, was a weak point in the January report, down a sharp 4.1 points to 51.6 which was the lowest rate of monthly growth since April last year. Input prices, at 45.5, were on the negative side of breakeven 50 for the second straight month and are at their sharpest rate of contraction since July 2009.

 

ISM non-manufacturing composite index Consensus Forecast for February 15: 56.5

Range: 55.0 to 57.5


 

The Beige Book was prepared for the March 17-18 FOMC meeting.  Traders will be focusing on labor market conditions and prices to determine if the economy is making enough progress for a Fed rate hike later this year.  Wages likely will get special attention.


 

Thursday

Initial jobless claims surged unexpectedly in the February 21 week, up 31,000 to a 313,000 level. The 4-week average was up 11,500 to 294,500 but was still more than 10,000 below a month ago in a comparison that, despite the latest week's surge, still points to improvement for the labor market.  Data on continuing claims, which are reported with a 1-week lag, were mixed. Continuing claims for the February 14 week fell 21,000 to 2.401 million but the 4-week average rose 2,000 to 2.399 million.

 

Jobless Claims Consensus Forecast for 2/28/14: 300,000

Range: 290,000 to 305,000


 

Nonfarm business productivity for the fourth quarter declined an annualized 1.8 percent, following a 3.7 percent jump in the third quarter. Unit labor costs increased 2.7 percent after falling an annualized 2.3 percent in the third quarter. Output growth softened to 3.2 percent in the fourth quarter, following a 6.3 percent jump the prior quarter. Compensation growth posted at 0.9 percent annualized after 1.3 percent the quarter before.  Year-on-year, productivity was unchanged in the fourth quarter, down from 1.3 percent in the third quarter. Year-ago unit labor costs were up 1.9 percent, compared to up 0.9 percent in the third quarter.

 

Nonfarm Business Productivity Consensus Forecast for revised Q4 14: -2.3 percent annual rate

Range: -2.7 to -2.0 percent annual rate

 

Unit Labor Costs Consensus Forecast for revised Q4 14: +3.1 percent annual rate

Range: +2.3 to +3.9 percent annual rate


 

Factory orders fell a very steep 3.4 percent in December for a 5th straight decline. This is the longest losing streak since the collapse of late 2008 and early 2009. Not helping was a full percentage point downward revision to November to minus 1.7 percent.

 

Factory orders Consensus Forecast for January 15: +0.2 percent

Range: -2.5 to +3.0 percent


 

Friday

Nonfarm payroll employment showed payroll jobs gains of 257,000 in January after strong increases of 329,000 in December and 423,000 in November.  With the revision, November is the strongest month since May 2010.  Private payrolls increased 267,000 in January after a 329,000 boost the month before.  The labor force may be tightening a bit as average hourly earnings rebounded 0.5 percent, following a 0.2 percent dip in December.  January's increase was the largest in about six years.  However, part of the boost in wages was due to increases in some states' minimum wage.  The average workweek held steady at 34.6 hours.

 

The unemployment rate nudged up to 5.7 percent from 5.6 percent in December.  The rise was due to a sharp rebound in the labor force.  The labor force participation rate rose to 62.9 percent from 62.7 percent in December.  It appears that some discouraged workers are returning to the labor force---a positive sign for how workers view the economy.  Looking at the broader underemployment measure from the household survey, the U-6 measure edged up to 11.3 percent from 11.2 percent in December. 

 

Nonfarm payrolls Consensus Forecast for February 15: 230,000

Range: 200,000 to 252,000

 

Private payrolls Consensus Forecast for February 15: 225,000

Range: 202,000 to 245,000

 

Unemployment rate Consensus Forecast for February 15: 5.6 percent

Range: 5.5 to 5.7 percent

 

Average workweek Consensus Forecast for February 15: 34.6 hours

Range: 34.5 to 34.8 hours

 

Average hourly earnings Consensus Forecast for February 15: +0.2 percent

Range: +0.2 to +0.3 percent


 

The U.S. international trade gap widened instead of narrowing as expected. Lower oil prices actually cut into petroleum exports.  In December, the U.S. trade gap grew to $46.6 billion from a revised $39.8 billion in November. Exports were down 0.8 percent after declining 1.1 percent the month before. Imports rebounded 2.2 percent after falling 1.8 percent in November.  Expansion in the overall gap was led by the goods excluding petroleum gap which increased to $49.7 billion from $46.3 billion in November.  The petroleum goods trade gap posted at $14.7 billion from $11.6 billion in November. Petroleum imports were up 7.7 percent while exports decreased 11.6 percent.  The services surplus was essentially unchanged at $19.5 billion.

 

International trade balance Consensus Forecast for January 15: -$41.8 billion

Range: -$44.5 billion to -$38.5 billion


 

Consumer credit outstanding rose $14.8 billion in December but the real headline was in the revolving credit component which jumped $5.8 billion. This is a very big jump for this component which typically shows not much of a monthly change at all. Non-revolving credit, which typically shows strong gains on vehicle financing and student loans, rose $9.0 billion.

 

Consumer credit Consensus Forecast for January 15: +$15.0 billion

Range: +$10.0 billion to +$17.0 billion


 

He can be found on a weekly broadcast talking about the U.S. economy, the easiest way to find him is by going to iTunes and searching for "Simply Economics."


 

Econoday Senior Writer Mark Pender contributed to this article.


 

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