Introduction

Surprise can be unsettling but at least it's interesting. Whether it's a snap election gone wrong or a firing gone viral. What is not likely to surprise, however, is the outcome of this month's FOMC as the Federal Reserve, resolved on meeting the expectations it has created, appears certain to raise its target rate one notch. But even here there may be a twist: A rate hike hitting an economy that, instead of accelerating, may actually be stalling. Let's look inside the week's data for clues.

The economy

Factory orders are considered a leading indicator not only for factory shipments of course but the overall economy in general. Civilian aircraft have been underpinning this year's orders, posting 4 straight months of good gains between December and March for the longest streak in 25 years of data. But aircraft fell back in April and further give back in May and perhaps June should be no surprise. And capital goods, in a sign of business caution, have been flat all along.

Unfilled factory orders have been underwater for the past 2 years which hasn't been a plus for manufacturing payrolls. Hiring workers is a very big expense that takes a lot of time, and it takes a stack of unfilled orders to trigger all the effort. Improvement is probably underway but you need a microscope to detect it. The rebuilding of factory jobs is the Trump administration's call to arms and unfilled orders are the place to watch. But so far, there's not very much to see.

The factory sector has been making up a smaller and smaller piece of the overall economy for years, a fact that by necessity focuses extra attention on the service sector. The ISM's non-manufacturing index has been on a long tear, trending up and posting high 50 readings for much of the last year. Ultimately this index should move in line with underlying consumer spending on services which, in contrast, has been slowing, not accelerating.

But the ISM is getting skewed higher by two industries that are not defined as either manufacturing or services, and that's mining and construction both of which have been on the rebound. Markit's services PMI excludes these two groups which may be why its readings have been stuck in the low to mid 50s area. Yet here too the trend is the same, up in constrast to actual spending. Political polls and private economic data share a fatal flaw: small sample sizes.

The initial outlook for second-quarter GDP, following the first quarter's roughly 1 percent rate of annualized growth, was for a very big bounce, perhaps to a 4 percent rate. But based on early returns, the second quarter will be lucky to make 2 percent. Both wholesalers and retailers, facing weak sales, visibly worked down their inventories in April which is a negative for GDP. But there is an upside. If demand does improve, inventories will have to be refilled which can't be bad for jobs.

Employment has in fact been the single greatest strength of the economy. Monthly job openings have surged for the last 3 years and burst over 6 million in April. This compares with 6.9 million Americans who are actively looking for work, perfect match right? Not right. The fit isn't working as hiring has slowed to only 5 million per month. It's a mismatch that hints at a skills mismatch, that is lack of skills. Little wonder we're stuck in a low wage, low productivity economy.

Demand for labor, in distinction to hiring, is a chief feature of our economy. Employers, unable to find the right people, are holding onto their existing employees like never before. Jobless claims have been unusually low for the past year, trending at a weekly 240,000 for initial claims and 1.9 million for continuing claims. These are the lowest readings since the early 1970s when the workforce, at 85 million, was nearly half the size it is now.

Markets: When weakness is a strength?

This year's dollar downdraft is probably a plus for the economy, raising foreign demand for our exports though at the same time lowering foreign demand for our stocks and bonds. The euro has been catching a very strong bid as economic growth in the Eurozone is improving and as the outlook for the UK and the pound becomes more and more uncertain. Yet the Eurozone, whose exports are known for their quality, may be well suited to withstand a strong currency.

The bottom line

The economy may not be doing that great but plans are plans and the Fed is on a mission to raise rates or as they say in proper Fedspeak, to "withdraw stimulus". However you say it the effect is the same: rising costs for borrowing that will slow economic activity ahead. Yet the economy, if not already slowing, isn't really moving that fast. "Data dependent" is another Fedspeak gem, one that's supposed to tie rate moves to actual movement in economic data. Needing to fit reality to their schedule, the Fed will have to dance around this one, no doubt repeating the formulation in May's FOMC statement that economic softness is merely "transitory" and that the economy will doubtlessly shift higher. We're all hoping so.

Week of June 12 to June 16

Wednesday's FOMC will dominate the week and will include updated FOMC forecasts, where retracement for inflation and growth estimates are possible, along with Janet Yellen's quarterly press conference. The meeting is widely expected to produce an incremental hike in the Fed's policy rate despite the ongoing run of weak economic data. Inflation has been among the weakest of any data and will dominate the week's economic reports beginning with producer prices on Tuesday followed by consumer prices on Wednesday and import & export prices on Thursday. Retail sales on Wednesday will offer an update on consumer spending which has also been weak and with very little strength expected for the May report. Major reports on manufacturing and housing will be crowded together late in the week including industrial production and both the Philly Fed and Empire State reports all on Thursday. The housing market index, which has been very strong, will be posted on Thursday with housing starts & permits, which have not been strong, to close out the week on Friday.

Monday

Treasury Budget for May

Consensus Forecast: -$87.0 billion

Consensus Range: -$154.6 to -$85.0 billion

Seven months into the fiscal year, the government's deficit in April was tracking 2.4 percent below fiscal year 2016. Both individual and corporate taxes have been up slightly while, on the outlay side, net interest has been rising as have expenses for Medicare. The Econoday consensus for May's Treasury budget is calling for an $87.0 billion deficit.

Tuesday

Small Business Optimism Index for May

Consensus Forecast: 104.0

Consensus Range: 102.0 to 105.0

The small business optimism index has been holding near expansion highs on strong economic optimism and aggressive hiring plans. Sales expectations and capital improvement plans have also been strong with earnings, however, the standout weakness. The Econoday consensus for May is 104.0 vs April's 104.5.

PPI-FD for May

Consensus Forecast, Month-to-Month Change: 0.1%

Consensus Range: -0.2% to 0.2%

PPI-FD Less Food & Energy

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.1% to 0.3%

Following unusual weakness in March, producer prices rebounded sharply in April and got a seasonal lift from guest rooms and also a lift at brokerages and loan firms following the Fed's rate hike in March. But trade services were weak, hinting at general weakness in demand and trouble for May's producer price report. Energy wasn't a major factor in April and isn't expected to be one in May either. Econoday's consensus gain for May's PPI-FD is 0.1 percent at the headline level (vs April's 0.5 percent) with less food & energy seen at plus 0.2 percent (vs 0.4 percent).

Wednesday

Consumer Price Index for May

Consensus Forecast, Month-to-Month Change: 0.0%

Consensus Range: -0.1% to 0.1%

Consumer Price Index

Consensus Forecast, Year-on-Year Change: 2.0%

Consensus Range: 1.9% to 2.1%

CPI Core, Less Food & Energy

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.1% to 0.3%

CPI Core, Less Food & Energy

Consensus Forecast, Year-on-Year Change: 1.9%

Consensus Range: 1.8% to 2.0%

Consumer prices proved unexpectedly weak in both March and, despite an upturn in producer prices, in April as well. April's weakness included medical care and once again communications where providers are in a price war. Econoday's consensus for consumer prices in May calls for no monthly change at the headline level (vs a 0.2 percent increase in April) with the year-on-year rate seen slipping to 2.0 percent (vs 2.2 percent). Energy doesn't look to be a major factor in May though the less food & energy is seen rising 0.2 percent (vs 0.1 percent) with this yearly rate, however, unchanged at 1.9 percent.

Retail Sales for May

Consensus Forecast: 0.2%

Consensus Range: -0.2% to 0.4%

Retail Sales Ex-Autos

Consensus Forecast: 0.2%

Consensus Range: -0.2% to 0.5%

Retail Sales Ex-Autos Ex-Gas

Consensus Forecast: 0.3%

Consensus Range: 0.1% to 0.5%

Retail Sales Control Group (Ex-Food Services, Ex-Autos, Ex-Gas, Ex-Building Materials)

Consensus Forecast: 0.3%

Consensus Range: 0.2% to 0.4%

Weakness in consumer spending has been perhaps 2017's most important economic theme, reflecting low wages and belying high levels of employment and strong consumer confidence. April was supposed to have been a big bounce back month for retail sales but only moderate gains were posted. A similar lack of punch is expected for May with headline retail sales seen up only 0.2 percent following April's 0.4 percent gain. Vehicle sales look to have been weak to flat in May with ex-auto retail sales also at a consensus gain of 0.2 percent vs 0.3 percent in April. Gas station sales are also expected to be weak to flat making for a slightly more solid ex-auto ex-gas consensus gain of 0.3 percent, which would be unchanged from May's 0.3 percent. Control group sales are expected to rise 0.3 percent vs April's slim 0.2 percent gain.

Business Inventories for April

Consensus Forecast,  Month-to-Month Change: -0.1%

Consensus Range: -0.2% to 0.3%

Business inventories are posing their own threat to second-quarter GDP and are expected to open the quarter at a consensus draw of 0.1 percent in April vs a 0.2 percent build in March. Low inventories do not likely reflect increased production needs, which have been modest, and more likely reflect caution among businesses that inventories, relative to demand, may be too high.

Federal Funds Target for June 13 & 14 Meeting:

Consensus Forecast, Midpoint: 1.125%

Consensus Range: 1.00% to 1.25%

The Federal Open Market Committee is expected to raise their federal funds target by 25 basis points to a 1.00 to 1.25 percent range with a 1.125 percent midpoint. The hike is expected to come despite a steady run of both soft consumer spending data and soft inflation data which will likely force the FOMC to repeat their prior language at the May meeting that ongoing weakness is only "transitory". The unwinding of the Fed's balance sheet is expected to begin at year end and additional specifics on the program are expected. This meeting will also include quarterly FOMC forecasts, where downgrades to growth and inflation are possible, and also Janet Yellen's quarterly press conference. Prospects of rising government stimulus have yet to affect policy as FOMC members wait for developments to take shape in Washington.

Thursday

Initial Jobless Claims for June 10 week

Consensus Forecast: 242,000

Consensus Range: 240,000 to 245,000

Jobless claims are very low and pointing to unusually strong demand for labor. Forecasters sees initial claims coming in at 242,000 in the June 10 week vs 245,000 in the prior week.

Philadelphia Fed Manufacturing Index for June

Consensus Forecast: 27.0

Consensus Range: 20.0 to 35.4

Growth in the factory sector may be modest but growth in the Philadelphia Fed index has been exceptional, at 38.8 in May which next to February's 43.3 is the highest in more than 30 years. New orders are showing similar strength, backlog orders are on the rise, while delivery times, in a sign of tight supply conditions, have slowed in each of the last 7 reports. The Econoday call for June is for slowing but at a still very strong reading of 27.0.

Empire State Index for June

Consensus Forecast: 5.0

Consensus Range: 1.4 to 8.0

Strength is expected to resume in June's Empire State index where Econoday's consensus is 5.0 vs a minus 1.0 reading in May that ended a run of unusual strength. Both new orders and backlogs contracted in May but manufacturers in the New York region still kept up production and hiring.

Import Prices for May

Consensus Forecast, Month-to-Month Change: 0.0%

Consensus Range: -0.6% to 0.2%

Export Prices

Consensus Forecast, Month-to-Month Change: 0.1%

Consensus Range: 0.0% to 0.3%

April import prices rose a sharp 0.5 percent in broad-based pressure, however, that did not appear at all at the consumer level during the month. Import prices for May are expected to be flat at a consensus no change. Export prices rose 0.2 in April with Econoday's May consensus, reflecting expected firming in farm prices, at 0.1 percent. Note that this report usually precedes, not follows, the release of the producer and consumer price reports, a calendar quirk that may lower focus on May's data.

Industrial Production for May

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: -0.1% to 0.5%

Manufacturing Production

Consensus Forecast,  Month-to-Month Change: 0.2%

Consensus Range: -0.3% to 0.3%

Capacity Utilization Rate

Consensus Forecast: 76.8%

Consensus Range: 76.5% to 76.9%

Forecasters are calling for only a 0.2 percent gain in May industrial production in what would be a modest result and far  down from April's 1.0 percent spike. The manufacturing component, which has been uneven but still positive this year, also spiked 1.0 percent in April with the May consensus also at 0.2 percent. Capacity utilization is expected to firm slightly to 76.8 percent vs April's 76.7 percent.

Housing Market Index for June

Consensus Forecast: 70

Consensus Range: 68 to 72

Rising material and labor costs have not been eroding optimism among builders who have not only been reporting strong sales, whether current or future, but also have been reporting a rare increase in customer traffic. More of the same is expected with Econoday's consensus for the housing market index at 70 for June which would be unchanged from May. Note that this report failed to pick up weakness in housing starts and permits in April.

Friday

Housing Starts for May

Consensus Forecast, Adjusted Annualized Rate: 1.221 million

Consensus Range: 1.170 to 1.270 million

Building Permits

Consensus Forecast: 1.249 million

Consensus Range: 1.240 to 1.260 million

The last housing starts & permits report was a major disappointment, showing weakness in April and including sharp downward revisions to prior months. There was one positive, though, in the April report and that was strength for single-family starts which helped offset a dip for permits and declines in both starts and permits for multi-units. Forecasters see housing starts bouncing back to a 1.221 million annualized rate in May vs April's 1.172 million with permits seen at a 1.249 million rate vs a revised 1.228 million in April.

Consumer Sentiment Index, preliminary June

Consensus Forecast: 97.1

Consensus Range: 95.8 to 97.6

The consumer sentiment index has been holding at strong levels reflecting a steady assessment of current conditions and solid confidence in the outlook. Econoday's consensus for preliminary June is 97.1 which would be unchanged from final May.