Introduction

The week saw an unrelenting rush of bad economic news, starting with continued weakness in inflation and including trouble for consumer spending, consumer confidence, housing, manufacturing and inventories. The week also saw the Federal Reserve carefully follow their script, removing stimulus as planned on the assumption that inflation and the economy will improve. But are the Fed's views based more on optimism or realism? Let's take a look.

The economy

Low unemployment is tied by tradition to rising inflation. But our 4.3 percent unemployment rate hasn't sparked anything. The CPI fell 0.13 percent in May for the 2nd decline in 3 months and worst run since the oil collapse of 2014. And the core, which excludes oil and also food, isn't doing any better, inching up 0.06 and 0.07 percent the last 2 months after an outright and very rare decline in March. This is the core's worst run since the Great Recession.

The public talks about inflation in year-on-year terms, not month-to-month. Since the promising 2.8 percent rate in Februrary, the CPI has fallen nearly 1 full percentage point to 1.9 percent and is right back under the general 2 percent target. The core over the last 4 months is down 5 tenths to 1.7 percent for the most sudden and steep drop in 7 years. It's the core that the Fed really looks at and remember that its own inflation measure, the PCE, runs several tenths below the CPI.

A special factor is the cell-phone price war which began in March and has been dragging down communications since. Yet this is only one item making up 4 percent of all costs. Items of similar size that have nothing to do with cell phones have also been falling: apparel down for the last 3 months and vehicles for 4 months. A big factor is housing which makes up 43 percent of costs and has been flattening. And medical care, which makes up 10 percent, has been moderating sharply.

Lack of inflation is a serious indication that demand in general is weak. Consumer spending makes up 69 percent of GDP and has been this year's big flop, but the FOMC in its June statement said "household spending has picked up in recent months". Really? Consumer spending did rise 0.4 percent in April and 0.3 percent in March but that's no better than average. And the first piece for May spending, retail sales, fell 0.3 percent which is far below average.

Consumers, in fact, are very cautious. Spending on key discretionary categories is not improving. Vehicle sales have fallen nearly every month this year with the year-on-year trend (3-month moving average) sliding 2 percentage points to the 4 percent line. Restaurant sales have slipped for 3 months in a row with this trend sinking to the 3 percent line. Ultimately, it's low wages that are to blame for both the lack of inflation and lack of consumer spending.

June of course is the last month of the second quarter and a very closely watched consumer indication isn't pointing to any quarter-end bounce. June's preliminary consumer sentiment index is 94.5, down from several months at the 97 level and the least optimistic reading since the November election. The current conditions component, which offers a specific gauge on month-to-month consumer spending, shows a similar decline.

An emerging disappointment is housing which broke out early in the year but has since lost pace. Housing starts fell 5.5 percent in May to a far lower-than-expected annualized rate of 1.092 million with permits likewise weak, down 4.9 percent to a 1.168 million rate. Starts have averaged 1.124 million so far this quarter, down 9.2 percent from the first quarter's 1.238 million average. Don't look for residential investment to bail out second-quarter GDP.

The big strength this year was supposed to be the manufacturing sector, at least based on the enormous strength of all the low sample-sized regional reports. But marginal strength, and weakness in capital goods, is how things are actually playing out. Manufacturing production did jump 1.1 percent in April but was preceded in March by a 0.8 percent drop and followed in May by a 0.4 percent dip. May's output of both vehicles and business equipment was very weak.

More bad news comes from inventories which are falling not because demand is strong but much more likely because sales expectations are falling. The first indications on the second quarter show a steep 0.5 percent April draw at wholesalers and a 0.2 percent draw at retailers. Factory inventories were positive but only barely and not enough to lift overall business inventories which fell 0.2 percent. Inventory draws are negatives in the GDP calculation.

Markets: Oil emerging risk for inflation

There's one wild card, and one that can be very powerful, that could sweep inflation further lower and once again upend the manufacturing sector. The price of oil is coming down and is below $45 for the first time since April last year. Over production and lack of industrial demand are two explanations for the decline which, the Fed for one, hopes will not deepen. Except for oil, most markets were little changed in the week though the Dow did rise 0.5 percent to a new record 21,384.

The bottom line

Many said the first quarter's 1.2 percent annualized GDP pace was understated by bad seasonal adjustments and would, in any case, make for an easy comparison and a burst higher in the second quarter. But the pieces for the second quarter are not falling into place, on the contrary. And the outlook for the third and fourth quarters? Well, tax cuts and fiscal stimulus are still nowhere in sight and worker pay, like inflation in general, is moribund. Federal Reserve policy makers see one more rate hike coming this year and they expect, sometime around year-end, to begin tapering down their $4.5 trillion balance sheet, that is reduce their support for Treasuries and mortgage-backed securities. If the economy doesn't pick up soon, don't be surprised if these expectations start getting pushed back into next year.

Week of June 19 to June 23

Steep declines in housing starts and permits were among the prior week's biggest disappointments and point to moderation for this week's heavy run of housing statistics. Existing home sales are not expected to improve in Wednesday's report for May with new home sales on Friday expected to show only a moderate bounce back from severe contraction in April. Growth in the FHFA house price index is expected to slow though still remain healthy. The current account deficit will be Tuesday's focus with jobless claims Thursday's focus.

Tuesday

Current Account Deficit for First Quarter

Consensus Forecast: -$121.8 billion

Consensus Range: -$128.8 to -$109.8 billion

The current account deficit is expected to widen sharply in the first quarter, to $121.8 billion from $112.4 billion in the fourth quarter. Yet the range of estimates is wide, from $128.8 billion at the low end to $109.8 billion at the high end. The account deficit relative to GDP has been moderate, at 2.4 percent in the fourth quarter.

Wednesday

Existing Home Sales for May

Consensus Forecast, Annualized Rate: 5.550 million

Consensus Range: 5.450 to 5.650 million

Like other housing data, existing home sales were disappointing in April following general strength during the first quarter. And forecasters aren't looking for a rebound in May with Econoday's consensus at a 5.550 million annualized rate vs 5.570 million in April. But prices have been on the rise and new supply has been coming into the market.

Thursday

Initial Jobless Claims for June 17 week

Consensus Forecast: 240,000

Consensus Range: 235,000 to 241,000

Jobless claims are very low and pointing to unusually strong demand for labor. Forecasters sees initial claims coming in at 240,000 in the June 17 week vs 237,000 in the prior week. Note that the June 17 week is also the sample week for the monthly employment report which will focus extra attention on the data.

FHFA House Price Index for April

Consensus Forecast, Month-to-Month Change: 0.5%

Consensus Range: 0.5% to 0.7%

The FHFA house price index has been posting solid rates of growth though slight slowing is expected for April, to a gain of 0.5 percent vs March's 0.6 percent. Pacific and Mountain are the leading regions with the Mid-Atlantic trailing.

Index of Leading Economic Indicators for May

Consensus Forecast, Month-to-Month Change: 0.3%

Consensus Range: 0.2% to 0.4%

The index of leading economic indicators has been signaling solid strength ahead for the economy, at 0.3 percent gains in both April and March which is also Econoday's consensus for May. Low interest rates and strong consumer confidence have been leading pluses for this report.

Friday

PMI Composite for June, Flash

Consensus Forecast: 53.8

Consensus Range: 53.6 to 53.8

PMI Manufacturing for June, Flash

Consensus Forecast: 52.6

Consensus Range: 52.2 to 53.0

PMI Services for June, Flash

Consensus Forecast: 53.7

Consensus Range: 53.6 to 53.9

The PMI composite picked up in May, from 52.7 in April to a final 53.6 (53.9 for the flash). May's gain was centered in services where the index rose to a solid 53.6 (54.0 for the flash) with growth in manufacturing trailing at a moderate 52.7 (52.5 flash). Expectations for June are pointing to little change. Rates of growth in this report have been more moderate than other private surveys and generally more in line with government data.

New Home Sales for May

Consensus Forecast, Annualized Rate: 590,000

Consensus Range:  575,000 to 615,000

New home sales are perhaps the most volatile of any economic report, swinging from a 621,000 annualized rate in March down to a 569,000 rate in April. Econoday's consensus for May is right in the middle at 590,000 in a result that, when compared with the 3-month average of 606,000, would be healthy though still slightly below the recent trend.