Introduction

There's plenty to look forward to in the third quarter especially employment-driven strength for consumer spending. But consumer spending isn't one of the week's themes, rather continued trouble for housing and a surprising dip for manufacturing where, however, a key strength is indeed showing greater life. And initial indications for the August employment report are very favorable, offsetting incremental gains in inflation expectations (something that might not please Jerome Powell) and the uncertain risks related to yield-curve inversion (something that might not please the FOMC in general).

The economy

Housing is the one sector of the economy not showing any life. The green line in the graph tracks existing home sales which managed only a 5.340 million annualized rate in July, for a 0.7 percent dip from June and the fourth decline in a row. This is the lowest rate in 2-1/2 years. Resales for both single-family homes and condos are weak, the former down 0.2 percent on the month to a 4.750 million rate and the latter down 4.8 percent to a 590,000 rate. The blue columns track new home sales which in this data set exclude condos and which fell 1.7 percent in July to a 627,000 rate. This is the lowest showing since October last year. Not a positive for housing and what is related closely to the Federal Reserve's rate-hike path is mortgage rates, averaging 4.81 percent in the latest week for 30-year fixed-rate conforming mortgages ($453,100 or less). This rate has been steady this summer but is still up an unfavorable 70 basis points from this time last year.

Housing data can be very volatile and it's always a good idea to step back and look at the long-term trends. The accompanying graph tracks sales of existing single-family homes and sales of new single-family homes by 3-month averages but the message is the same, declining sales rates for both. By this measure existing home sales are at a 4.767 million rate, down 3.1 percent so far this year, while new home sales, at a 640,000 rate, are down 2.3 percent. One factor that has specifically held down new home sales is lack of supply on the market as construction has been slow, held down by lack of available construction labor, lack of available lots, and high prices for construction materials.

But there are some positives for housing and that's new supply coming into the market for both resales and new homes. Existing homes on the market (green line) have been moving higher this year, coming in at 1.920 million in July and giving home shoppers more choices which should be a plus of sales in the coming months. New homes on the market (blue columns) have been steadily rising, last at 309,000. A risk here, though, is the constraints in the construction sector evident in the prior week's housing starts report where homes under construction were flat and the number of homes permitted but not started were rising.

An unwanted feature of the 2018 economy has been moderation in home prices, one tied to the softness in sales. The blue columns of the graph are the FHFA house price index where the year-on-year growth rate slowed by 2 tenths to 6.5 percent. This rate had been approaching 8 percent early in the year. The green area of the graph is the Case-Shiller 20-city index which has also been moving back toward the 6 percent line. Unfavorable mortgage rates are one factor behind the lack of punch in home sales but there are probably other factors as well. One may be a fixed feature of the ongoing recovery, that is a general lack of interest in home ownership evident since the subprime housing meltdown 10 years ago.  Case-Shiller data will be a highlight of the coming week's calendar.

July's durable goods report at the headline level is a disappointment showing a steep $4.2 billion decline for orders to $246.9 billion (blue columns) and a $0.5 billion slip in shipments to $250.8 billion (green line). But the weakness for both orders and shipments is tied directly to the always volatile commercial aircraft component where monthly change can be very sizable, as in July with orders down $5.0 billion from June to $9.2 billion and with shipments down $3.6 billion to $10.6 billion. When excluding aircraft and also vehicles as well as ship building, orders excluding transportation equipment, which is a conventional measure for this report, show a modest increase of $0.4 billion for orders to $164.0 billion and a rise of $1.1 billion for shipments to $166.9 billion.

But the picture changes dramatically when focusing on the real meat of the durable goods data, and that is capital goods which are goods used to manufacture other goods. The graph tracks the blue line of core capital goods, which are nondefense excluding aircraft, against the green columns of all other durable goods that exclude core capital goods. Here, core capital goods are up $1.0 billion in the month of July to $69.7 billion while all other goods are down $5.4 billion to $177.2 billion. And it's more than just July. Core capital goods have been on a climb this year, up a monthly $3.2 billion from March's level of $66.5 billion while the rest of the durables sector has been sinking, down a monthly $9.1 biillion from a March peak of $186.3 billion. Computers & electronics as well as machinery were positive contributors for the capital goods group in July where strength points to further acceleration for what has already been very strong growth in business investment. And shipments, which of course follow orders, have in fact been very strong, up $0.6 billion in July to $68.6 billion and also up $0.6 billion in June to $68.0 billion. These levels, which are direct inputs to GDP, point to a strong start for third-quarter nonresidential fixed investment and a strong ending for second-quarter fixed investment. What has been behind the rise in capital investment? This year's big corporate tax cut is one answer. Strength in capital goods points to more efficient output and greater economic productivity ahead.

But not all the week's factory data are so favorable. Rough indications on what to expect for manufacturing as a whole in August have been soft. The Kansas City Fed's index slowed to 14, down from 23 in July and 9 points below Econoday's consensus for the lowest reading of the year. Orders slowed 3 points to 9 with shipments down 4 points to 18 and hiring down 2 points to 12. And the workweek barely showed any growth at all, at plus 1 in August vs 14 in July. But a little slowing may actually be a plus for Kansas City's sample given the risk that activity was becoming unsustainably strong, a risk highlighted by lengthening delivery delays and highly elevated input costs. These results follow the prior week's manufacturing report from the Philadelphia Fed where the headline dropped 13.8 points to 11.9 for the lowest score in this report in nearly two years.

Jerome Powell in Friday's speech at Jackson Hole described the labor market as "strong", which of course is a very favorable assessment and perhaps a bit of an understatement, at least based on layoffs as indicated by jobless claims. Initial jobless claims for the August 18 week, which was also the sample week for the monthly employment report, fell 2,000 to 210,000 with the 4-week average down 1,750 to 213,750. Comparisons with the sample week of the July employment report show a marginal 2,000 rise for the weekly level and a 7,000 decline for the 4-week average in what are favorable signals that point to yet another healthy employment report for August. Continuing claims edged 2,000 lower in lagging data for the August 11 week with this 4-week average down 5,000 to 1.736 million. The unemployment rate for insured workers held at 1.2 percent, which is very low and like all readings in this report is at or near historic lows and consistent with, to say the least perhaps, "strong" demand for labor.

The thrust of Powell's remarks was that stable inflation expectations are what he described as the "central precondition" for monetary policy. With inflation expectations well anchored, he believes the Fed can make adjustments without risking economic dislocations as people expect the central bank to pursue policies that will ultimately keep inflation steady and in turn keep inflation expectations from rising. But inflation expectations are in fact rising, though at an incremental pace. The green line of year-ahead inflation expectations for businesses as published by the Atlanta Fed has edged just above the 2 percent line but hasn't accelerated since June. The blue line of year-ahead consumer expectations as published by the University of Michigan has been testing the 3 percent line but also hasn't accelerated since June. Are these trend lines going up too fast? Jerome Powell apparently doesn't think so at all. The final August reading for the consumer half of this graph will be posted at the end of the coming week.

Markets: The inevitable meeting of the 2 with the 10

FOMC minutes from the 2-day meeting on July 31 and August 1 were another highlight of the week. They absolutely did not mention President Trump's unprecedented call on July 20 for the Fed to go slow on rate hikes but they did touch on what is a flattening yield curve, specifically a narrowing between the 2-year Treasury yield (blue line) and the 10-year Treasury yield (green line). When these yields have come to together in past, most recently in 2008 and 2001, recessions immediately followed. High short-term rates certainly would not appear to stimulate economic growth but do they in fact predict a recession? "Several" FOMC members according to the minutes raised this concern at the meeting though others were not convinced that this is a statistically meaningful indicator. One who does believe it apparently is St. Louis Fed President James Bullard who was out on the news wires on Friday warning that the Fed should be very careful for these rates not to invert. Yet touching and then inverting, whatever the significance, are real risks given that the 2-year yield follows in lockstep with the federal funds rate. And this latter rate, as underscored by Powell at Jackson Hole, looks to be moving incrementally higher in the months ahead. The latest spread between the two Treasury yields is 20 basis points and narrowing, at 2.61 percent for the 2-year and 2.81 percent for the 10-year. And an added factor is that the 10-year yield, reflecting demand for safety among many investors, is coming back toward the 2-year, falling 5 basis points in the week.

The bottom line

The ultimate message from Jerome Powell's speech as well as the FOMC minutes is that rates, complaints from the administration notwithstanding, are inexorably moving higher. A hike at the September meeting appears very likely with another one penciled in for the December meeting. Such hikes won't be a plus for mortgage rates nor for housing and they won't likely add acceleration to the factory sector. But business investment right now appears to be outstanding and may prove the overriding highlight for the second-half economy not to mention the 2018 economy as a whole.

Week of August 27 to August 31

After Jackson Hole, Fed speak will take a break in the coming week with no speeches or appearances scheduled. The most urgent data will come out on Thursday with the personal income & outlays report and an update on the core PCE price index. Acceleration is not expected for core prices in July with solid strength in consumer spending expected to steal the show for this report. Key data will also come out on Tuesday with international trade in goods for July. This will be the first input for third-quarter net exports which in the second quarter were a major positive for GDP. Released along with trade in goods will be retail inventories which have been very lean relative to retail sales and where a sizable build, in what would be a plus for third-quarter GDP, would not be a surprise. Housing data in the week will include Case-Shiller home prices, which have been soft but are expected to firm, and pending sales of existing homes which are not expected to show any lift. The week closes with the final consumer sentiment report for August which in the initial report showed no rise in year-ahead inflation expectations.

Monday

National Activity Index for July

Consensus Forecast: 0.38

Consensus Range: 0.35 to 0.40

July looks like it will prove another solid month for the national activity index. Nonfarm payrolls rose 157,000 in July with the unemployment rate coming down 1 tenth to 3.9 percent. Industrial production inched only 0.1 percent higher though manufacturing production was a bit stronger as were building permits. Econoday's consensus for the index is 0.38 vs a very strong 0.43 in June.

Dallas Fed General Activity Index for August

Consensus Forecast: 28.0

Consensus Range: 27.7 to 33.0 

Firm energy prices have been underpinning the Dallas Fed's manufacturing sample. Orders have been strong and backlogs have been rising with overheating a question for capacity utilization, delivery times, and prices. Another month of strength is expected for August, at a consensus 28.0 for the general activity index vs 32.3 and 36.5 in the prior two reports.

Tuesday

International Trade In Goods for July

Consensus Forecast, Month-to-Month Change: -$69.1 billion

Consensus Range: -$72.0 to -$68.5 billion

The nation's goods deficit is expected to widen to a consensus $69.1 in July vs $67.9 billion in June (revised from an initial $68.3 billion). July's result will mark the first input for third-quarter net exports, which proved very favorable in the second quarter.

Advance Wholesale Inventories for July

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

Consensus Range: -0.1% to 0.3%

Wholesale inventories are expected to rise 0.1 percent in July as they did in June. Inventories have been low relative to sales.

Case-Shiller, 20-City Adjusted Index for June

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

Consensus Range: 0.2% to 0.8%

Case-Shiller, 20-City Unadjusted Index

Consensus Forecast, Year-on-Year Change: 6.5%

Consensus Range: 6.4% to 6.7%

Home-price appreciation slowed sharply during the Spring selling season, at least through most of the country with the exception of the West where strength remained formidable. But another month of overall limited growth is the call for Case-Shiller data in June where the consensus gain for the 20-city adjusted index is for a third straight 0.2 percent. The unadjusted year-on-year rate is seen holding at May's 6.5 percent.

Consumer Confidence Index for August

Consensus Forecast: 126.5

Consensus Range: 124.0 to 128.0

At 126.5 for August, Econoday's consensus is calling for steady strength in the consumer confidence index which came in at 127.4 in July. Job assessments have been exceptionally strong in this report while inflation expectations have been turning higher.

Richmond Fed Manufacturing Index for August

Consensus Forecast: 19

Consensus Range: 16 to 20 

Strong order growth in June and July points to August strength for the Richmond Fed's manufacturing index, at a consensus 19. June came in at 21 with July at 20.

Wednesday

Real GDP: 2nd Quarter, 2nd Estimate, Annualized Rate

Consensus Forecast: 4.0%

Consensus Range: 3.8% to 4.2%

Real Consumer Spending, Annualized Rate

Consensus Forecast: 3.9%

Consensus Range: 3.9% to 4.0%

GDP Price Index

Consensus Forecast: 3.0%

Consensus Range: 2.9% to 3.0%

The second estimate for second-quarter GDP is expected to come in at a 4.0 percent annualized rate vs 4.1 percent in the first estimate. Consumer spending is expected to come in at a 3.9 percent rate vs the prior estimate's 4.0 percent. The GDP price index is seen holding at 3.0 percent.

Pending Home Sales Index for July

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

Consensus Range: -1.1% to 1.0%

Pending home sales are expected to come in unchanged in July after rising 0.9 percent in June. This index has on trend been accurately forecasting final resales as tracked in the existing home sales report.

Thursday

Initial Jobless Claims for August 25 week

Consensus Forecast: 214,000

Consensus Range: 210,000 to 215,000

Initial claims are expected to come in at 214,000 in the August 25 week vs 210,000 in the prior week. All readings in this report are at or near historic lows and consistent with strong demand for labor.

Personal Income for July

Consensus Forecast, Month-to-Month Change: 0.4%

Consensus Range: 0.3% to 0.4%

Consumer Spending

Consensus Forecast, Month-to-Month Change: 0.4%

Consensus Range: 0.1% to 0.5%

PCE Price Index

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

Consensus Range: 0.1% to 0.3%

PCE Price Index

Consensus Forecast, Year-on-Year Change: 2.3%

Consensus Range: 2.3% to 2.4%

Core PCE Price Index

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

Consensus Range: 0.1% to 0.3%

Core PCE Price Index

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

Consensus Range: 2.0% to 2.1%

Personal income is seen rising a solid 0.4 percent in July while consumer spending is expected to also increase 0.4 percent. The core PCE price index, which excludes both food and energy, is seen posting a modest 0.2 percent monthly rise for a year-on-year on-target gain of 2.0 percent. This year-on-year rate, which is the most closely watched of all inflation readings, hit the Fed's 2 percent goal in March before edging to 1.9 percent in subsequent reports. The consensus for the overall PCE price index is also 0.2 percent for a year-on-year rate of 2.3 percent.

Friday

Chicago PMI for August

Consensus Forecast: 63.5

Consensus Range: 61.0 to 65.0 

Easing strength at a very high level is the call for the Chicago PMI with the August consensus at 63.5 vs 65.5 in a July report when input costs an 11-year high.

Consumer Sentiment Index, Final August

Consensus Forecast: 95.3

Consensus Range: 94.0 to 96.0

Expected to hold at the preliminary score, Econoday's consensus for the final consumer sentiment index for August is expected to come in at 95.3. The preliminary report was the softest since September last year and included a sharp downshift in buying plans tied to rising prices for cars and household durables. Year-ahead inflation expectations were steady at 2.9 percent with 5-year expectations up 1 tenth to 2.5 percent.