It was a lighter week for U.S. data, but there was an important monetary policy announcement from the European Central Bank, and U.S. trade data has implications for fourth quarter GDP.
The European Central Bank left its key policy interest rates unchanged, near zero, and in the case of its deposit rate, at -0.4 percent. President Mario Draghi announced that asset purchases would extend beyond March 2017, but at a reduced pace of 60 billion euros per month. Draghi indicated that asset purchases were likely to continue through the end of 2017. The euro had been strengthening against the dollar in late November, but reversed course, weakening after the ECB announcement. At 1.06 euros to the dollar, parity is not far away.
The U.S. international trade deficit widened in October to -$42.6 billion. The inflation-adjusted balance of trade in goods fell to -$60.3 billion for the month, below the third quarter average, meaning that trade is on course to be a drag on GDP growth for the fourth quarter.
The ISM Non-Manufacturing Index for November increased to 57.2, showing that the service sector performed well for the month. Both the ISM Non-Manufacturing Index and the Manufacturing Index improved in November, consistent with near-3-percent real GDP growth for the fourth quarter.
The job openings rate for October was steady at 3.7 percent, a good number. Hiring and separation rates were also unchanged for the month. Initial claims for unemployment insurance fell by 10,000 for the week ending December 3, to hit 258,000. Continuing claims fell noticeably by 79,000 for the week ending November 26, to hit a very low 2,005,000.
We continue to expect the Federal Reserve to increase the effective range of the fed funds rate by 25 basis points on Wednesday, December 14. The fed funds futures market places an implied probability of 97.2 percent on the event. Fed officials have done nothing to counter the very strong market expectation.
The most interesting new element of the Fed’s upcoming policy announcement will be how it guides expectations for 2017. We will get a new set of economic forecasts from the Fed on Dec. 14, and a new dot plot. The dot plot shifted down through 2016. We will watch to see if it shifts again next week.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: cmaeconweekly-12-09-2016.
Since we had the holiday week last week, we will cover two weeks’ worth of U.S. economic data, which has been generally favorable.
Expectations for the official payroll job numbers for November were boosted by a stronger-than-expected ADP Employment Report, which showed 216,000 private sector jobs added in November. The official BLS payroll report did not quite get there, showing 178,000 net new jobs added to the U.S. economy in November. The unemployment rate dropped more than expected, down to 4.6 percent from October’s 4.9 percent. Average hourly earnings dipped by 3 cents in November after gaining 11 cents in October. Over the previous 12 months, average hourly earnings were up by 2.5 percent. Average weekly hours were unchanged at 34.4.
Initial claims for unemployment insurance for the week ending November 26 increased by 17,000, to hit a still-low 268,000. Weekly data around holidays is always suspect due to seasonal adjustment.
Third quarter real GDP was revised to show an annualized growth rate of 3.2 percent, up from the initial estimate of 2.9 percent. We expect to see a similar near-3-percent growth rate for the fourth quarter when that data is published at the end of January.
The Conference Board’s Leading Economic index increased by 0.1 percent in October. We expect to see a stronger gain in November.
Real disposable income increased by a solid 0.4 percent in October. Real consumer spending gained 0.1 percent. The 12-month change in the personal consumption expenditure (PCE) price index increased to 1.4 percent, showing that the rate of inflation is warming up.
Auto sales for November were better than expected, dipping slightly to a 17.9 million unit sales rate as domestic truck sales eased.
Consumer confidence jumped in November. The Conference Board’s Consumer Confidence Index increased from 100.8 in October to 107.1. This is good news for fourth quarter consumer spending.
Existing home sales for October increased by 2.0 percent to hit a 5.6 million unit annual rate. The months’ supply of existing homes for sale dipped to 4.3 months’ worth, indicating tight conditions in most U.S. markets. New home sales for October eased by 1.9 percent to a 563,000 unit rate. The months’ supply of new homes for sale increased to 5.2 months’ worth, up from the July low of 4.6 months’ worth. Home prices increased more than expected in September. The Case-Shiller U.S. National House Price Index was up 0.8 percent in September (after seasonal adjustment) and was up 5.5 percent over the previous 12 months. Recent increases in home mortgage rates will be a headwind for first-time buyers.
Total construction spending increased by 0.5 percent in October, boosted by a 2.8 percent increase in spending on public projects.
The ISM Manufacturing Index for November firmed up to 53.2 percent, indicating improving conditions for U.S. manufacturers. New orders for durable goods increased by 4.8 percent in October with large gains in the typically volatile aircraft categories, both civilian and military. The “core” category, nondefense capital goods excluding aircraft, increased by 0.4 percent for the month.
The minutes of the November 1-2 Federal Open Market Committee meeting reinforced expectations for a 25-basis-point increase in the fed funds rate range at the next FOMC meeting, coming up over December 13-14. We expect to see a rate hike on December 14. We look for two more in 2017. However, the early speculation about Trumponomics suggests that the risk to our interest rate outlook for 2017 and 2018 is shifting to the upside.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: cmaeconweekly-12-02-2016.
U.S. economic data released in mid-November has been generally positive and consistent with growing expectations of a fed funds rate increase on December 14. In her prepared remarks for the congressional Joint Economic Committee, FOMC chair Janet Yellen said today that “…an increase [in the fed funds target range] could well become appropriate relatively soon.” Yellen is still hedging her bets, but that is about as strong an indication from her as we are likely to hear that we will see a December rate hike. Expectations for a December rate hike are very high. According to the fed funds futures market, the implied odds of a December rate hike are 91 percent.
Retail sales were solid in October, gaining 0.8 percent, after increasing by a strong 1.0 percent in September. Auto sales drove the numbers higher. Unit auto sales for the month reclaimed the 18.0 million unit mark. Other retail sales categories were generally positive.
One of the softer reports for the week was on U.S. industrial production for October, which was unchanged after dipping slightly through August and September. Manufacturing output increased by 0.2 percent for the month. Mining output gained 2.1 percent, consistent with moderate gains in the drilling rig count. Utility output fell by 2.6 percent.
Housing starts surged in October, gaining 25.5 percent, with strong single-family construction and a rebound in multifamily building activity. Permits gained slightly, up 0.3 percent for the month.
Business inventories increased in September by 0.1 percent. Better still, the inventory/sales ratio is trending down after climbing through 2015.
The Producer Price Index for final demand was unchanged in October. On the goods side, increases in energy prices were muted by declining food prices. On the services side, declines in trade and other service prices reduced the services sub-index for the month. Over the previous 12 months the PPI for final demand was up by 0.8 percent. Excluding food, energy and trade, it was up by 1.6 percent over the year.
The Consumer Price Index increased by 0.4 percent in October, driven by increases in energy, apparel and shelter prices. Headline CPI is trending up on a year-over-year basis, now up by 1.6 percent. Core CPI (less food and energy) was up 0.1 percent for the month, and by 2.1 percent over the previous 12 months.
Initial claims for unemployment insurance fell by 19,000 for the week ending November 12, to hit a very low 235,000. Continuing claims for the week ending November 5 dropped by 66,000, with the total falling below the benchmark two million level to an ultralow 1,977,000. The Empire State Manufacturing Survey for November was stronger than expected, showing a pick-up in manufacturing activity for the New York region over the month.
The Federal Reserve bank of Philadelphia’s manufacturing index eased in November to a still-positive 7.6.
According to the Federal Reserve Bank of Atlanta, their hourly wage tracker was up 3.9 percent in October over the previous 12 months.
We will not publish a Comerica Economic Weekly next week. Happy Thanksgiving!
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 11-18-2016.
It was a light week for economic data, but a tremendously weighty week for political events. The widespread expectation, supported by the majority of polling institutions, that Hillary Clinton would become the first female president of the United States, gave way Tuesday evening to the growing awareness that the world was changing in a different direction.
Republican President-elect Donald John Trump will be supported by a slim majority in the Senate (51/48) and a stronger majority in the House of Representatives (239/192). Global financial markets swooned on the results. Fortunately, U.S. markets were closed in the early hours of Wednesday and could not reinforce the panic selling. Soon after U.S. markets opened on Wednesday morning, stock prices stabilized and then accelerated through the day. With now two days of strong U.S. financial market performance following the shock of Trump’s campaign victory, we do not expect to see a repeat of the Tuesday night swan dive.
This is important for a variety of obvious reasons, not the least of which is the upcoming Federal Open Market Committee meeting of December 13/14. As long as nothing unexpectedly falls out of bed, the odds of a December 14 feds funds rate hike look strong. Charles Evans, President of the Federal Reserve Bank of Chicago, and well known interest rate dove, said this week that he thinks that a December rate hike looks reasonable. According to the fed funds futures market, the implied odds of a December 14 rate hike are now 71.5 percent. We look for good economic data and financial market performance between now and mid-December to allow the Fed to fulfill widespread expectations for a year-end rate hike.
We currently have two rates hikes in our forecast for 2017, one in June and one in December. The balance of risk for our interest rate forecast for 2017 appears to have shifted marginally to the upside with the results of the 2016 general election. If we have fiscal stimulus from the Trump administration, combined with a widening federal deficit, a lower unemployment rate and stronger inflation, then it would be reasonable to expect a slightly steeper trajectory for future fed funds rate hikes, maybe three in 2017 rather than two.
Much depends on the new administration’s ability to follow through on the strong rhetoric of the campaign.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 11-10-2016.
U.S. economic data for the week fell reasonably close to expectations and did not alter our view of a fed funds rate hike on December 14.
U.S. nonfarm payrolls increased by a net 161,000 jobs in October, a little shy of the near-173,000 consensus. According to the Bureau of Labor Statistics, the data in parts of the East Coast was likely impacted by Hurricane Matthew. The unemployment rate eased back to 4.9 percent in October, after increasing to 5.0 percent in September.
Nominal personal income increased by 0.3 percent in September, as wages and salaries also increased by 0.3 percent. Rental income gains were still strong in September, with the category up 0.6 percent, supported by tight real estate markets and increasing rents. After accounting for inflation and taxes, real disposable income was unchanged again in September following no change in August. Nominal consumer spending increased by 0.5 percent for the month. After adjusting for inflation, real consumer spending gained 0.3 percent in September and was up 2.4 percent over the previous 12 months. The personal consumption expenditure (PCE) price index increased by 0.2 percent in September. Over the previous 12 months the PCE price index was up 1.2 percent, showing weak inflation. The core PCE price index (less food and energy) gained 0.1 percent in September and was up by 1.7 percent over the previous 12 months. We expect inflation indicators to continue to normalize to around 2 percent year-over-year through the first half of 2017.
The ISM Non-Manufacturing Index eased from a solid 57.1 in September, to a still-positive 54.8 for October. Anecdotal comments were generally positive; however, some industries reported stalling or cooling demand. The ISM Manufacturing Index increased from a modestly positive 51.5 in September to an even better 51.9 in October. New orders, production and employment were all positive factors. Anecdotal comments were generally steady to positive. However, primary metals reported a “considerable slowdown” for October and November.
The U.S. international trade gap narrowed in September to -$36.4 billion. There should be little net impact on the initial estimate of the Q3 GDP data, which contained an estimate for September trade. Nominal imports decreased by $3 billion while nominal exports increased by $1 billion in September.
The Federal Reserve issued a monetary policy announcement Wednesday that lived up to expectations. First, they left the fed funds rate range unchanged at 0.25 to 0.50 percent. Second, they hinted that a December rate hike is on the table. The Bank of England hinted that they are changing course on monetary policy by dropping forward guidance of further easing. Similarly, The Bank of Japan did not ease further in their policy announcement of November 1. It looks like some other central banks are starting to line up behind the Fed in preparation for a gradual increase in global interest rates.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 11-04-2016.