Economic data in the May 13 week was plentiful and generally consistent with modest-to-moderate growth. However, geopolitical events overshadowed whatever positive impact the data might have made. The announcement of fresh tariffs on Chinese goods entering the US and then a Presidential order of restrictions on technology trade, and China’s intention to retaliate cast the future of the economy in a more uncertain light. In spite of some jawboning to take the edge off the negatives for US businesses and consumers, the situation does not look to resolve soon or in a favorable manner. Additionally, expectations for slower global growth and increased tension in the Middle East were less than helpful in lifting the mood for markets from the deep plunge early in the week.
Present events are likely to undo some of the improvements in confidence seen in the April NFIB Small Business Optimism Index which rose to 103.5 from 101.8 in April and was the highest since 104.4 in December 2018. The level is off the peaks of mid-2018, but still reflects sturdy activity. The preliminary University of Michigan Consumer Sentiment Index for May surprised with a 5.2 point jump to 102.4, its highest January 2004. In both instances caution is called for. The respective surveys occurred while there was still a positive outlook for the resolution of trade negotiations that lifted the outlook for the future, and these have since collapsed followed by combative rhetoric.
Anticipation of a Federal Reserve rate cut are largely driven by tame inflation readings and expectations. I think these expectations were and are overblown and out of line with the FOMC’s focus on the medium term.
The April CPI and Final Demand PPI certainly did not suggest that inflation was running far off the Fed’s 2% objective. However, the Import Price Index for April pointed to only slight upward pressures from imported goods overall at up 0.2% month-over-month, and most of that was in petroleum. Excluding petroleum, the index was down 0.6%. The imposition of fresh tariffs could mean May looks very different for non-fuel imports, although tensions in the Middle East may also mean higher prices for petroleum.
Inflation expectations for businesses were at 2.0% year-over-year in May in the Atlanta Fed’s Business Inflation Expectations report. This was only marginally higher than the 1.9% in the prior three months, but it does point to some slight firming. On the consumer side, the University of Michigan Survey of Consumers showed that while inflation expectations remain low and have not escaped from the recent narrow range of readings, they were a bit higher in May.
Retail and food sales for April were disappointing even against the low expectations in market estimates. Overall sales were down 0.2% from March which had a solid 1.7% increase. Sales excluding motor vehicles were up a scant 0.1% in April after up 1.3% in March. The March-April period can be difficult to evaluate due to the variable timing of the Passover/Easter observances. This may have been the case for 2019. Nonetheless, sales were broadly softer. Motor vehicle sales declined as expected while gasoline sales were up due to higher prices at the pump. What may have been less expected was the decline in the building materials which normally picks up sharply with the arrival of milder weather and consumers start working outside, although the prior month was robust. So-called “core” retail sales – excluding motor vehicles, building materials, and gasoline – were flat in April after up 1.1% in March.
Quarterly data for e-commerce sales put the share of all retail in the first quarter at 10.2%, the first time that has topped 10% since the Commerce Department began keeping track. With the closure of large numbers of retail brick-and-mortar outlets, more sales are shifting to on-line.
Data for the housing market showed the influence of lower mortgage interest rates. The NAHB/Wells Fargo Housing Market Index rose to 66 in May, its highest since 68 in October 2018 just around the time mortgage rates were reaching a near-term peak. Builders are more optimistic about selling current properties and those not yet built and are seeing busier customer traffic. Housing starts were up 5.7% in April from March and at 1.235 million units (SAAR) are the highest since 1.236 in September 2018. Permits issued in April showed a far less vigorous gain at up 0.6% to 1.296 million units (SAAR) and was concentrated in the volatile multi-unit sector.
Early reads on conditions in the factory sector for May pointed to solid improvement in general business activity for the New York (17.8 in May after 10.1 in April) and Philadelphia Fed (16.6 after 8.5) surveys of manufacturing. If activity in the factory sector has been uneven, expansion continues at the start of the second quarter. However, like the last year, there may be some impacts from another round of increased tariffs that will affects costs and supply chains.
Industrial production continued to reflect soft output in March for manufacturing (down 0.5%), weather-related fluctuations for utilities (down 3.5%), and short-term increases in energy extraction in mining (up 1.6%).
Even with signs of slower economic activity, the labor market is tight and not showing evidence that that is changing any time soon. Initial jobless claims in the May 11 week fell 16,000 to 212,000, moving past the noise in recent weeks that was probably related to the late timing of the Passover/Easter observances. The insured rate of unemployment through the May 4 week held at 1.2% where it has been over a year. The state unemployment rates for April do not suggest that there is much change on a month-to-month basis among the four major regions and that the 10 states with the largest share of the labor force are stuck at recent lows with only mild variation of a tenth of a percent at most from the prior month.
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