A look back at the July 15 week shows that the economic data took a back seat to any and everything Fed officials had to say. Fedwatchers were anxious for confirmation that Fed policymakers will deliver a rate cut on July 31, and more than a few were seeking evidence that it will be a 50 basis point cut, not just 25. No voting policymaker would make an unambiguous commitment to a rate cut except St. Louis Fed President James Bullard who has made his preference abundantly clear. Some are more favorable, some less so. Conversely, no one said he/she wouldn’t support a reduction in short-term rates at this time, although Kansas City Fed President Esther George sounds unconvinced of the necessity and more concerned about the consequences down the line.
Back at his seminannual monetary policy testimony, Chair Jerome Powell indicated that there were a number of pieces of economic data between then and the FOMC meeting on July 30-31 that could sway the decision.
Arguing for a rate cut were the contents of the Fed’s Beige Book that compiled anecdotal evidence about the economy for the period from late May through early July. That information suggested that conditions across the 12 Districts were for expansion along the lines of slight-to-moderate, but on net were a trifle softer than the previous edition which in turn was softer than the prior one. The composition of growth and its trend definitely suggests a slower economy, but not necessarily one on the verge of a recession. However, should the next Beige Book on September 4 show further softening, it will be difficult to ignore the signs that a downturn is close.
The Import Price Index for June pointed to continued low inflation on the part of imported commodities for overall price stability. It is not just rapid declines in costs of energy commodities, but also other goods, although to a lesser extent. The strength in the dollar is keeping prices for imported goods down. Should the dollar weaken, that may change. With inflation low and few upward price pressures, Fed policymakers have a little more room to provide accommodation in spite of the tight labor market.
The University of Michigan’s Surveys of Consumers include its measures of inflation expectations for 1- and 5-years. The 5-year expectations more-or-less correspond to the Fed’s medium-term horizon for price stability. Although inflation expectations are relatively low compared to the past, the July reading was up three-tenths to 2.6% and on the high side of the recent trend range. Concerns appear overblown that inflation expectations have lost their anchor and consequently damaged the credibility of the Fed’s 2% objective.
Arguing against a rate cut were indications that economic activity was solid retail sales for the April-June period. Each month was up 0.4% from the prior month, and the data was not much different even excluding the motor vehicles component. In fact, “core” retail sales – sales excluding motor vehicles, building materials, and gasoline – was up 0.7% in June from May, up 0.7% in May from April, and up 0.6% in April from March. The numbers included annual revisions. This sets up consumer spending to make a solid contribution to growth in the second quarter.
The NAHB/Wells Fargo Housing Market Index for July eked out a 1 point gain to 65, suggesting that the activity generated by lower mortgage rates was not losing steam as the summer progressed. If housing starts were a bit softer with a 0.9% decline in June from May, it was entirely due to volatility in the multi-unit sector. Starts of single-family homes were up 3.5% while consumers are active buying new homes. Permits-issued were sharply lower by 6.1% in June, but this was also due to the multi-unit sector. Permits for single-family homes were up 0.4%. If builders can find land and labor, starts are likely to remain on the upswing for now. Much will depend on if mortgage rates remain low, which they look to do for a while yet.
I note that the sharp decline in permits helped bring The Conference Board’s Leading Economic Index to down 0.3%, its lowest since -0.2% in December. I would not read this as a warning that the economy is about to slow. The drop in permits is likely a one-off that will return to trend in July. The weakness in new orders that contributed to the June decline may not change momentum soon, but it shouldn’t be any worse. Finally, the increase in jobless claims was short-lived in June and claims have trended lower since then.
Consumers certainly remain quite confident into July. The preliminary University of Michigan Consumer Sentiment Index was a tad higher at 98.4 from 98.2 in June. Confidence in current conditions remains robust with a little month-to-month variation and will as long as the labor market is tight and wages are rising. Confidence in the outlook for six months from now improved slightly and feels less uncertain than it did a few months ago.
The first of the monthly regional surveys for manufacturing and services were broadly higher in July from June when concerns of a slowdown were more evident. The New York Fed’s manufacturing general business conditions index had another big turnaround and rose to 4.3 in July from -8.6 in June. The Philadelphia Fed’s general business conditions for manufacturing also jumped higher to 21.8 after 0.3. The latter tends to correlate better with the ISM Manufacturing Index than the former, but in both cases it suggest that the factory sector has regained its expansionary pace after a stumble in the prior month. The New York Fed’s Business Leaders Survey for July saw its activity index rise to 9.7 from 5.8 and is back on track for modest expansion. Underlying conditions in manufacturing and services may be healthy enough to withstand a few adjustments related to trade and tariffs.
Also, manufacturing industrial production was up 0.4% in June from May and mining was up 0.2%. The 3.6% decline for utilities output was what restrained overall production for the month.
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