A look back at the July 29 sees the economic data – including the premiere data on employment – pale in comparison to the FOMC rate announcement on Wednesday and Chair Jerome Powell’s press briefing.
The 25 basis point cut was well anticipated and anxiously desired by markets, but somehow it failed to satisfy.
In part, it may have been that the FOMC statement included two dissents in the vote. The July 30 statement had a fairly dovish tone of the wording that the Committee, “will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.” However, two dissents among the 10 votes constitutes a significant minority. Public comment available before the communications blackout period went into effect at midnight on July 20 suggest that Kansas City’s Esther George and Boston’s Eric Rosengren are not the only FOMC participants who were not convinced that a rate cut was necessary at this juncture. Thus, achieving a comfortable consensus among Fed policymakers may be difficult at the present time. Should the economic data remain more-or-less consistent with modest expansion, a solid labor market, and inflation not slowing further, it could be tough to make the case for another “insurance” cut in short-term interest rates at the September 17-18 FOMC meeting. Also, the FOMC minutes from the July 30-31 meeting are going to be combed through carefully to get a sense of just how divided the Committee is on the topic.
It may also have been that Powell didn’t signal that another rate cut was under consideration, and even hinted that the FOMC could be one-and-done on the July 31 action. He called it a “mid-cycle adjustment”. Those who had been thinking of a rate cut as the start of an easing cycle were pulled up short.
As a footnote, I will point out that the FOMC also said, “The Committee will conclude the reduction of its aggregate securities holdings in the System Open Market Account in August, two months earlier than previously indicated.” There wasn’t much warning about this decision. It is possible to interpret it as an end to the so-called “quantitative tightening” that some Fedwatchers have complained about that was occurring in conjunction with modestly higher. Short-term administered rates are the primary tool of monetary policy, but the July 31 rate cut could get a little support from an end to the reduction in the Fed’s holdings and the continuance of a larger balance sheet of about $3.6 trillion as of the end of July.
Of course all this may be rendered moot if President Trump announces further steps in the trade war that was part of the reason the FOMC determined on a rate cut.
The week’s economic data wasn’t particularly momentous for the economic outlook, even with the release of the July Employment Situation. Payrolls continue to increase at a healthy rate, although that rate has definitely lost some steam. The unemployment rate of 3.7% in July in another in a long string of undershoots for the Fed’s long-run expectation of 4.2%. The U6 rate fell to a low not seen in approaching 19 years and indicated that the un- and under-employed are still benefiting from the labor market’s vigor. Wages are rising modestly and consistently. There was nothing in the report that would cause the FOMC to second-guess its Wednesday decision.
Other labor market reports in the week also had the same sort of middling-to-solid tone. The ADP National Employment Report for July was quite similar to the government data with a 156,000 increase in private payrolls compared to the BLS’s up 148,000. The Challenger report on layoff intentions was down for a second month in a row in July and shows that while businesses are planning more job cuts than they were, in the historical context these remain relatively low. Initial jobless claims were past the worst of the normal noise of July and returned to the underlying trend of about 215,000-225,000 in the July 27 week’s data. The insured rate of unemployment has held at 1.2% since early May 2018 and offers no hint of anything except tight labor resources.
In sum, the labor market data should probably be taken at face value. Businesses continue to hire and raise wages, if not so generously as last year. Businesses are adjusting their staffing due to labor shortages and/or cooler business activity, but widespread reductions in payrolls are far from reality at present.
Consistent with this, personal income for June was modestly on the rise and consumers spent relatively freely on goods and services. This was good news for the economy at the end of the third quarter and looks set to bring a little upward momentum to the third. One piece of the spending puzzle for July will be sales of motor vehicles. These were down a bit in July, but the balance of sales increased in the more expensive light trucks category, so the dollar value could be better than the headline suggests.
As well as retail spending, consumers are buying homes while mortgage interest rates are low. The NAR’s Pending Home Sales Index for June was up 2.8% to 108.3 from May, signaling that contracts for home purchases are likely to be closed at a solid pace in July. July will continue to deliver an incentive to commit to a home purchase with the average Freddie Mac 30-year fixed mortgage rate at 3.76%, the lowest since 3.46% in September 2016.
The PCE deflator for June put inflation at an anemic up 1.4% year-over-year, and the core PCE deflator at 1.6%. This didn’t suggest that inflation was going to start moving back toward the Fed’s 2% objective any time soon and provided one of the FOMC’s justifications for lowering the fed funds rate target range. The second quarter Employment Cost Index (ECI) indicated that overall compensation remains on an upward trajectory of 2.7% year-over-year that is being driven more by wages and salaries at up 3.0% than benefits costs up 2.9%). Nonetheless, evidence is lacking that higher compensation is leaking into overall price stability.
The ISM Manufacturing Index for July was essentially unchanged at 51.2 from 51.7 in the prior month. New orders were only narrowly higher and production and employment were down. Conditions in manufacturing don’t appear to have deteriorated month-over-month but are hovering at low levels of expansion. There doesn’t appear to be much room to maintain growth if more headwinds emerge, such as the tariff action announced by the White House on Friday. If the trade negotiations with China are not resolved on a positive note soon, it could push the factory sector closer to contraction.
The data on new orders for factory goods in June was up 0.6% overall. The dollar value of orders was restrained by a 0.5% decline for nondurables that reflected in part lower prices for petroleum. However, durables were up a solid 1.9% with a modest boost from a 3.7% increase in transportation delivered by nondefense aircraft and motor vehicles.
Consumer confidence remained quite elevated in July. The Conference Board’s Consumer Confidence Index – which focuses more on employment and business conditions – rebounded in July to 135.7 after 124.3 in June and was the highest since 136.4 in November 2018. The final University of Michigan Consumer Sentiment Index – which is more about income security and buying conditions – was essentially unchanged at 98.4 in July after 98.2 in June, but at a level not far off the near-term peak of 100.0 in May. Broadly, consumers are optimistic about jobs and wage growth, low interest rates to take on buying big ticket items like houses and motor vehicles, and having disposable income while inflation is low and gasoline prices relatively steady and low.
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