A look behind at the August 12 week obscures the generally good economic data behind the wild moves in equity markets and a disturbing warning of a downturn in a brief intraday inversion of the 2-year/10-year yield curve. The 3-month/10-year spread has been negative for months, but it is not the one that policymakers tend to focus on. The 2-year/10-year is more prominent in monetary policy discussions. It briefly inverted during the day on August 14 and is still hovering close to doing so again. Stocks had trouble with yet more gyrations in trade policy out of the White House combined with news that some major global economics were on the brink of recession.
The highlight of the week was the data on retail and food sales for July which managed to surpass even the best of forecasters’ expectations for the month. It got the numbers off to a good start for the third quarter on top of a solid performance in the second. Sales were up 0.7% overall for July from June and increased 1.0% excluding motor vehicles. “Core” retail sales – excluding motor vehicles, building materials, and gasoline – were also up 1.0% for the month. At present, consumer spending appears to be the bright spot in the US economy. But will it be enough to compensate for slower activity in other components of GDP?
The sharp decline in the preliminary University of Michigan Consumer Sentiment index to 92.1 in August from 98.4 in July should probably not be read as a harbinger of slower consumer spending. Consumers were badly shaken in recent weeks by the news of mass shootings in El Paso and Dayton in addition to rising fears of a recession. I would anticipate that the revised final reading will be upward when it is reported at 10:00 ET on Friday, August 30. In the historical context, consumers remain optimistic overall. Continued solid gains for the jobs and earnings will help keep it there even if some of the recent peaks have faded.
On the other hand, the NFIB Small Business Optimism Index for July managed to surprise to the upside with a reading of 104.7 after dipping to 103.3 in June. While off the highs seen in 2018, this is still a strong reading and one which suggests that small businesses are not losing confidence in current conditions or for the near future.
Initial jobless claims in the week ended August 10 were up 9,000 to 220,000, the highest since 222,000 in the June 20 week. However, this is probably more attributable to noise from a mismatch in seasonal adjustment factors than any fundamental change in momentum. The insured rate of unemployment held at 1.2% in the August 3 week where it has been since May 2018, holding at extraordinary lows consistent with a tight labor market.
Data on state unemployment rates gave some regional nuance to the July 3.7% unemployment rate at the national level. In the states with the largest share of payrolls, unemployment rates remain low and little changed month-to-month. For the 50 states and the District of Columbia, the story is one of job gains over large geographic areas, not just a few beneficiaries of economic growth.
Early surveys of activity for manufacturing and services point to continued lackluster expansion that includes maintaining a modest pace of hiring and some upward pressure on compensation. The New York Fed’s Empire State Survey’s general business conditions index was little changed at 4.8 in August after 4.3 in July. Its counterpart in the Philadelphia Fed’s Manufacturing Business Outlook Survey moderated to 16.8 after 21.8 in the prior month, but only a relatively small decline after several months of substantive swings and in line with steady expansion. The current business activity index in the New York Fed’s Business Leaders Survey was at 9.1 in August after 9.7 in July and pointed to service sector conditions that were expanding steadily.
The NAHB/Wells Fargo Housing Market Index for August confirmed that home builders are confident about conditions for present and expected sales, and are seeing strong buyer traffic. The housing market cannot help but respond to low mortgage rates, rising personal incomes, and increased supply with more competitive pricing. The numbers on housing starts in July swung lower due to the volatile multi-unit sector, but starts of single-family homes were the strongest since the burst of new construction in January. The rebound in permits issued in July points to a fresh wave of home building in coming months.
If low inflation was one of the reasons for the FOMC to lower short-term rates on July 31, the July and August numbers may not support it again when the September 17-18 meeting rolls around. The PCE deflator for July won’t be published until Friday, August 30 at 8:30 ET. However, the July CPI suggested that underlying inflation has firmed a bit with a 1.8% increase year-over-year, and up 2.2% at the core. These are within reach of the Fed’s 2% inflation objective. Moreover, inflation expectations are no longer exhibiting the same lower readings seen a few months ago for both consumers and businesses. The University of Michigan 5-year inflation expectation measure for consumers was at 2.6% in August, up from 2.5% in July and 2.3% in June. The Atlanta Fed’s Business Inflation Expectations median was at 1.9% in August from 2.0% in July and has been trending there since January. If businesses are not anticipating an upswing in prices, neither are they expecting them to soften significantly.
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