Archive for June, 2018

International Trade In Goods

Forget about tariffs and trade wars. Exports in May surged a convincing 2.1 percent to pull down the nation’s goods deficit to a much lower-than-expected $64.8 billion in May. The results will add further to second-quarter GDP forecasts where high-end estimates were already approaching 5 percent.

The export gain is led by a 12.8 percent monthly jump in foods & feeds and includes a 3.7 percent gain for capital goods which are the nation’s strongest exports. And consumer goods also rose, up 3.2 percent. The overall gain comes despite a 3.1 percent decline in industrial supplies, a component where swings in oil prices dominate.

Imports were nearly neutral in May, up only 0.2 percent following a 0.4 percent decline in April. Auto imports fell 1.2 percent in the month with consumer imports, which is the Achilles heel of U.S. trade, down 1.0 percent. Imports of industrial supplies, again reflecting oil prices, fell 0.7 percent. A category that shows a gain, and here perhaps a welcome one pointing to rising business investment, is imports of capital goods which jumped 3.4 percent.

This is a very healthy report and it may offer a signpost of the nation’s trade performance going into a summer of cross-border discontent.


Housing Starts

The good news in May’s housing starts report is centered in the present, less so in the outlook. Starts jumped 5.0 percent in the month to a 1.350 million annualized rate that hits the top end of Econoday’s consensus range and that should give a boost to residential investment in the second-quarter GDP report. Good news also comes from completions which rose 1.9 percent to a 1.291 million rate which will help feed a housing market starving for immediate supply.

The question of future supply is still very positive but, however, has not improved in the May report as building permits fell for a second straight month and very steeply in May, down 4.6 percent to a 1.301 million rate. Weakness includes single-family homes, down 2.2 percent to a 844,000 rate, and once again multi-family units which are down 8.8 percent to a 457,000 rate.

Back to the good news as the breakdown for starts shows a 3.9 percent rise in single-family homes to 936,000 and a 7.5 percent gain for multi-units to 414,000. The gain for completions is entirely centered in the key single-family category, up 11.0 percent to 890,000 to offset a 13.8 percent decline for multi-units.

Building in the housing sector, given reports of shortages of construction workers and also construction equipment, may be progressing at the fastest rate possible based on year-on-year rates of growth: at 20.3 percent for starts, 10.4 percent for completions with permits at 8.0 percent.

The new home market, where sales are up in the low double digits, is a leading sector of the economy but appears to be bumping up against capacity constraints. Showing much less strength than new home sales have been resales which have been surprisingly flat and which will be updated with tomorrow’s existing home sales report.


Fed Chair Press Conference

“Great shape” is how Jerome Powell describes the state of the U.S. economy, stressing strong growth in the jobs market over the last couple of years. In reaction to this, Powell says the Fed, after years of accommodation, is now gradually normalizing policy in an effort to head off the risk of wage-driven inflation.

Powell is warning that inflation, due to high oil prices, may run over its 2 percent symmetric target during the summer, but only briefly. He said policy makers would only be concerned if inflation were to persistently run either above or below target, which he does not expect. On the risk of wage inflation, he does cite reports of labor shortages but notes that there has yet, in what he concedes is a mystery, to be much reaction in wages. And Powell also pointed to the positives of low unemployment, including how it may pull workers at the margin into the labor force.

On Washington policies, he said lower tax rates and fiscal stimulus will likely have a “significant” positive impact on demand. On tariffs, he acknowledged reports that they may be holding down business investment and hiring but he emphasized that such effects have yet to appear in the economic numbers.

On questions over the neutral rate, that is when the funds target neither holds back nor stimulates the economy, Powell acknowledges that it may be reached “relatively soon”. He stressed the importance of the gradual path for rate hikes which he said has been the “right thing” for the economy. Note that based on the latest FOMC forecasts, the neutral rate will be hit after four more 25-basis-point hikes.

Asked about credit risks in the economy, the chair said leverage among non-banks in the corporate sector is high but that defaults are low and that interest rates are still low. He stressed that debt among households, where credit stress was high in the 2008 collapse, is not a problem. On the flattening underway in the yield curve, he attributed the rise in short rates to the rise underway in the funds target and the relative stability of long rates to demand for safety. There were no questions on the unwinding of the Fed’s balance sheet which, for mortgage-backed securities, is noticeably behind schedule.

In a special note, the chair announced that beginning next year, in an effort to enhance transparency and the flexibility of policy, press conferences will be scheduled at each FOMC, formerly ever other FOMC.


JOLTS Report

For the first time in nearly 20 years of existing records, the number of job openings, at 6.698 million in April, is exceeding the number of unemployed actively looking for work, at 6.346 million in April (subsequently falling in last week’s employment report to 6.065 million in May).

And though 5.578 million were hired in April, the gap between openings and hires in today’s JOLTS report, at 1.120 million, is the second largest on record next only to March’s 1.147 million. This gap suggests that employers are having a hard time finding people to fill the jobs.

Today’s report is a standout milestone of full employment that will capture the attention of monetary hawks whose focus is the risk of wage inflation.