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Industrial Production

American industrial production is up and shows no signs of slowing down. Our overall output was up 0.7% in each of the months of March and April. These statistics come to us even with a fall in vehicle production by 1.3% in the month of April. Our manufacturing output does not look to be waning anytime soon. However, the threat of tariffs and our current looming trade war can greatly affect America’s overall industrial production significantly.

Continuing strength is evident from today’s jobless claims data. Jobless claims data where initial claims for the August 4 week were below the Econoday consensus range at 213,000. The 4-week average was down 500 to 214,250. Continuing claims in lagging data for the July 28 week were up 29,000 to 1.755 million with this 4-week average down 4,000 to 1.742 million. The unemployment rate, like all the readings in this report, was very low, at only 1.2 percent.


ADP has underestimated the strength of the last two employment reports making perhaps today’s much higher-than-expected 219,000 result for July a noticeable indication of strength for Friday’s report. ADP’s estimate compares with a 184,000 consensus for July private payrolls.

Existing home sales have been flat and results for June are on the low end of expectations, at a 5.380 million annualized rate for a 0.6 percent decline from May’s 5.410 million. Year-on-year sales in June were down 2.2 percent.

For home sellers, the good news in the report is strength in prices, up 4.5 percent for the median to $276,900 and a 5.2 percent year-on-year gain. For buyers, the good news is a 4.3 percent rise in the number of homes on the market, at 1.950 million and, relative to sales, a gain to 4.3 months from 4.1 months.

Yet the sales results are nevertheless very soft with only the South, at a mere 0.4 percent, in the year-on-year plus column. Watch for new home sales on Wednesday which have been doing better than resales though a fractional decline is Econoday’s consensus.


Strong gains for the discretionary categories of autos and restaurants and a big upward revision to May highlight the June retail sales report. Total sales rose an as-expected 0.5 percent in June with May, in what will be a positive for second-quarter GDP estimates, revised a sharp 5 tenths higher to an outsized 1.3 percent jump.

What’s striking is that autos were very strong in both June and May, up 0.9 and 0.8 percent respectively, with restaurants really showing unusual acceleration, up 1.5 and 2.6 percent in the two months. Gains here point to new confidence among consumers and are consistent with the strength underway in the labor market.

Sales at health & personal care stores were unusually strong in June, up 2.2 percent following a series of very strong gains in the 1 percent range. Nonstore retailers, in a sign of e-commerce strength, rose 1.3 percent in June and continue to make ground compared to other components. Gasoline stations, boosted by high gas prices, saw a 1.0 percent rise in June sales following a 3.0 percent spike in May. Building materials, at plus 0.8 percent in June, and furniture store sales, up 0.6 percent, are both positive indications for residential investment.

Consumer spending in May was at first modest overall on weakness in spending on services though today’s upward retail revision will offer a major lift for May’s final result. And unless services prove flat again, June — based on today’s report — should prove a very strong finish for the second-quarter economy.


The government’s deficit wasn’t quite as deep as expected in June, at $74.9 billion vs Econoday’s consensus for $91.0 billion. Nine months into the government’s fiscal 2018, the deficit totals $607.1 billion and is up significantly from a $523.1 billion at this time last year. Tax receipts this fiscal year are up 8.9 percent for individuals, at $1.305 trillion so far, and down 27.6 percent for corporations, at $161.7 billion. Customs duties so far this fiscal year, which is something of course to keep an eye on given widening tariffs, are $28.3 billion for a $3.1 billion gain. On the spending side, defense spending is up 5.5 percent at $497.2 billion.

May proved to be a good month for manufacturing after all as factory orders rose 0.4 percent vs Econoday’s consensus for no change. Durable orders did slip 0.4 percent on an expected downswing in aircraft orders which otherwise have been strong and also on supply snags tied to a fire at an auto supplier. Orders for nondurables, the new data in today’s report, proved very strong on energy products, rising 1.1 percent on the month on gains for petroleum and coal.

Solid news comes from capital goods where core orders (nondefense ex-aircraft) rose a respectable 0.3 percent on top of the prior month’s 2.0 percent surge. Shipments for this reading in May, which are inputs into GDP business investment, are revised higher from last week’s advance data, up 3 tenths from the initial reading to a gain of 0.2 percent (in an offset, April’s shipments are revised 2 tenths lower to what is still a very strong 0.8 percent gain).

Orders for steel, where tariffs are in effect, slipped in May after rising strongly the prior two months with aluminum orders extending a strong 3-month run. Inventories for the metals are building strongly. A major positive in this report is a fourth straight strong build for total unfilled orders, up 0.5 percent which hints at strength for factory payrolls in Friday’s employment report.

This report overshadows a decline in the Federal Reserve’s measure of manufacturing production, one skewed lower by a cut in factory hours tied to the auto sector snag, and it closes the book favorably on May. Advance factory data so far in June have been mostly strong including yesterday’s ISM report and month-end upgrade for the manufacturing PMI. Tariffs and the risk of trade disruptions aside, the factory sector is a major driver right now for the 2018 economy.


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.


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.


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