Monday Update: Very Positive Data, Due in Part to Storms

Posted by Brad McMillan, CFA, CAIA, MAI

This entry was posted on Oct 9, 2017 1:37:08 PM

and tagged In the News

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Monday updateLast week gave us a broad look at the economy, including business confidence surveys and the jobs report. The news came in surprisingly strong, at multiyear bests in many cases. This was, of course, positive and consistent with other data, but the magnitude of the improvements raises the question of how much the storms may have affected the results. That impact varies, but there is reason to believe that the improvements are real—although likely not as good as the numbers would suggest.

Last week’s news

On Monday, the Institute for Supply Management (ISM) Manufacturing index was released, which strongly beat expectations. It rose to 60.8 for September, up from 58.8 in August and against expectations of 58.1. This is a diffusion index, with numbers over 50 indicating growth, so this result indicates strong growth. In fact, the index is at a 13-year high, up from the 6-year high reached in August. That being said, much of the increase may have been based on how it is calculated—with storm-induced delivery delays being interpreted as supply shortages—which would mean that at least part of the increase is spurious. We will see how this plays out in the next couple of months. While the number was likely strong, based on other surveys, it was probably not as strong as it looks.

The ISM Nonmanufacturing index, released on Wednesday, also bounced substantially, from 55.3 in August to 59.8 in September, well above expectations of 55.5. The index came back in August from a surprise decline in July, and further improvement is in line with other surveys. As with the Manufacturing index, at least some of the improvement appears to come from technical factors. So, while this report signals continued business confidence, we need to watch and see how much of it persists.

On Friday, as expected, the employment report showed that job creation dropped sharply due to the storms. Job growth did even worse than expected, with a loss of 33,000 jobs in September, down from a gain of 156,000 in August. But this has been the case with past storms and was therefore not a reason for serious concern. While the headline was weak, the details were surprisingly strong. The unemployment rate dropped to 4.2 percent from 4.4 percent, and wage growth spiked from a 0.1-percent gain to a 0.5-percent gain, beating expectations. Again, there is reason to question how much of the improvement will last. Overall, however, this is a much more solid report than was expected and is positive going forward.

What to look forward to

We’ll see a wide range of economic news toward the end of this week, including consumer prices, retail sales, and national sentiment.

On Wednesday, the Fed will release the minutes of its last meeting. The Fed already announced its plan to reduce the balance sheet. So what markets will be looking for is information on how the Fed feels about low inflation—and what that means for interest rates. Markets currently expect another rate increase in December, and the minutes could reveal whether the Fed is as hawkish as the markets think it is.

On Friday, the Fed will get some more data to chew on with the release of consumer prices. The headline Consumer Price Index is expected to rise by 0.6 percent on the month and 2.3 percent on the year. This would be up from increases of 0.4 percent and 1.9 percent, respectively, in the last report. This uptick reflects a post-hurricane surge in gasoline prices, due to a 10-percent decline in U.S. refining capacity. As such, the Fed will likely deem the data as temporary and not worrisome. Core prices, which exclude food and energy, are expected to increase by a modest 0.2 percent on the month (the same as last month) and 1.8 percent on the year, which is up slightly from a 1.7-percent increase in the last report. These numbers are more relevant for the economy, and they suggest that inflation continues to run low. The Fed may be more cautious about raising rates as a result.

Also on Friday, the retail sales report is expected to show substantial hurricane-related distortions. A gain of 1.6 percent is expected for the headline index, which includes transportation. This is a significant improvement from last month’s 0.2-percent drop and can be attributed largely to an increase in auto sales to replace those destroyed in the storms. The core index, which excludes auto sales, is also expected to rise—up 0.9 percent, compared with just 0.2 percent last month. This likely will be due in part to the higher gas prices that also drove up inflation. If sales in other areas have increased, the hurricanes probably make this month’s data too noisy to draw broad conclusions. A strong result, however, would be interpreted as positive overall.

Finally, on Friday, the University of Michigan consumer sentiment survey is expected to drop slightly from 95.1 to 95. This would indicate that the hurricanes have had almost no effect on national sentiment—despite disruptions in the job market and a rise in gas prices. That resilience is a reflection of solid fundamentals, which is a good sign going forward. Despite stressful events, overall confidence is likely to remain strong.

Have a great week!

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