On Monday, the Institute for Supply Management (ISM) Manufacturing survey was released. It beat expectations, rising to 60.2 for June from 58.7 in May. This is a diffusion index, where values above 50 indicate expansion and below 50 indicate contraction. The rise leaves the index at a very healthy level and should be positive for growth. The result is especially positive in light of the stronger U.S. dollar, which hurts manufacturers, as well as the increasing trade conflicts.
On Thursday, the ISM Nonmanufacturing index was released. It also beat expectations, rising from 58.6 in May to 59.1 for June; this result was well above the expected pullback to 58.3. With retail and spending doing well in response to the tax cuts and high consumer confidence, domestic demand continues to be strong. As with the manufacturing index, this month’s number leaves this index at a healthy expansionary level. Combined, the indices suggest growth may accelerate even further.
Also on Thursday, the Fed released the minutes from its June meeting. Some concern over rising trade tensions was revealed in the minutes, but they also showed continued and rising confidence that the economy continues to expand. Inflation, while rising, did not register as a significant concern. Overall, the minutes validated what markets had taken from the initial statement—that the Fed will continue to raise rates in a measured way, with probably two more hikes this year.
On Friday, the international trade report did better than expected. The trade deficit declined from $46.2 billion in April to $43.1 billion in May. The deficit in traded goods declined significantly last month on strong export growth, so net exports should add meaningfully to second-quarter growth.
Finally, also on Friday, the employment report significantly beat expectations. Although job growth pulled back from May levels, the 213,000 jobs created in June were well above the 195,000 expected. Plus, the May figure was revised up by 21,000. Even better than the strong job creation was the fact that workers are apparently moving back into the labor force. Unemployment rose from 3.8 percent in May to 4 percent in June—but for the right reasons—as workers decided to look for jobs again, expanding the labor force. Growth in average earnings came in slightly below expectations, down from 0.3-percent monthly growth in May to 0.2 percent in June. This took the annual rate down to 2.7 percent, which is also consistent with the expansion of the labor force. The combination of strong job creation, an expanding labor force, and moderate wage growth is very positive for continued economic growth.
On Wednesday, the Producer Price Index is expected to rise by 0.2 percent in the headline number, which includes energy and food. This result would be down from a 0.5-percent increase in May and would be due largely to flat gasoline prices and tariff-driven increases in other input prices. The annual change for the headline index is expected to remain stable at 3.1 percent, indicating that longer-term pressures are keeping inflation elevated above the Fed’s 2-percent target. The core number, which excludes energy and food, is expected to tick up from 0.1 percent in May to 0.2 percent in June. The annual figure should remain solid at 2.6 percent. Overall, these figures are steady in aggregate. Beneath the surface, however, tariffs are driving faster input inflation.
On Thursday, the Consumer Price Index is likely to show steady inflation. The headline number is expected to rise by 0.2 percent in June, just as it did in May. The annual figure should increase from 2.8 percent in May to 2.9 percent in June on base effects. Similarly, the core number is expected to remain steady at 0.2 percent for June and tick up from 2.2 percent to 2.3 percent on an annual basis. As with the Producer Price Index, these figures indicate that inflation continues to run above the Fed’s target, driving interest rate increases.
On Friday, we’ll see the University of Michigan consumer confidence survey. It is expected to remain steady at a high 98.2, the same as in June. A small rise is possible, with the stock market moving back up and gas prices holding steady. But those factors may have been offset by rising concerns around trade. In any event, if confidence stays at the current elevated level, it would be a positive signal for continued growth.
Have a great week!