Monday Update: An Encouraging Week, Overall

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Dec 14, 2015 12:00:34 PM

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Monday updateAlthough I identified consumer confidence as a yellow light in December’s economic risk factor update, last week’s data releases gave a largely encouraging take.

A look at last week’s numbers

The retail sales report came in a bit below expectations, at a 0.2-percent gain as opposed to an expected 0.3 percent. On a headline basis, this was somewhat disappointing, but looking at the details, it was considerably more encouraging:

  • Even the headline number was up from 0.1 percent the previous month, signaling overall improvement.
  • That improvement came despite a decrease in gasoline sales of 0.8 percent on declining prices and in vehicle sales, which, despite a 0.4-percent decline in dollar sales, remained at high levels in terms of unit sales, also suggesting a price effect rather than lower demand.

Core retail sales, excluding autos and gasoline, grew at 0.5 percent, up from 0.3 percent and above the historic average of 0.4 percent. Overall, consumer demand continued to grow—and at an improved rate.

Although these numbers are healthy rather than strong, they indicate again that the U.S. economy is likely to continue to grow rather than suffer a consumer-led recession—and that fears of a terrible holiday season are likely overblown.

Consumer confidence also showed encouraging results. The University of Michigan Consumer Sentiment Index edged up from 91.3 to 91.8, which, though slightly below expectations of 92.0, is at least an increase (the third in a row). On an absolute basis, this indicator remains at healthy levels, suggesting continued moderate growth—which is consistent with the retail sales data above. Neither of these data points should affect the Fed’s potential decision to raise rates this week.

What’s coming this week?

This week’s releases include consumer prices, housing industry sentiment and housing starts, and industrial production, plus the most important one: the decision by the Federal Open Market Committee on whether to start raising interest rates—or not.

On a headline basis, consumer prices are expected to remain flat for the month and to show a 0.5-percent increase over the previous year. Core prices, excluding food and energy, are expected to increase by 0.2 percent for the month and 2.0 percent for the year. The difference between the two is largely oil prices, but this difference should start to decline in 2016, as the large declines in energy prices in 2015 start to roll off the calendar. Given that, inflation gives the Fed no reason to postpone a rate increase.

Housing industry sentiment, as measured by the National Association of Home Builders survey, is expected to improve from an already high level—from 62 up to 63—which is close to its all-time high of a few months ago. Housing starts are expected to follow suit, with an increase from 1.06 million in the previous month to 1.14 million. Housing is a key driver of future growth and consumer spending and should continue to support economic growth.

Industrial production, on the other hand, is expected to continue to be a weak spot, although the decline is expected to moderate from 0.2 percent last month to 0.1 percent this month. Unfortunately, though, even that looks optimistic, as the risks are to the downside. Hours worked in manufacturing declined by about 0.3 percent, and oil drilling also continued to decline, suggesting the actual results may well be worse.

Industrial production and manufacturing continue to be negatively affected by the strong dollar and low oil prices. On balance, though, the service sector comprises seven-eighths of the economy, and its growth continues to override weakness in the industrial sector.

The Fed is widely expected to raise the target rate by 25 basis points, or 0.25 percent, when its meeting concludes on Wednesday. Although growth continues to be relatively slow, current data suggests that growth will persist and may even accelerate—making such an increase very likely. I expect the increase, along with a commitment from the Fed to make future increases “gradual.” What does that mean? That is what we will all be trying to figure out.

Have a great week!

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