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Monday Update: Better Than It Looks

Written by Brad McMillan, CFA®, CFP® | Sep 21, 2015 6:14:34 PM

Last week was a busy one, with the release of important data for business and consumers, two macro reports, and the Fed’s decision on raising interest rates. Generally, the economic news in this Monday update is reasonably good and nothing to indicate worry.

Last week’s data

For consumers: The retail sales report looks worse than it is. The headline number was an increase of 0.2 percent—below expectations of 0.3 percent and well below the previous month’s gain of 0.6 percent. This drop was principally due to a decline in gasoline prices. The core retail sales number (excluding autos, gasoline, and building materials) is a better indicator: that grew by 0.4 percent, up from the initial estimate for July of 0.3 percent and well above expectations of 0.1 percent. July’s gain was also revised significantly upward, to 0.6 percent, showing consistent growth.

For business: Industrial production fell by 0.4 percent, below expectations of a decline of 0.2 percent and well below the previous month, which showed a gain of 0.9 percent, revised up from 0.6 percent. Capacity utilization dropped down to 77.6 percent from 78.0 percent. Once again, the news is better than it looks. Last month’s unreasonably strong numbers—and this month’s very weak numbers—are due to what appears to be a statistical distortion around how the auto industry handles plant closings. The two months together provide a steadier indicator. U.S. industrial production is facing headwinds, but the damage is much more limited than what’s indicated by this month’s figures alone.

The housing business continued strong. The NAHB Confidence Index rose again, to 62, which is a new postrecession high. Housing starts dropped by 3.0 percent, down from an increase of 0.2 percent in the previous month but beating expectations of a 3.8-percent decline. Offsetting the decline, however, building permits increased, beating both expectations and the previous month. This suggests that lower August sales were not indicative of a longer-term slowdown.

Price inflation came in very low for the month, with a decline of 0.1 percent for headline inflation and a gain of 0.1 percent for core inflation (excludes food and energy). Annual gains did remain the same as those of the previous month, at 0.2 percent and 1.8 percent, for headline and core inflation, respectively. Overall, inflation remains low, although the primary cause continues to be low gasoline prices, rather than lack of demand.

What about the Fed?

The biggest news of last week, which I wrote about the other day, was the Fed’s decision not to raise interest rates yet. This decision appears to reflect worries about financial markets and global economies rather than U.S. conditions, which, according to the Fed, continue to improve.

The week ahead

Existing Home Sales: The disappointing existing home sales report was released this morning; it showed a decline of 4.8 percent, well below the previous month’s gain of 2.0 percent, which was also revised down to 1.8 percent. August’s results were well below the low end of the expectations range. This is a very disappointing number. But given the shrinking supply of homes for sale, it may reflect inventory constraints rather than lack of demand.

New Home Sales: New home sales, to be released Thursday, will have to be watched closely to see whether they validate this weak data point. They are expected to increase from 507,000 to 520,000, given strong home builder confidence, rising inventory, and the record sales levels of July. Should this number also disappoint, it might be time to take a closer look at the housing market.

Durable Goods: Finally, durable goods orders will be released on Thursday as well. The headline statistic is expected to decline, following two big monthly gains, by about 2.3 percent due to the same auto industry distortion that affected industrial production and a decline in airplane orders, which are extremely volatile. Core orders, excluding transport, are expected to increase by about 0.5 percent, up slightly from the previous month’s gain of 0.4 percent, creating another probable “better than it looks” data point.

Overall, I think the news is generally better than it looks at first glance and isn’t reason to worry.