Last week’s economic data showed that business confidence and activity continue to improve. Plus, housing sentiment and activity continue to expand, while manufacturing and even mining have started to grow again. Overall, last week’s results demonstrate that the weakest part of the recovery—private business—continues to strengthen.
Housing forges ahead
Housing news continued to be positive last week. As expected, the National Association of Home Builders survey ticked up to 60 from a downwardly revised 58, as builders were encouraged by falling inventory.
Housing starts moved up by 2.1 percent, from just under 1.2 million to just over 1.2 million, beating expectations of a flat month. These numbers reflect the second-highest level since late 2007 and suggest the housing sector continues to grow.
Industry and manufacturing expanding again
Also surprising to the upside was industrial production, continuing its rebound with an increase of 0.7 percent, the biggest jump since November 2014. Beating expectations of a 0.3-percent increase, this gain was offset by a downward revision in the previous month from 0.6 percent to 0.4 percent. Much of this expansion was due to increases in utilities production, but the magnitude of the overall result was very positive.
Manufacturing also beat expectations, with growth of 0.5 percent, which was the most improvement in a year and well over expectations of 0.3 percent, suggesting that the U.S. manufacturing recovery continues to gain strength. Manufacturing has been a weakness this year, but the continued moderation of the value of the dollar suggests that we may see continued improvement.
Inflation slows on energy price drops
Inflation came in below expectations:
- The month-on-month headline number was flat, below the previous increase of 0.2 percent and in line with expectations.
- The year-on-year figure was down to 0.8 percent from 1.0 percent; this was below expectations for a decrease to 0.9 percent and can be attributed to further declines in energy prices, which dropped 1.6 percent for the month.
Core prices, which exclude energy and food, grew by 0.1 percent on the month (below expectations of 0.2 percent) and 2.2 percent over the previous year (below expectations of a 2.3-percent increase). These changes are small enough—and likely tied to energy—that they should not significantly affect the Fed’s decision process.
Speaking of the Fed’s decision process, the minutes from the last meeting of the Federal Open Market Committee were released last week. As expected, there were no clear hints about its likely decision on interest rates in September, but the minutes did reveal more discussion about the possibility than had been expected.
The week ahead
This week is all about housing sales and durable goods orders, which will expand our view of last week’s results.
On Tuesday, new home sales will be released, with expectations for a decline from 592,000 in June to around 575,000, due primarily to a lack of supply. With sales rising over the past three months, inventory has simply been run down.
On Wednesday, existing home sales are also expected to decline, with the June sales rate of 5.57 million—the highest level since early 2007—dropping back slightly to 5.55 million. Here again, the problem is lack of inventory, with the supply of homes available for sale at a 10-year low in June. If results come in as expected, this would indicate continued market and industry strength.
The durable goods orders report, which will be released on Thursday, is expected to be substantially better than last month’s and more in line with last week’s improved industrial and manufacturing data. Headline orders, which include the volatile transportation sector, are expected to swing from a decline of 3.9 percent to a gain of 3.5 percent on a big bounce in commercial aircraft orders. The more relevant core number, which excludes transportation, is also expected to show a swing from a decline of 0.4 percent to a gain of 0.4 percent, on the continued growth in manufacturing that we saw last week. If we do indeed get the gains expected, it would be a positive development as this has been a weak area in the economic recovery.
Finally, Janet Yellen has a speech at the Fed’s annual Jackson Hole conference that will be widely watched as an indicator of what is likely to happen with interest rates. While real news remains unlikely, this speech is her last chance to define the September meeting ahead of time, so it will be worth watching.
Have a great week!