Monday Update: Inflation Low, Confidence and Spending Up

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on May 15, 2017 2:00:28 PM

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Monday updateLast week’s data was positive, reversing concern about consumer spending and suggesting consumer confidence remains strong. Lower inflation results were noteworthy but not of immediate worry. Overall, the data suggests that the slowdown in the first quarter is likely to get better—possibly significantly—over the next couple of months.

A look at last week’s data

Three key economic reports were released on Friday.

Consumer price data faced a pivotal month in the face of March’s surprise decline in inflation, the first in seven years. For the headline index, which includes everything, inflation was in line with expectations at a 0.2-percent increase. This was good news, as the increase reversed most of last month’s decline. But it took the year-on-year rate down to 2.2 percent from 2.4 percent, and below expectations of 2.3 percent. For the core index, which excludes food and energy, inflation came in at 0.1 percent, below the expected 0.2-percent increase. The annual rate also moved down to 1.9 percent, again below expectations. Although these figures are consistent with Federal Reserve expectations, the question is whether inflation will continue to move higher. The answer, increasingly, seems to be no. This may pose a headache for the Fed in the future, but for the moment inflation remains in a sweet spot.

Retail sales numbers also largely reversed weak March data. The headline number was up 0.4 percent, though it had been expected to increase 0.6 percent. This number was bolstered by an upward revision of the March data from a drop of 0.2 percent to a gain of 0.1 percent, more than making up the gap. Core sales, which exclude autos and gas, performed similarly. They were up 0.3 percent, which was below expectations of a 0.4-percent increase. But with the weak March number revised upward from 0.1-percent to 0.4-percent growth, this figure more than accounted for the gap. Overall, retail sales data suggests that high confidence levels are finally starting to translate into faster spending growth.

Finally, the University of Michigan released its May consumer confidence survey. Here again, results beat expectations by rising from 97.0 to 97.7, rather than the expected flat result. High confidence, along with signs of improving spending, should help growth accelerate again in the second quarter.

What to look forward to

The housing market and industrial sector will dominate economic headlines this week.

On Monday, the National Association of Home Builders will release its Housing Market Index. This survey conveys homebuilders’ opinions on the health of the housing industry. It is expected to remain strong and steady at 68, which is close to the 12-year high it reached in March. Downside risks to this result include recent tariffs on Canadian lumber, which could raise costs substantially and hurt industry confidence.

Housing starts, a measure of new residential construction, will give us another read on this sector on Tuesday. Expectations are downbeat—for a decline to 1.125 million from 1.215 million—but a rise in building permits suggests this report could surprise to the upside.

The Industrial Production report, also released on Tuesday, is expected to show a 0.4-percent gain. Although down from the previous month, it would still be a healthy number. Solid gains in mining and manufacturing are expected to be offset by another decline in utilities output. Results could come in worse than expected, depending on how big that decline is. Manufacturing, which fell unexpectedly by 0.4 percent in March, is expected to reverse course with a 0.4-percent gain, based on an increase in employee hours worked. If the numbers come in as expected, this would be a reasonably healthy report.

Have a great week!

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