Monday Update: Latest Economic Reports Reveal Mixed Results

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on May 20, 2019 2:15:22 PM

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Monday updateLast week’s data was wide ranging, with an unusual mix of strong and weak results. This is a moderately busy week for economic reports, with a focus on the housing market, news from the Fed, and trends in business investment.

Last week’s news

The data releases started on Wednesday with a very disappointing retail sales report. The headline index dropped by 0.2 percent for April, against an expected gain of 0.2 percent. This result was down from a rebound gain of 1.6 percent in March, on a decline in auto sales and despite a rise in gas prices. The core index, which excludes autos and gasoline and is a better economic indicator, also disappointed. It dropped from a 0.9 percent gain in March to a decline of 0.2 percent in April, below expectations of a 0.3 percent gain. These numbers suggest the expected bounce in consumer spending has faded much faster than anticipated, which could lead to slower economic growth in the second quarter.

On Wednesday, the industrial production report also disappointed. Here, the March figure was revised up from a drop of 0.1 percent to a gain of 0.2 percent. But this gain was more than offset by the April result, which was a decline of 0.5 percent, well below the flat result expected. Much of the decline was due to a drop in utility production from unseasonably warm temperatures. Still, the weakness was wider spread than that, as manufacturing also came in at a 0.5 percent decline in April, down from flat in March and well below the expected gain of 0.1 percent. This data suggests the weakness in business investment and exports continues.

For the housing sector, the National Association of Home Builders gave some good news with the industry survey, released on Wednesday. It rose from 63 in April to 66 for May, above the expected 64, reflecting rising confidence in the homebuilding market on improving sales of new homes. On Thursday, the housing starts report also showed similar improvement, with an increase from 1.14 million in March to 1.235 million starts for April on an annualized basis, above the expected 1.22 million. Such an improvement suggests the housing market is stabilizing after a slowdown, which is consistent with the rise in affordability and is a positive economic indicator.

Finally, the University of Michigan consumer confidence survey, released on Friday, also surprised to the upside. It rose from 97.2 in April to 102.4 in May, a 15-year high, despite rising gas prices and the recent stock market turbulence. Notably, most of the improvement came in the expectations category, which may suggest consumers now expect conditions to improve and could be a positive forward-looking indicator. This strong survey serves as a counterweight to the weaker results from the recent Conference Board surveys.

What to look forward to

The week starts on Tuesday with the existing home sales report. It is expected to show that sales rose from 5.21 million in March to 5.34 million in April on an annualized basis. Housing has been in a slump recently, so an acceleration would be good news.

On Wednesday, the minutes from the last meeting of the Federal Open Market Committee will be released. The meeting itself was uneventful, with no action taken on interest rates (as expected) and no real changes in the statement. Markets will be looking at the minutes to find out how worried the Fed is about inflation being too low, which is a rising concern.

On Thursday, the new home sales report is expected to pull back from 692,000 in March, which was an unexpected jump, to 677,000 for April, which is more in line with previous months. If the numbers come in as expected, this could indicate that housing is stabilizing.

Finally, on Friday, we’ll see the durable goods orders report. The headline index is expected to show a significant swing, dropping from a 2.8 percent increase in March to a 2 percent decrease for April due to a drop in aircraft orders. This is a highly volatile number, and a swing like this is not unusual. The core index, which excludes transportation and is a much better economic indicator, is expected to hold steady at 0.2 percent growth for April, as it did for March. If the numbers come in as expected, it would suggest that business investment continues to grow at current levels, which would be positive.

Have a great week!

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