Monday Update (on Tuesday): Weak Headlines but Positive Details

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on May 30, 2017 4:18:14 PM

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Monday updateBased on the headlines, last week’s data was disappointing. But the details were more positive, leaving conditions pretty much as expected. In addition, despite the weak current results, previous months generally turned out better than initially reported and were revised upwards. Plus, long-term trends remain positive. So, while not a great month overall, it was better than it first looked for these data points.

Last week’s data

On Tuesday, new home sales dropped from 621,000 in March to 569,000 in April—worse than the expected drop to 610,000. At the same time, however, the previous three months were revised up by 55,000, more than making up for the shortfall. This left the 12-month average at the highest level since June 2008 and the positive trend intact. The decline is due, in part, to a relatively limited supply of less expensive homes, which sell more quickly. It was a surprise—and bears watching—but the upward revisions suggest the market remains strong.

On Wednesday, existing home sales also disappointed, dropping from 5.71 million in March to 5.57 million in April, worse than expectations of 5.65 million. In this case, the drop is due to a lack of supply. On a seasonally adjusted basis, the number of single-family homes for sale has ticked up, but it remains close to the lowest level since records started in 1982. Despite strong demand, there are simply not enough homes available for sale. Looking at the longer term, both the 6- and 12-month averages remain at the highest levels since 2007, further supporting a continued healthy market.

Also on Wednesday, the minutes of the last meeting of the Federal Open Market Committee were released. A couple of notable points: the first-quarter slowdown was viewed as transitory, and slow inflation growth was seen as largely due to short-term factors, rather than being a longer-term trend. Overall, the minutes indicated that, as far as the Fed is concerned, the economy remains healthy and a rate hike in June remains quite likely.

Finally, on Friday, April durable goods orders did better than expected, declining by 0.7 percent instead of the expected 1.5 percent, after a gain of 0.9 percent in March. The decline was largely due to a sharp drop in commercial aircraft orders. Such orders are extremely volatile, and the headline decline is therefore not necessarily a concern. Core orders, which exclude transportation, are a better indicator. These disappointed, dropping by 0.4 percent against expectations of a 0.4-percent gain. But the prior month was revised up from flat to a gain of 0.8 percent, which left the indicator overall at the expected level. It’s nothing to cheer about, perhaps, but not a real worry point either.

The week ahead

We’ll get quite a bit of data in the week ahead, providing a good picture of whether the economy is accelerating—or not.

On Tuesday, personal income grew as expected by 0.4 percent for April, up from 0.2 percent for March, on continued job and wage growth. Personal spending growth was also strong at 0.4 percent in April, with the March figure revised up from flat to growth of 0.3 percent. These are very positive results and suggest that consumers are spending again after a slow winter.

Also on Tuesday, the Conference Board Consumer Confidence Survey gave us a more forward-looking view of the consumer. Confidence declined from 120.3 to 117.9, slightly worse than the expected drop to 119.9. Still, the index remains close to a 16-year high and indicates an expanding economy.

On Thursday, the ISM Manufacturing Index is expected to drop back slightly as well, from 54.8 to 54.6. Again, this would leave it securely in expansion territory but suggests further acceleration is still to come. While U.S. manufacturing has benefited from higher global trade growth, that now appears to be slowing.

This trend should also be apparent in the international trade report, due on Friday, which is expected to show a small increase in the trade deficit, from $43.7 billion to $44.0 billion. There is downside risk to this report, however, on a rise in imports and drop in manufactured exports. If so, trade will most likely be a drag on economic growth in the second quarter.

Finally, on Friday, the jobs report is expected to show an increase in jobs of 176,000 in May, which is a healthy level but down from 211,000 in April. The unemployment rate is expected to remain constant, at a low 4.4 percent, and wage growth to remain at 0.3 percent. Should this report meet expectations, it would indicate a continued trend in growth but, again, no acceleration.

Have a great week!

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