Monday Update (on Wednesday): Consumers and Manufacturers Confident

Posted by Brad McMillan, CFA, CAIA, MAI

This entry was posted on Sep 5, 2018 11:20:46 AM

and tagged In the News

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Monday updateLast week was all about the consumer—what they are earning, what they are spending, and how confident they are. The week ahead is short but busy, with looks at business sentiment, the trade balance, and, most important, the job market.

Last week’s news

On Tuesday, the Conference Board Consumer Confidence Index blew away expectations. It rose from 127.4 in July to 133.4 in August, against an expected small decline. This result is the highest level in almost 18 years (during the dot-com boom) and occurred despite rising inflation concerns and muted wage growth. Clearly, the strength in job creation and rising stock market continue to inspire confidence.

On Thursday, July’s personal income and spending reports also ratified the high level of consumer confidence. Personal income was up by 0.3 percent for July. Although this result is down from 0.4-percent growth in June, it is still a healthy level. Personal spending growth stayed steady at 0.4 percent, which is a strong level and constructive for economic growth this quarter. Healthy growth in these measures starting the third quarter is a good sign for overall economic growth for the second half of the year.

Other economic news last week included a small upward revision to economic growth in the second quarter. It went from 4.1 percent to 4.2 percent, which is a positive development. We also saw a rise in the Fed’s preferred measure of inflation to its target of 2 percent on an annual basis. Both should keep the Fed raising interest rates in coming months.

What to look forward to

On Tuesday, the Institute for Supply Management (ISM) Manufacturing index also beat expectations. It rose from 58.1 in July to 61.3 in August, well above expectations and a 14-year high. This is a diffusion index, where values above 50 indicate expansion and below 50 indicate contraction. So, this is an extremely strong result. The uptick was a surprise and is inconsistent with other surveys. This raises the risk that it is an outlier, given slowing global growth, recent appreciation in the dollar, and uncertainty in trade policy. In this survey, however, the rise was well supported, with increasing new orders and production. All things considered, this is a strong result. If it holds, it has to be considered quite positive for the economy as a whole.

On Wednesday, the international trade report beat expectations—in a bad way. The trade deficit worsened, going from $45.7 billion to $50.1 billion, a five-month high. Exports surged in the second quarter, as buyers bought ahead of pending tariffs. But exports declined last month, even as imports increased. Overall, given this weakness, trade will likely be a drag on third-quarter growth.

On Thursday, the ISM Nonmanufacturing index is expected to rebound a bit—from 55.6 to 56.9—after a sharp drop in August. As with the manufacturing report, this is a diffusion index, so this level continues to indicate expansion. The expected bounce should come from strong retail sales growth, as well as strong regional surveys. With consumer confidence high and spending growth solid, this indicator should remain positive for the economy as a whole.

Finally, on Friday, the employment report is expected to show that job growth rebounded to 191,000 in August from a weak July report of 157,000. The unemployment rate is expected to remain steady at 3.9 percent as the labor force continues to grow. Wage growth is also expected to stay steady at 0.3 percent on a monthly basis but tick up from 2.7 percent to 2.8 percent on an annual basis. If the numbers come in as expected, this would be another healthy report and signal continued economic growth. It would also likely lock in another rate hike from the Fed in September.

Thanks for reading and have a great week!

Upcoming Appearances

Tune into Fox Business' Varney & Co. on Friday, September 28, between 8:40 AM and 12:00 PM to hear Brad talk about the markets in-studio with Stuart Varney. Exact interview time will be updated once confirmed. Check your local listings for availability.

Brad will be presenting an Economic and Market Update at the Financial Planning Association’s Annual Conference in Chicago, Illinois, on Thursday, October 4, from 7:30 A.M. – 8:30 A.M. From 10:00 A.M. - 12:00 P.M., he will be signing copies of his new book, Crash-Test Investing, by Commonwealth's booth, #321, in the Exhibit Hall. To attend, visit: https://fpaannual.org/.

 

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