Monday Update: Service Sector Down, Remains Healthy

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jun 12, 2017 1:08:13 PM

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Monday updateLast week was quite slow from an economic news standpoint, but things will pick up in the week ahead.

Last week’s data

The only report of significance last week was released on Monday: the ISM Non-Manufacturing Index, which covers business sentiment in all areas except manufacturing. This is a diffusion index, with values above 50 indicating expansion. The number came in slightly below expectations, at 56.9 versus 57.1, which was also down from a very positive 57.5 in April. The drop was due in large part to a decline in the new orders index, which had been at a 12-year high and still remains at a strong level. Also on the positive side, there was an increase in the employment index. Plus, the number of industries reporting growth rose to 16, the most in three years. Despite the overall small decline, then, the data still signals healthy growth, although at a slightly slower rate.

What to look forward to

After a slow week, the data flow heats up this week. First, on Wednesday, are consumer prices. Headline prices, which include food and energy, are expected to remain flat for May, down from a 0.2-percent increase in April, due to lower gasoline prices. On an annual basis, headline prices are expected to show an increase of 2 percent, down from the previous figure of 2.2 percent. Core consumer prices, however, are expected to rise by 0.2 percent for May, better than the 0.1-percent increase in April. The annual increase should remain stable at 1.9 percent. These numbers are still in line with what the Federal Reserve would like to see and probably won’t cause a delay in this week’s expected interest rate increase.

Another Wednesday report, retail sales are expected to show a similar pattern. Headline sales, which include automobiles, are expected to increase 0.1 percent in May, down from a 0.4-percent rise in April, due to slower vehicle sales and the drop in gas prices. Core sales, which exclude autos, are expected to show a smaller decline—coming in at 0.2-percent growth versus 0.3-percent growth in April. These numbers suggest consumers continue to feel positive about the economy.

Also on Wednesday, the Federal Open Market Committee will finish its regular meeting. Markets expect another rate increase and will also be looking for any hints on whether the Fed plans more increases this year. In addition, markets will look for details about how and when the Fed plans to start shrinking the balance sheet.

Thursday’s Industrial Production report is expected to show a slowdown—from a 1-percent gain in April to just a 0.1-percent increase in May. This would reflect continuing but slower growth in oil and gas production. Manufacturing growth is also expected to slow, from 1 percent in April to 0.2 percent in May. This slowdown is reasonable after April’s surge.

Also on Thursday, the National Association of Home Builders survey is expected to show a strong result for June: 70, the same as for May. Supporting this, housing starts are expected to rise from 1.172 million in April to 1.223 million in May. There may be downside risk to this number, though, on weakness in last month’s building permits. Even if housing development slows somewhat, continued strong demand supports the industry confidence figures.

Finally, to close the week, the University of Michigan Consumer Confidence Survey is expected to remain steady at 97.1, close to its highest level in more than a decade. High confidence, as noted above, is driving retail sales and spending growth, which should help the economy as a whole.

Have a great week!

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