The Independent Market Observer

Monday Update: Strong Business Confidence Continues

Posted by Brad McMillan, CFA®, CFP®

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This entry was posted on Sep 11, 2017 2:08:58 PM

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Monday updateThere were only two major data releases last week, but they were important in terms of the business sector: durable goods orders and the Institute for Supply Management (ISM) Nonmanufacturing index. Both were quite positive on the whole and suggest business confidence remains strong, which may result in faster business investment growth. Overall, the data indicates that the economy remains healthy and that economic growth is likely to continue at current rates or even accelerate over the near term.

Last week’s news

The headline index for durable goods orders, released on Tuesday, disappointed for the second month in a row. It was down 6.8 percent, which was well below expectations of a decline of 2.9 percent. This result was due to a drop in orders for commercial aircraft, a very volatile sector, and was not representative of the rest of the economy. The core orders, which exclude transportation and are a better economic indicator, were up 0.6 percent. This result was even better than the strong 0.5-percent gain in the previous month, suggesting that durable goods orders as a whole continue to grow strongly. Since this index is a proxy for business confidence and investment, this data represents a positive signal for the economy as a whole, despite the drop in the headline index.

On Wednesday, the ISM Nonmanufacturing index was released. This measure of confidence for the service side of the economy bounced back to 55.3 in August from a surprise decline to 53.9 in July. Although this result was slightly below expectations of an increase to 55.6, the indicator remains in healthy territory. The bounce back also suggests that last month’s drop was a one-off, rather than something worse. Combined with the very strong manufacturing survey last week, business confidence continues to be quite strong.

What to look forward to

We’ll see a wide range of economic news this week. We’ll get a good look at consumer behavior, manufacturing, and the economy as a whole. These combined factors will influence the Fed’s decision on when to raise rates.

On Thursday, the Consumer Price Index will be released, giving us a look at inflation. The headline index, which includes food and energy, is expected to rise 0.3 percent in August, largely due to a spike in gas prices after Hurricane Harvey. This will take the annual inflation rate from 1.7 percent to 1.8 percent, which is closer to the Fed’s 2-percent target. There may be some upside risk to this number. Core prices, which exclude energy and food, are expected to rise a more modest 0.2 percent for the month. On an annual basis, however, core prices are expected to decline from 1.7 percent to 1.6 percent. Core prices are a better signal for underlying economic conditions because energy and food prices can be volatile, although a decrease could raise the Fed’s concern about low inflation.

On Friday, headline retail sales are expected to slow from 0.6 percent in July to 0.1 percent in August due to a decline in auto sales. The core figure, which excludes auto sales and is a better indicator for underlying trends, is expected to remain steady at 0.5-percent growth. There could be some upside to these results, as consumer confidence is high, and buying ahead of the hurricanes may have driven sales higher.

Industrial production is expected to decline modestly, from 0.2-percent growth in July to 0.1-percent growth in August. This decline can be attributed to low utilities output. Manufacturing growth is expected to increase strongly from negative to 0.5-percent growth, as exports continue to rise on the weak dollar. This growth would align with the improved ISM Nonmanufacturing survey, which would be a boon for the economy.

Finally, the University of Michigan Consumer Confidence survey is expected to decline from 96.8 to 96.6. There may be some downside risk due to the hurricanes and rising gas prices, but the overall confidence level is likely to remain strong, indicating a robust economy.

Have a great week!

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