Monday Update: The Good and the Bad in the Economic Data

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Sep 14, 2015 2:03:00 PM

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economic dataLast week was light on economic data, but it brought two important releases: one very good and one very bad.

Last week’s highs and lows

The very good: The JOLTS job opening figure set another new high at 5,753,000. This was up more than half a million from the prior month’s initial estimate of 5,249,000, which itself was revised up by 74,000 to 5,323,000. The number even beat the high end of expectations, at 5,350,000. With job openings continuing to accelerate, we can feel good about this sign of economic strength.

The very bad: The University of Michigan Consumer Sentiment Index dropped to 85.7 from 91.9, well below expectations of 91.9 and just below the lower end of the expected range. This is the third decline in a row and the biggest since December 2012, just after the government shutdown. Decreasing consumer confidence can hit consumer spending, which, as you may know, makes up more than two-thirds of the economy.

It appears that the damage can be attributed to concerns over China and emerging markets, as well as the decline in the U.S. stock market, rather than the U.S. economy. The details were all over the map, though, rather than pointing to specific areas of weakness. It’s worth noting, however, that this decline merely brings the level back to its long-term average—a number that still signals growth ahead.

Although concerning, this month’s report may be an outlier. The Bloomberg Consumer Comfort Index, released the prior day, showed confidence unchanged. Similarly, the NFIB Small Business Optimism Survey came in at 95.9, up from 95.4 the previous month though slightly below an expected 96.0. Small business is a major driver for employment, and improving confidence here is a good sign for future growth.

On balance, the very strong jobs figure and improving business confidence measure suggest that the economy remains on track. We have seen short-term pullbacks in some confidence figures recently, only to have them recover, so while the consumer sentiment figure is worth watching, it is not a game changer yet.

What to watch this week

Retail Sales: We should continue to see growth, although at a somewhat slower pace than last month due at least in part to lower gasoline prices. Expected growth is 0.3 percent for overall retail sales and 0.1 percent for core retail sales, although some forecasters are predicting stronger numbers.

Industrial Production: Unlike retail sales, industrial production is expected to decline 0.2 percent, with a 0.3-percent decline in manufacturing output. The decline is driven by continuing economic turmoil in overseas economies and the stronger dollar, as well as a continued decline in oil-related capital spending here in the U.S. Forecasters show the risk to the downside for these categories, suggesting continued weakness in this sector. That said, manufacturing accounts for only about one-eighth of the economy, so the damage on the whole should be limited.

Consumer Prices: Inflation is expected to continue its current trends, with the Consumer Price Index declining slightly by 0.1 percent, for a change of 0.2 percent over the past 12 months. This is much lower than the core CPI, which is expected to increase by 0.1 percent, for an annual increase of 1.9 percent—which is getting very close to the Federal Reserve’s target range. The difference is largely due to a decline in gasoline prices.

NAHB/Housing Starts: Single-family home starts are expected to drop back slightly from the previous month’s level of 1,206,000 to a still strong 1,160,000, while the NAHB Builder Confidence Index should stay at its post-recession high of 61. Again, these are strong numbers.

Fed Interest Rate Decision: On Thursday, the Fed will release its decision on whether to increase base interest rates by 25 basis points. This is easily the most consequential event of the economic week and remains too close to call.

There are good reasons on both sides of the argument, and I expect the decision will ultimately be based on which is considered to have the least potential risk. Either way, it is quite possible the decision will result in market turbulence.

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