The Independent Market Observer

Monday Update: Weak Economic Data Across the Board

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jun 19, 2017 1:34:37 PM

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Monday updateLast week, we saw a wide range of economic data. Overall, the news was disappointing, with all indicators coming in below expectations. In many cases, however, the details were better, as annual numbers often remained in healthy territory. Still, future growth acceleration is becoming less likely as signs accumulate that the economy has peaked. That being said, growth is expected to continue, just at a lower level than anticipated earlier this year.

Last week’s data

Released on Wednesday, consumer price data continued to come in below expectations—and lower than what the Fed would like to see. Headline prices, which include food and energy, declined by 0.1 percent in May; this decline was against expectations of a flat result and down from a 0.2-percent increase in April. On an annual basis, headline prices were up by 1.9 percent, which is down substantially from the previous figure of 2.2 percent. Much of the actual decline resulted from a drop in gasoline prices, but the weakness was widespread. Core consumer prices, which exclude food and energy, rose by 0.1 percent for May; this result was also below expectations of a 0.2-percent increase and the same as the 0.1-percent increase seen in April. The annual increase was down to 1.7 percent, a two-year low, and below what the Fed would like to see. The Fed did just increase rates, but should the low inflation trend continue, future increases may be less likely.

Retail sales, also released on Wednesday, did even worse. Headline sales, which include automobiles, decreased by 0.3 percent in May. This decline was below already depressed expectations of a 0.1-percent increase and down from a 0.4-percent rise in April. Slower vehicle sales and the drop in gas prices were largely to blame. Core sales, which exclude autos, also disappointed; they came in flat, below expectations of 0.3-percent growth. Looking at the details, however, the news was not quite so bad: April sales growth was revised up to 0.5 percent from 0.3 percent, which largely offset the disappointment in May. Overall, then, this level is about what was expected. It suggests consumers continue to feel positive about the economy. although that might be changing.

The Federal Open Market Committee ended its regular meeting on Wednesday. As anticipated, it raised rates and suggested that one more increase is likely this year. The Fed also provided more details on how it plans to start shrinking the balance sheet, which has been slower than anticipated and is expected to start sometime this year. Overall, expectations were unchanged, although concerns about inflation are rising on the committee.

Thursday’s industrial production report also disappointed. It came in flat for May, under an expected gain of 0.2 percent and down from an upwardly revised 1.1-percent gain in April. The annual growth rate remains at a healthy 2.2 percent, but recent numbers have slowed. This month's numbers reflect strong oil drilling results offset by a 0.4-percent decline in manufacturing. This was well below expectations of 0.2-percent growth and, again, below strong results of 1-percent growth in April. While this was a big downward swing, it was partially offset by upward revisions to previous months, and forward-looking survey results suggest a bounce back is likely. Given the strengthening of the global economy, plus the decline in the dollar, this is a reasonable possibility.

Also on Thursday, the National Association of Home Builders survey came in below expectations at 67 for June, down from 70 in May. While the drop is a concern, the overall level remains strong. Supporting this, housing starts dropped rather than rising as expected, down to 1.092 million in May from 1.172 million in April. This was not a total surprise, given weakness in building permits. Overall, although housing development has slowed somewhat, continued strong demand supports the solid industry confidence figures.

The University of Michigan Consumer Confidence Survey closed the week, with a drop from 97.1 to 94.5. As with the housing survey, while the decline is a concern, the absolute level remains strong by historical standards.

The week ahead

In a slow week for economic news, there are just two reports on tap: existing home sales and new home sales.

The existing home sales report, released on Wednesday, is expected to show 5.55 million sales in May, down from 5.57 million in April. (Sales also declined from March to April.) A lack of homes for sale, rather than a lack of demand, is the primary reason for the decline; the supply of homes for sale is at its lowest level since records began in 1982. Given this lack of supply, there may be additional downside risk to the report.

The report on new home sales will be released on Friday. Here, sales are expected to bounce back from 569,000 in April to 600,000 in May, after a large drop from March to April. Developers continue to build new homes; therefore, new homes are more readily available than existing homes. This limits the shortage of supply, and the bounce back should reflect continued demand.

Overall, if the numbers come in as expected—even if the existing home sales number is weak—they will indicate continued strong demand and a healthy market.

Have a great week!

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