Consumer sentiment in weak uptrend

The Reuters/University of Michigan Index of Consumer Sentiment showed a slight improvement at the end of June, rising from 75.5 in the middle of the month to 76.0.  The index is up 2.4 points from May.

Sentiment has been gradually improving over the past year, as the job market stabilizes and economic activity no longer declines.

 

“The improvement was not because consumers now view the economy more favorably, but that any improvement, however small, was seen as a welcome development after the unprecedented economic recession,” according to the press release.

The survey also revealed that most “anticipate that the unemployment rate will remain largely unchanged through the balance of the year.”  Job insecurities and still-high layoffs seem likely to restrain consumer spending for much of the year.

Consequently, an acceleration in the rate of growth is unlikely.

Weekly jobless claims meander in narrow range

Jobless claims rise, then jobless claims fall.  And the cycle repeats itself.  This week claims fell 19,000 to 457,000, while the 4-week moving average slipped 1,500 to 462,750.

But as the chart below reveals, claims are range-bound.

Until we see a significant drop in weekly claims (below 400,000), job creation is likely to remain weak.  And recent data suggest that the already fragile and uneven recovery has moderated in recent weeks (see Fed takes dimmer view on economy).

This is not good news for those who fear a layoff or those who are looking for work.

Dissecting the Fed statement

Yesterday’s press release from the Fed, along with its decision to keep rates unchanged, not only gives us some insights into how policymakers are thinking, but by comparing it with the prior press release, we can get a feel of how their view on the economy is changing.

So let’s dive in.

April 28, 2010:

Information received since the Federal Open Market Committee met in March suggests that economic activity has continued to strengthen and that the labor market is beginning to improve.

vs.

June 23, 2010:

Information received since the Federal Open Market Committee met in April suggests that the economic recovery is proceeding and that the labor market is improving gradually.

The modest shift in the language shows that Fed officials did not see the economic recovery accelerate in the weeks leading up to the current meeting as they detected prior to the April gathering.

Moving along.

While bank lending continues to contract, financial market conditions remain supportive of economic growth (removed). Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.

vs.

Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending has continued to contract in recent months. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be moderate for a time (order reversed).

Plenty going on here. The FOMC removed the bolded statement, underscoring their concern over what’s happening in the credit markets. And it inserted the sentence above that is underlined.  Without mentioning Europe by name - “largely reflecting developments abroad,” the new language is an indication that policymakers are concerned and are monitoring events.

Additionally, the reversal in the clauses of the final sentence – placing “the pace of the economic recovery is likely to moderate for a time” at the end versus  the beginning – is a subtle way of telegraphing that the Fed is slightly more worried about the strength of the recovery.

Let’s keep going.

With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

vs.

Prices of energy and other commodities have declined somewhat in recent months, and underlying inflation has trended lower. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

At least publicly (and probably privately), the Fed is even less concerned about inflation, at least in the short term. Some of the big drop in energy prices, however, has reversed itself over the past three to four weeks.

What does it all mean? 

The Fed became slightly more pessimistic on the outlook between the April and June meetings, but it gave no indication that it expects the recovery to stall, let alone enter a double dip recession.

Moreover, it is showing even less concern, at least temporarily, about inflation (lowering odds of a near-term rate hike).

And given the slow recovery in the labor market, the still-fragile and uneven recovery, and new problems that have cropped up in credit markets in Europe, any possible rate hike that might have been contemplated earlier in the year is likely to be delayed.  In my view, we may not see any change through the end of the year.

Philly Fed slows

Manufacturing has been one of the few bright spots in an otherwise lackluster economic recovery.  Inventories are tight, overseas demand has picked up and most surveys of the sector point to further increases in production.

But today’s release of the Philly Fed Index is somewhat surprising and may be pointing to an eventual slowdown in manufacturing.  The index fell from a reading of 21.4 in May to 8.0 in June.  Zero marks the line between expansion and contraction.

The survey of mid-Atlantic manufacturing can be volatile as the chart above reveals, but it has also been a good predictor of future activity.  June’s big drop may just be a one month aberration, but the index is worth keeping an eye on.

Inflation?

There isn’t any as measured by the latest Consumer Price Index.  The CPI fell for the second straight month, dropping 0.2% in May, as a steep drop in energy prices led the way.

Removing the 2.9% decline in energy prices last month, core inflation, which also excludes food (unchanged), rose a tiny 0.1% – only the second time  this year the core rate has been positive. 

Year-over-year, the headline number is up 2.0%, with the overall rise in energy prices being the  primary driver. The core rate is up 0.9% from a year ago, a bit on the low side for observers at the Fed who would prefer to see a rate between 1-2%.

For  the most part, inflation has been held in check by small wage gains and plenty of competition.  In addition, recent gains in the dollar should extinguish any inflation from abroad.

Price hikes muted, for now

Rarely will there be any risks to an outlook ,and there is no exception in this case.  Inflation expectations among the public have been mostly muted, making it difficult for businesses to quickly boost prices.

However, if trillion dollar deficits are not brought under control and inflation expectations become unanchored, the Fed will find it increasingly difficult to maintain its ultra-accommodative monetary policy without risking a flare up in prices.

Currently, there is little risk of this scenario playing out, in my view, but it is something that is worth watching.

Manufacturing enjoys robust gains

Manufacturing has been among the few bright spots in the recovery and today’s report on output does little to sway that view.

Industrial production increased a robust 1.2% in May.  Eliminating outsized gain in utility production caused by a warm month, as well as any other contributions from energy, manufacturing output still grew a strong 1.0%.

Inventories among most businesses are near record lows based on current sales, which is encouraging firms to increase orders and re-stock bare shelves. If sales continue to grow modestly as many forecast, it seems reasonable to expect that manufacturing will continue to lead the recovery in the near term.

In the meantime, capacity utilization rose from 73.7% to 74.7%, indicating that some of the excess slack in manufacturing is being used up by rising production.  Shuttering of plants over the past year has also had a limited impact in lifting capacity utilization.

With manufacturing output ramping up at a quick pace, hiring has picked up noticeably in the sector, providing a limited amount of good news on the job front.

Also noteworthy, capacity utilization, which stood just over 80% at the start of the recession before bottoming out at about 68% a year ago, has shown significant improvement – 74.7% as mentioned above.

Yes, there still slack at the nation’s factories, but expanded production and a lack of increase in capacity has been eating away at excess capacity. 

If current trends continue, the fast-paced recovery among goods producers could put  the Fed in a tight spot. Low rates needed to  encourage growth in the rest of the economy and placate queasy financial markets could eventually stoke inflationary pressures among manufacturers.

Home builder sentiment tumbles

The NAHB/Wells Fargo Housing Market Index took a dive in June, falling 5 points to 17 as the expiration of  the tax credit for first time and repeat buyers ended.  A reading of 50 indicates home builders are neither optimistic nor pessimistic.

NAHB Chairman Bob Jones, a home builder from Bloomfield Hills, Michigan, said “… the reduction in consumer activity may have been more dramatic than some builders had anticipated, which resulted in their lower confidence levels.”

Judging from the plunge in the U.S. MBA’s survey of purchase applications, interest in the housing market has waned in the wake of the tax credit’s expiration.

That was to be expected; however, early indications suggest that the pullback in sales is a bit more pronounced than many have been forecasting. Stay tuned.

Consumer sentiment at two-year high

Consumer sentiment, as measured by the Reuters/University of Michigan survey, increased to its highest level since January 2008, suggesting that improving economic conditions are helping to bolster attitudes towards the economic recovery.

Sentiment increased from 73.6 in April to 75.5 in mid-June, topping most economic forecasts.

Nonetheless, consumer sentiment has yet for move noticeably higher amid lackluster job prospects and still-high layoffs.  Modest gains in confidence have helped retailers and the overall economy.

Improved hiring and increased job security would go a long way in fueling further increases in consumer confidence and putting the recovery on solid ground.

Retail sales winning streak comes to an end

An unexpected drop in retail sales in may ended a seven month winning streak, but an upward revision to April and may eased some of the sting.

Despite the drop, the upward trend remains intact. More at Examiner.

Weekly jobless claims stuck in narrow range

Weekly initial jobless claims fell just 3,000 in the latest week to 456,000, but the prior week was revised upward by 6,000.  The 4-week moving average increased 2,500 to 463,000.

The chart below speaks volumes.  There has been virtually no improvement since the beginning of the year, as uncertainty in the corporate world persists.

Census hiring sparks payroll gain

Private sector reflects weakness

On the surface, the economic recovery appears to be creating new jobs, but much of May’s increase of 431,000 came from a 411,000 rise in temporary hiring for the 2010 Census.

Private sector job creation was more robust in April but jobless claims remain elevated, suggesting a reluctance to hire among private employers.

A deeper look at the report is available at Examiner.

Weekly jobless claims in holding pattern

Weekly initial jobless claims fell 10,000 in the latest week to 453,000, registering the second-straight weekly drop.  But the 4-week moving average managed a small rise of 1,750 to 459,000. And as the chart below reflects, progress has all but stalled.

On Friday, the government will issue the highly-anticipated labor report for May.  Employers are forecast to have created 540,000 new jobs last month, with the bulk having come from temporary census workers. 

Hence, private payrolls will be the mostly closely watched release in the data.  Another solid gain in excess of 200,000, like we saw last month, would be welcome.

But the economists surveyed by Bloomberg are providing a range of 225,000 to 635,000, highlighting the uncertainty among forecasters.

ISM services index keeps rolling ahead

The ISM Non-Manufacturing Index is a survey that measures economic activity in the broad-based service sector.  For the third-straight month, the index held steady at 55.4, signaling that growth in the service sector is neither robust nor tepid.   A reading of 50 marks the line between growth and contraction.

There’s really not a whole lot to say about today’s report except that Europe’s debt crisis is yet to have any impact on the U.S., nor would we expect any negative effect this quickly.

What the ISM survey is telling us is that the recovery that started in manufacturing has spread to the service sector, which is growing modestly.

ISM reveals strong manufacturing recovery

The latest survey released by the Institute for Supply Management shows that manufacturing continues to recovery at a strong pace.

The ISM Manufacturing Index fell 0.7 points to 59.7.  A reading above 50 indicates that goods producers are expanding.  New orders held at a very robust 65.7, pointing to further gains, while manufacturers continue to say that customer inventories are too low, which also implies that production will stay strong.

Those looking for jobs also received good news, as the employment index increased 1.3 points to a strong 59.8.

Manufacturing underwent wrenching cuts in production in late 2008 and early 2009.  The difficult but needed cuts helped to get inventories back in line with sales. 

Now that demand is picking up, formerly bloated stockpiles have been replaced by barren warehouses, and manufacturers are reacting by boosting production and helping to power overall growth in the economy.