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Settling in for hurricanes
Simply Economics - September 8, 2017
By Mark Pender, Senior Editor



Hurricane Harvey is already beginning to skew economic data and Hurricane Irma promises more of the same. Jostled weakness in jobs data won't be a plus for confidence but the economy, increasingly helped by manufacturing despite weakness in autos, is still on track for a solid second-half finish to 2017.


The economy

No report is likely to show bigger storm effects than initial jobless claims which are already spiking, up 62,000 in the Sept. 2 week to 298,000. This took forecasters by surprise who expected filings to be delayed by the storm. But Texas got its numbers in and the state accounted for roughly 50,000 of the jump. Claims peaked 100,000 higher after Katrina in 2005 with the effect lingering for 6 weeks. As far as the September jobs report goes, the size of Harvey's and Irma's impact is any one's guess.


The factory sector has been slowly moving higher this year. Strength in aircraft has been a big plus but monthly swings in this component have been clouding the data. The graph excludes civilian aircraft and tracks both orders and shipments for all other manufactured goods. The story is one of recovery with growth moving to the solid 5 to 6 percent range after a long run of contraction tied to the 2014 collapse in oil. Yet yearly growth rates may soon begin to slow as tougher comparisons take hold.


The best factory news has been coming from the most critical area: core capital goods where strength reflects rising investment in future production. Orders have been strong two of the last three reports, up 1.0 percent in July and 0.8 percent in May. This will boost shipments over the next few months which are already on the rise, up 1.2 percent after June's 0.6 percent gain. An upswing in capital goods is auspicious for the factory sector which itself is consdered a leading inidicator for the economy as a whole.


Another major positive for the factory sector is an emerging build in unfilled orders, tracked in the red line which is up and over the year-on-year zero line for the first time in 2 years. Orders that stack up require labor to work them down and factory payrolls, the blue line, are on the mend. They were in fact the highlight of the August jobs report with a rise of 36,000 that followed strong gains of 26,000 and 21,000 in July and June. In year-on-year terms, factory payrolls are up 1.1 percent, also a 2-year best.


But not all the news is good. Vehicle sales have been sagging, which the Fed underlined in its Beige Book assessment for this month's FOMC. The report in fact raised the question whether sales could be in for a long slowdown. And one corresponding reading on the factory side is also slowing as vehicles in the industrial production report are moving lower and holding down the rest of manufacturing production with it. If vehicles keep slowing, the factory sector will have a tougher time building speed.


Inflation news in the week was thankfully light athough the productivity & cost report offered a reminder on why prices are soft. Productivity did pick up as output improved in the second quarter, coming in at an index of 108.1 or, in annualized terms, a modest 1.5 percent rate. Real compensation, that is inflation adjusted, also improved and is acclerating slightly but at a still flat 2.1 percent. The slow grind for productivity is a key reason why wage power is light and with that, inflation in general is light.


Other data in the week included advance sampling of the service sector by both the Institute For Supply Management (ISM) and Markit Economics. August results from both are strongly positive and are pointing to year-end momentum for the bulk of the economy. The employment index of the ISM report does a nice job of predicting change in underlying payrolls. The graph tracks the red line of the ISM employment index against monthly growth in private payrolls excluding manufacturing.


Markets: Requirements of a Fed candidate

Fed positions are up for grabs with Vice Chair Fischer stepping down for personal reasons. Randal Quarles passed his committee test in the week and will be filling one of the three empty seats. Quarles strongly favors financial deregulation but is also known as a monetary hawk. Deregulation is a definite plus for a Trump hopeful but perhaps not hawkishness given the president's warm words for low rates. The ideal candidate? Perhaps a dove who doesn't like too many rules.


Markets showed little reaction in the week to the administration's deal that keeps the government open until at least December. But this may only be a standoff deferred. Stocks have had a very good run this year, up 10.3 percent for the Dow, yet there may be signs of slowing. Money is pouring right now, not into stocks, but into bonds and gold where building strength could be pointing to a shying away, at least temporarily, from investment yield to investment safety.


One asset not benefiting from a safe-haven bid is the dollar, down 1.6 percent in the week on the dollar index and 10.7 percent year-to-date. Yet dollar weakness reflects in part specific demand for the euro which is over $1.2000 for the first time in 2-1/2 years. The euro's gain came despite a dovish European Central Bank meeting and it underscores confidence in the Eurozone's unity and economic strength. But strength in the euro will slow Eurozone exports while dollar weakness will be a plus for US exports and also inflation.


Markets at a Glance Year-End Week Ended Week Ended Year-To-Date Weekly
2016 1-Sep-17 8-Sep-17 Change Change
DJIA 19,762.60 21,987.56 21,797.79 10.3% -0.9%
S&P 500 2,238.83 2,476.55 2,461.43 9.9% -0.6%
Nasdaq Composite 5,383.12 6,435.33 6,360.19 18.2% -1.2%
Crude Oil, WTI ($/barrel) $53.71 $47.31 $47.53 -11.5% 0.5%
Gold (COMEX) ($/ounce) $1,152.50 $1,330.50 $1,352.60 17.4% 1.7%
Fed Funds Target 0.50 to 0.75% 1.00 to 1.25% 1.00 to 1.25% 50 bp 0 bp
2-Year Treasury Yield 1.21% 1.34% 1.25% 4 bp –9 bp
10-Year Treasury Yield 2.45% 2.16% 2.06% –39 bp –10 bp
Dollar Index 102.26 92.83 91.32 -10.7% -1.6%


The bottom line

This year has had its share of uncertainties to say the least and hurricanes are only the latest. Disruptions to the labor market are certain to be temporary but their timing, right before the FOMC is set to begin balance sheet unwinding, could shift monetary prudence in favor of the patient policy maker, not the planner who has dates in mind, and make the September meeting a no-action affair. A dovish Fed could give a psychological boost to the outlook, offsetting economic concerns from Hurricane effects and perhaps building confidence in a strong second-half finish to 2017.


Week of September 11 to September 15

The consumer price report could be a major factor at this month's FOMC when policy makers may or may not decide to begin balance-sheet unwinding. The week's inflation data start off on Wednesday with producer prices and the first indications of August's pre-Harvey energy effects followed on Thursday by consumer prices where strength, at least for the headline, is the forecast. Initial jobless claims for the September 9 week will also be posted on Thursday and here Harvey's full effect, whether more severe or less severe, will be very clear following the prior week's initial spike. There is no let up on Friday with the calendar very heavy beginning with retail sales where moderation is expected followed by industrial production where flat readings are the consensus. Consumer sentiment winds up Friday and will tally the psychological effects of both Harvey as well as Hurricane Irma.




Small Business Optimism Index for August

Consensus Forecast: 104.8

Consensus Range: 103.0 to 105.9


Led by strong hiring and strong sales expectations, the small business optimism index moved back up to expansion highs in July to a 105.2 level that easily beat expectations. Econoday's call for August is a small step back, to a consensus 104.8.


JOLTS: Job Openings for July

Consensus Forecast: 6.010 million

Consensus Range: 6.000 to 6.100 million


Job openings in the JOLTS report have been very strong and moved higher in June to 6.163 million. Hires, however, are lagging way behind at 5.356 million which points to a tight labor market and difficulty filling positions. The consensus for job openings in the July report is 6.010 million.




PPI-FD for August

Consensus Forecast, Month-to-Month Change: 0.3%

Consensus Range: 0.1% to 0.4%


PPI-FD Less Food & Energy

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.1% to 0.3%


PPI-FD Less Food, Energy, & Trade Services

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.2% to 0.3%


Inflation readings have been very soft and producer prices have been among the softest, posting a 0.1 percent decline in July. Energy firmed in August even before Hurricane Harvey hit at month end and forecasters see a rebound to a headline 0.3 percent gain. The consensus for less food & energy is a 0.2 percent increase with less food, energy & trade services at a consensus 0.2 percent gain. Note that trade services were a glaring weakness of the July report.


Treasury Budget for August

Consensus Forecast: -$119.5 billion

Consensus Range: -$133.0 to -74.4$ billion


Ten months into fiscal year 2017, the government's deficit in July was tracking 10.6 percent above fiscal year 2016. The spending side is where the red ink lies, hit by increases in Social Security payments and also net interest payments. Higher receipts, led by individual income taxes, have only been a partial offset to the rise in spending. The Econoday consensus for August's Treasury budget is calling for a $119.5 billion deficit.




Consumer Price Index for August

Consensus Forecast, Month-to-Month Change: 0.4%

Consensus Range: 0.3% to 0.4%


Consumer Price Index

Consensus Forecast, Year-on-Year Change: 1.9%

Consensus Range: 1.8% to 2.1%


CPI Core, Less Food & Energy

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.1% to 0.2%


CPI Core, Less Food & Energy

Consensus Forecast, Year-on-Year Change: 1.6%

Consensus Range: 1.6% to 1.8%


Econoday's consensus is calling for a needed uptick in consumer prices, to a monthly consensus gain of 0.4 percent in August vs only a 0.1 percent rise in July. Higher energy prices are expected to provide the lift as the consensus for the core rate, which excludes energy and also food, is for only a 0.2 percent gain vs July's 0.1 percent rise. Year-on-year readings have been very soft, at only 1.7 percent for both July's headline and the core with August's consensus at 1.9 percent overall but only 1.6 percent for the core. Holding down prices has been moderation in housing costs and also declines in vehicle prices and especially communication costs.


Initial Jobless Claims for September 9 week

Consensus Forecast: 300,000

Consensus Range: 285,000 to 320,000


Forecasters missed badly in the September 2 week, calling for little initial effect from Hurricane Harvey which in fact proved severe. Initial claims in the week surged 62,000 to 298,000 and not much more is expected in the September 9 week with the consensus at 300,000. Hurricane Harvey and Hurricane Irma will be big wildcards for initial claims data during the next several weeks.




Retail Sales for August

Consensus Forecast: 0.1%

Consensus Range: -0.3% to 0.5%


Retail Sales Ex-Autos

Consensus Forecast: 0.5%

Consensus Range: 0.3% to 0.8%


Retail Sales Ex-Autos Ex-Gas

Consensus Forecast: 0.3%

Consensus Range: 0.2% to 0.5%


Retail Sales Control Group (Ex-Food Services, Ex-Autos, Ex-Gas, Ex-Building Materials)

Consensus Forecast: 0.3%

Consensus Range: 0.1% to 0.4%


Unit auto sales, held down in part by Hurricane Harvey, proved very weak in August and are holding down the consensus for retail sales which are expected to increase only 0.1 percent in what would be a fraction of July's very strong 0.6 percent gain. But when excluding autos, the consensus moves up sharply to a 0.5 percent increase to match July's gain. Two other readings -- less autos & gas and control group sales -- rose 0.5 and 0.6 percent with forecasters looking for gains of 0.3 percent for both in August. The August results and any revisions to July will put two major pieces of third-quarter GDP in place.


Empire State Index for September

Consensus Forecast: 19.0

Consensus Range: 10.5 to 20.5


The Empire State report will be the first factory indication on what is proving to be a weather-stricken month of September. The index is coming off a 3-year high of 25.2 in August and though the report tracks New York manufacturing, which has been free of hurricanes, forecasters are calling for moderation to 19.0.


Industrial Production for August

Consensus Forecast, Month-to-Month Change: 0.1%

Consensus Range: -0.6% to 0.5%


Manufacturing Production

Consensus Forecast,  Month-to-Month Change: 0.2%

Consensus Range: 0.1% to 0.5%


Capacity Utilization Rate

Consensus Forecast: 76.8%

Consensus Range: 76.2% to 77.0%


The 0.1 percent dip in the manufacturing component of the industrial production report was one of the few negatives in all of July's economic data. But forecasters are only calling for a limited 0.2 percent bounce for manufacturing in August and only a 0.1 percent gain for total industrial production vs a 0.2 percent rise in July. Capacity utilization is expected to firm to 76.8 percent vs July's 76.7 percent.


Business Inventories for July

Consensus Forecast,  Month-to-Month Change: 0.2%

Consensus Range: 0.1% to 0.3%


Business inventories have been climbing in line with expectations for future sales but nevertheless ahead of current sales. Another build is expected for July but only a moderate one with the consensus at a 0.2 percent increase. Inventories were neutral in second-quarter GDP and a big build in July could further lift expectations for third-quarter GDP.


Consumer Sentiment Index, Preliminary September

Consensus Forecast: 96.0

Consensus Range: 94.0 to 97.3


Despite Hurricane Harvey and the approach of Hurricane Irma, forecasters are not calling for much of a downdraft in the consumer sentiment index for preliminary September. The consensus is at 96.0 vs 96.8 in final August (preliminary August was 97.6).


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