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Hurricanes came and went, economic signals positive
Simply Economics - October 27, 2017
By Mark Pender, Senior Editor



The economy easily took in stride the heavy hurricane season and is showing solid momentum going into year end. There are some question marks in the third-quarter GDP report but the overall rate of 3.0 percent is very good news. More good news comes from durable goods and new home sales which may be pointing to upward pivots for manufacturing and housing. And then there's the economy's central strength which is employment and here jobless claims are pointing to a big gain for payrolls.


The economy

Real GDP hit the 3 handle for a second straight showing, at 3.0 percent exactly in the third quarter vs the second quarter's 3.1 percent annualized rate. These are the best results in 2-1/2 years and lift the long-term trendline higher and slightly above the 2 percent mark. The report's components show wide strength with only isolated weakness that includes government spending, which shaved GDP fractionally, and residential investment which posted a back-to-back decline.


Adding to the third quarter was a $35.8 billion rise in inventories which represents about 1/4 of the quarter's growth. Delivery times in regional data have been lengthening the past two months, delays tied to hurricane disruptions and which may be contributing to a rise in finished inventories. Unplanned inventory growth would be a concern if demand was weak, but demand is definitely not weak and any inventory overhang is likely to be absorbed during the fourth quarter.


A clear positive is the showing for exports, rising at a constructive 2.3 percent rate and representing about 1/10 of the quarter's growth. The inflation-adjusted dollar total for exports, at $2.19 trillion annualized, is the third straight improvement. Export strength has been centered in services, especially financial and information services, which have offset a mixed showing for goods where most categories are flat. An exception here is industrial supplies where petroleum exports are giving a boost.


Another positive is contraction in imports, falling at 0.8 percent. Consumer imports and vehicle imports have both been slowing, two traditional trouble spots that have deepened the deficit. Yet even with the improvement, a great imbalance remains with imports tracking at $2.79 trillion. The quarter's $595.5 billion deficit for net exports is an improvement but more is needed. For GDP to move up to the 3 percent bracket and stay there, rising exports and moderating imports will have to play central parts.


Now let's look at the great core of GDP and that's consumer spending which came in at a 2.4 percent rate, not the best but respectable enough. This trendline is pointing upward to 3 percent which, if realized, would on its own lift GDP to the stated goal. Durable spending was very strong in the quarter, at 8.3 percent and reflecting, at least in part, hurricane replacement demand for vehicles. Whether the buying stole vehicle sales out of future months will be a factor that plays out in the fourth quarter.


And what is the outlook for fourth-quarter spending? Based on consumer confidence, strength is clearly the call. The average amount Americans expect to spend on holiday gifts is $906 based on Gallup's annual survey, way up from $785 last year and suddenly matching the peaks of the prior expansion. The gain is centered in middle and lower income groups and there is no difference between Republicans and Democrats with spending from both groups estimated to be up roughly $100 from last year.


One sector that looks to help the fourth quarter is manufacturing. The key here is capital goods orders which, in the week's durable goods report, posted a third straight 1.3 percent rise. This is exactly what business confidence has been pointing to all year — rising business investment! New capital goods, like machinery, will be long-term positives for both productivity and economic growth. Shipments of capital goods will track the gains underway in orders and may well boost fourth-quarter GDP.


Another plus in manufacturing is a build underway in unfilled orders. Gains have been modest but the curve is up with year-on-year growth, as tracked by the red line, at 1.4 percent. Rising backlogs may well encourage employers to keep adding new workers. Yet so far this year, factory payrolls have been on an uneven upswing. Econoday's consensus for October's factory payrolls is a sizable 19,000 gain which if realized would underline the health of manufacturing and with it, the economy as a whole.


Housing unlike manufacturing may be no better than mixed, yet that modest looking light blue column on the far right of the graph is nothing less than one of the year's most unexpected gains. New home sales shot up 19 percent in September to a consensus crushing annualized rate of 667,000. This is the largest percentage gain in 28 years and the highest level of the cycle, since October 2007. In stark contrast, existing home sales, the green line, haven't shown any kind of bounce.


New home sales are notoriously volatile which would make a big downward revision no surprise. Stepping back and looking at 3-month averages for new home sales (blue line) and existing home sales (green line) smooths out bumps and puts the last year into perspective — as a flat one. New homes have struggled to hold prior gains while existing homes have pancaked and are tailing off. Yet over the long run, growth in new home sales has been substantial, doubling from 300,000 in 2011 to 600,000 now.


But back to existing homes sakes, they won't be showing much improvement at all in the next month or two based on pending sales which track intial signings. The red line of pending sales is moved forward a month in the graph to give us a peak at final sales in October. But there's not much to see with the pending index flat at 106.0 and existing homes likely to hold near 5.400 million. Resale prices ($245,100 median) are far lower than new homes ($319,700), but it's not helping sales.


Jobless claims are clearing up after hurricane disruptions which, in the end, proved moderate and short lived. Initial claims moved from a 4-week average below 240,000 going into Hurricane Harvey to a peak near 280,000 after Hurricane Irma and have since come back to 240,000. Continuing claims never showed the slightest effect, edging down in fact to below 1.900 million for the lowest level in 44 years. It's these results that are behind expectations for a 323,000 jump in October nonfarm payrolls.


But it's too soon to declare an end to hurricane effects. Hurricane Maria upended Puerto Rico and has delayed filings on the island which are just now beginning to pick up. Initial claims in the territory jumped nearly 1,300 in the October 21 week to over 3,200. How this plays out in the weeks ahead is anyone's guess. Claims from the Virgin Islands spiked at first but have quickly moved back. Note that neither territory is part of the payroll data in the monthly employment report.


Markets: Dollar's big dipper run its course?

A big positive for third-quarter exports was this year's decline in the dollar which makes U.S. products less expensive to foreigners. At least that was a positive. The dollar, as tracked here by the dollar index, has turned higher after nine months of contraction. Rising U.S. interest rates are one factor behind the gain as is the sell-off underway in the euro which has fallen more than 3 percent the last two months. Events unfolding in Catalonia are not helping the European currency.


Markets at a Glance Year-End Week Ended Week Ended Year-To-Date Weekly
2016 20-Oct-17 27-Oct-17 Change Change
DJIA 19,762.60 23,328.63 23,434.19 18.6% 0.5%
S&P 500 2,238.83 2,575.21 2,581.07 15.3% 0.2%
Nasdaq Composite 5,383.12 6,629.05 6,701.26 24.5% 1.1%
Crude Oil, WTI ($/barrel) $53.71 $51.66 $54.02 0.6% 4.6%
Gold (COMEX) ($/ounce) $1,152.50 $1,282.60 $1,273.70 10.5% -0.7%
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% 1.57% 1.59% 38 bp 2 bp
10-Year Treasury Yield 2.45% 2.38% 2.42% –3 bp 4 bp
Dollar Index 102.26 93.73 95.01 -7.1% 0.6%


The bottom line

Whether exports keep up their strength and whether inventories need to be drawn down are two key questions for the fourth quarter, as are new home sales and whether September's jump will prove a forgotten outlier. Manufacturing is more certain with the strength in durable goods pointing to year-end acceleration. Hurricanes were the question for the third quarter with the disaster loss of Hurricanes Harvey and Irma, as estimated by the Bureau of Economic Analysis, at $121 billion. A heavy total yes but really no more than marginal in a $17 trillion economy.


Week of October 30 to November 3

October's employment report caps off a very busy week that begins with personal income & spending on Monday and the employment cost index on Tuesday. Inflation indications from both of these reports will help set the tone for the week's FOMC meeting. ADP's call for Friday's employment report followed by the sky high ISM manufacturing report will fill Wednesday morning pending the afternoon's FOMC announcement where no action is the unanimous call. On Thursday, jobless claims will focus attention on hurricane effects while productivity will focus attention on the longer term issues for the labor market. Snapback is the call for October's nonfarm payrolls, at 323,000, with the unemployment rate and average hourly earnings also possible headliners. But Friday isn't over after employment with September's trade deficit and factory orders also released.




Personal Income for September

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

Consensus Range: 0.0% to 0.5%


Consumer Spending

Consensus Forecast, Month-to-Month Change: 0.9%

Consensus Range: 0.6% to 1.1%


PCE Price Index

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

Consensus Range: 0.3% to 0.4%


PCE Price Index

Consensus Forecast, Year-on-Year Change: 1.7%

Consensus Range: 1.6% to 1.7%


Core PCE Price Index

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

Consensus Range: 0.1% to 0.3%


Core PCE Price Index

Consensus Forecast, Year-on-Year Change: 1.3%

Consensus Range: 1.3% to 1.5%


Income and especially spending are expected to show life in September but not the Federal Reserve's core price index which is expected to remain flat. Personal income is seen is rising 0.4 percent in September vs August's 0.2 percent gain while consumer spending, reflecting September's post-hurricane surge in auto sales, is expected to jump 0.9 percent vs August's 0.1 percent rise. The PCE price index is expected to rise 0.4 percent for a year-on-year rate of 1.7 percent but the core rate, which excludes both food and energy, is seen up only 0.1 percent for a year-on-year rate stuck at 1.3 percent.


Dallas Fed General Activity Index for October

Consensus Forecast: 21.3

Consensus Range: 16.7 to 22.0 


Hurricane Harvey had no effect on the Dallas Fed general activity index in September which surged instead of sank. Readings are robust with employment at a multi-year high. Econoday's consensus for October's general activity index is for a second straight 21.3.




Employment Cost Index for 3rd Quarter

Consensus Forecast, Quarter-to-Quarter Change: 0.7%

Consensus Range: 0.6% to 0.8%


Second-quarter wage and benefit costs slowed to 0.5 percent but they didn't completely offset the first quarter's 0.8 percent surge. Expectations for the third quarter's employment cost index is an imposing 0.7 percent quarter-to-quarter gain. The low rate of unemployment, at only 4.2 percent, is a warning signal for rising employer costs.


Case-Shiller, 20-City Adjusted Index for August

Consensus Forecast, Month-to-Month Change: 0.5%

Consensus Range: 0.2% to 0.6%


Case-Shiller, 20-City Unadjusted Index

Consensus Forecast, Month-to-Month Change: 0.6%

Consensus Range: 0.6% to 0.8%


Case-Shiller, 20-City Unadjusted Index

Consensus Forecast, Year-on-Year Change: 6.0%

Consensus Range: 5.7% to 6.3%


Case-Shiller home prices moved higher in July and more of the same, following strength in the prior week's FHFA house price index, is expected for September. Econoday's consensus is calling for a 0.5 percent gain in the 20-city adjusted index on top of July's 0.7 percent rise. August is a busy month for home sales and is reflected in the consensus for the unadjusted monthly index which is slightly higher, at 0.6 percent gain. The year-on-year rate is seen up 2 tenths to 6.0 percent.


Chicago PMI for October

Consensus Forecast: 62.0

Consensus Range: 58.0 to 65.0 


No regional report has been stronger than the Chicago PMI which, at 65.2, hit a 29-year high in September. The sample's backlogs have piled up which points to future gains for hiring. For October, forecasters are unsurprisingly calling for slowing, to a still 60-plus consensus at 62.0.


Consumer Confidence Index for October

Consensus Forecast: 121.0

Consensus Range: 119.0 to 122.9


Consumer confidence in September was pulled down only slightly by weakness in hurricane states, otherwise readings remained unusually strong especially labor market assessments. The Econoday consensus is calling for a gain in October, to 121.0 vs September's 119.8.




Total Unit Vehicle Sales for October

Consensus Forecast, Annualized Rate: 17.5 million

Consensus Range: 16.5 to 17.8 million


Domestic-made Unit Vehicle Sales

Consensus Forecast, Annualized Rate: 13.6 million

Consensus Range: 13.5 to 13.7 million


Hurricane replacement made for an unusual spike in September unit vehicle sales, to an 18.6 million annualized rate and a 12-year high. Forecasters see a sharp fall off for October though the consensus forecast of 17.5 million is still healthy. Sales of domestic-made vehicles are seen coming in at 13.6 million vs September's 14.7 million.


ADP, Private Payrolls for October

Consensus Forecast: 220,000

Consensus Range: 165,000 to 340,000


ADP did call for slowing payroll growth during the hurricane-hit month of September but, at 135,000, was far above the actual decline of 40,000 as reported by the Labor Department. The consensus for ADP's October call is 222,000 though the spread is very wide, between 165,000 and 340,000.


PMI Manufacturing for October, Final

Consensus Forecast: 54.5

Consensus Range: 53.4 to 54.5


PMI manufacturing accelerated sharply in October's flash, up 1.5 points to a solid 54.5 and an 8-month high. New orders and employment were highlights while delivery delays, tied to Hurricanes Harvey and Irma, gave perhaps a one-time boost to the composite index. Forecasters see no change for final October with the consensus at 54.5.


ISM Manufacturing Index for October

Consensus Forecast: 59.5

Consensus Range: 58.6 to 61.1


The ISM manufacturing index has been surging this year, beating Econoday's consensus for 5 straight months and often, as in September, by very wide margins. September's 60.8 marked a 13-year best though hurricane-related delivery delays did skew the score higher. Yet strength has been very evident with new orders at a 4-year high and employment at a 6-1/2 year high. The Econoday consensus for October calls for cooling, to 59.5.


Construction Spending for September

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

Consensus Range: -0.5% to 0.5%


Construction spending, mixed all year, rose a solid 0.5 percent in August in a report, however, that also included sharp downward revisions to July. Forecasters see construction spending posting a fractional September rise of 0.1 percent. Residential spending, led by single-family homes, has been strong this year, in contrast to non-residential spending which is being held down by weakness in highways & streets and public building.


Federal Funds Target for October 31 & November 1 Meeting

Consensus Forecast, Midpoint: 1.125%

Consensus Range: 1.00% to 1.25%


The Federal Open Market Committee is expected to hold their federal funds target at a 1.00 to 1.25 percent range with a 1.125 percent midpoint. Econoday's sample is unanimous with no expectations for a rate hike. Language on inflation and spare capacity in the labor market will be closely watched following recent pressure in average hourly earnings. Hurricane effects, and whether they're described as temporary, will also be watched. Though a pass is the call for this meeting, the FOMC is widely expected to raise the funds target at their December meeting.




Initial Jobless Claims for October 28 week

Consensus Forecast: 235,000

Consensus Range: 235,000 to 240,000


Puerto Rico is appearing as a factor yet hurricane effects have otherwise eased. Initial claims are expected to rise slightly in the October 28 week to a consensus 235,000. Claims in the prior week totaled 233,000 with Puerto Rico rising sharply to more than 3,000.


Nonfarm Productivity, 1st Estimate, 3rd Quarter

Consensus Forecast, Annualized Rate: 2.4%

Consensus Range: 1.5% to 3.5%


Unit Labor Costs

Consensus Forecast, Annualized Rate: 0.6%

Consensus Range: 0.1% to 2.0%


Third-quarter GDP of 3.0 percent points to strength for third-quarter productivity. Forecasters see nonfarm productivity rising 2.4 percent vs the second-quarter gain of 1.5 percent with unit labor costs at plus 0.6 percent vs the prior quarter's 0.2 percent rise.




Nonfarm Payrolls for October

Consensus Forecast: 323,000

Consensus Range: 200,000 to 371,000


Unemployment Rate

Consensus Forecast: 4.3%

Consensus Range: 4.2% to 4.4%


Private Payrolls 

Consensus Forecast: 320,000

Consensus Range: 260,000 to 368,000


Manufacturing Payrolls 

Consensus Forecast: 19,000

Consensus Range: 10,000 to 34,000


Labor Force Participation Rate

Consensus Forecast: 63.0%

Consensus Range: 63.0% to 63.1%


Average Hourly Earnings

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

Consensus Range: 0.0% to 0.5%


Average Hourly Earnings

Consensus Forecast, Year-on-Year Change: 2.7%

Consensus Range: 2.6% to 3.1%


Average Workweek

Consensus Forecast: 34.4 hours

Consensus Range: 34.4 to 34.5 hours


Hurricane effects pulled nonfarm payrolls down 33,000 in September and a bounce-back gain of 323,000 is expected for October. The consensus range, however, is very wide, between 200,000 and 371,000. September's unemployment rate fell to a 16-year low of 4.2 percent with an uptick to 4.3 percent the consensus for October. No less dramatic was a sharp jump for average hourly earnings where September's 0.5 percent surge is expected to slow to 0.2 percent for a 2.7 percent yearly rate vs 2.9 percent in September. Other calls are for a 320,000 rise in private payrolls, a 19,000 gain for manufacturing payrolls, and no change for the workweek at 34.4 hours.


International Trade Balance for September

Consensus Forecast: -$43.4 billion

Consensus Range: -$44.2 to -$42.3 billion


The international trade deficit narrowed in August to $42.4 billion as exports rose and imposts fell. Advance data for September showed a slight widening in the goods portion of the deficit with widening the overall call for the month, to $43.4 billion.


PMI Services for October, Final

Consensus Forecast: 55.9

Consensus Range: 55.0 to 55.9


PMI services popped back to 55.7 for the mid-month October flash after slowing below 55 during September. Strength was centered in the 6-month outlook offsetting slowing for orders and employment. The consensus for October's final is 55.9.


Factory Orders for September

Consensus Forecast, Month-to-Month Change: 1.2%

Consensus Range: 0.5% to 1.6%


Momentum has been emerging in factory orders and a breakout is possible for September. The durables side of the report is guaranteed to be strong given the 2.2 percent surge in the prior week's advance reading. Growth for non-durables is not expected to be quite as strong, pulling back the factory orders consensus to a gain of 1.2 percent. Year-on-year rates in this report are likely to move up a notch to the mid-single digits.


ISM Non-Manufacturing Index for October

Consensus Forecast: 58.7

Consensus Range: 56.0 to 60.0


ISM non-manufacturing re-accelerated in September to 59.8 and the highest score in 3 years. Orders and employment in ISM's sample have been very strong while deliveries, tied to Hurricanes Harvey and Irma, have slowed sharply. Econoday's call for October is 58.7 vs August's 55.3.


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