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Some signals slow but year-end momentum still in place
Simply Economics - November 24, 2017
By Mark Pender, Senior Editor



The latest signals from the factory sector are positive but do show a bit of slowing while the latest from the housing sector points to the opposite, and that is acceleration. Indications on the labor market remain very strong and support expectations for a successful holiday shopping season. But first let's take an overall view of where the economy is after the bumps of a rough hurricane season.


The economy

The national activity index offers the broadest composite available of economic indicators and the October reading is one of the best of the expansion, at 0.65 for a 6-year high. This however follows August which, at minus 0.37, was the poorest month in a year and reflected Hurricane Harvey's impact on Texas. Oil output, electricity output and factory output were all pulled down by Harvey but then all swung higher as activity got back on line.


The 3-month average helps to smooth out the index and allows us to step back for a clearer look. At 0.28, the average is at a 3-1/2 year high but it does follow (putting hurricane swings aside) no better that moderate growth for most of the past year. The report's three other components have been steady with employment making solid contributions but with sales, orders & inventories making no more than modest contributions. The personal consumption & housing component has been flat.


Economic growth hasn't been soaring but it has been steady and moderate. So what are the indications as year-end approaches? Let's turn to the index of leading economic indicators for a clue. Hurricanes have also made their mark on the LEI which was held down in September then surged in October with an unusually strong gain of 1.2 percent. Unemployment claims are a major factor in this report, jumping sharply as those put out of a job by the hurricanes filed claims but then quickly moving back lower to pre-hurricane levels which was a major positive for October. Strengths in October also included gains in building permits and the factory workweek, the latter also reflecting a hurricane reversal. ISM new manufacturing orders were strong positives in both months as were still low short-term interest rates. Even if October's big surge is overstated, the LEI is nevertheless pointing to accelerating strength.


Now let's turn to specific indications on the month of November. These come from Markit Economics' manufacturing and service sector samples. Manufacturing is considered a leading indicator for general economic movement so let's look at this first. Markit's manufacturing PMI has slowed this month, to 53.8 as tracked by the blue line in the graph which however is still a very respectable reading. New orders continue to rise at a solid rate while backlogs are up for a fourth month running. Business optimism is the strongest it's been in this sample since early last year. Inventories of finished goods are down reflecting sustained pressures on capacity that are holding back production, while efforts to build inventories of raw materials continue to be constrained by lengthening delivery times. Input prices are very hot this month, at the highest in five years and are being passed through to finished goods prices which are at a 3-year high. Though the 53.8 composite score is moderate, the details of this report, especially the building signs of capacity constraints that include price pressures, point to accelerating conditions. The green line in the graph is ISM manuafcturing which has been unusually strong and, as was noted for new orders, has been giving a big lift to the LEI.


There's nothing more important than new orders and they are the highight of Markit's service sector  sample, though here too the PMI is slowing, to 54.7 in November which is nevertheless a very solid rate of growth. Service sector employment is the bread and butter of the nation's labor market and the measure in this report is at a 3-month high. Business optimism, though easing slightly, is very strong as it is in manufacturing. Both input costs and selling prices are also increasing for this sample. The green line in the graph is ISM's non-manufacturing index which, like it's ISM manufacturing counterpart, has also been much stronger than Markit's sample. Here, however, a differing industry make up may explain the separation as ISM's data include the construction and mining industries, the latter of which has had an especially good year. Though Markit's readings aren't as spectacular as ISM or the national activity index or the LEI, they are very positive.


But one reading in the week that has the pessimists talking is a 1.2 percent monthly decline in durable goods orders. The dip reflects an understandable 33 percent reversal for commercial aircraft orders which were very strong in the prior two months. And pointing to strength for the coming months was Boeing's major success at this month's Dubai Air Show where record orders were posted. A positive in the report is a 1.7 percent rise in vehicle orders which follows the post-hurricane spike in vehicle sales. Yet there was one key weakness that is raising talk of slowing and that is a 0.5 percent decline for core capital goods orders (nondefense ex-aircraft). But this October dip masks an important positive and that's an 8 tenth upward revision to September's gain which now stands at a very robust 2.1 percent.


Stepping back and looking at capital goods compared to the balance of the factory sector shows just how strong growth for this reading is. Core capital orders, which again exclude aircraft, are up a year-on-year 8.2 percent which next to September's 8.7 percent is the best showing in 5-1/2 years. Business investment has been bouncing back this year and the latest orders on capital goods, despite the monthly dip in October, don't point to much of a let down. If this strength continues, it will combine with the coming Dubai order surge and could make the durable goods report one of the big headliners in coming economic data.


Housing is another sector that may well show strength going into year end. Existing home sales proved stronger-than-expected in October, up 2.0 percent to a 5.480 million annualized rate. Strength shows for both single-family resales, up 2.1 percent to a 4.870 million rate and up 1.7 percent for condos to a 610,000 rate. Discounting was limited in October with the median price down only 0.2 percent to $247,000 for 5.5 percent year-on-year appreciation. But supply is yet again a negative for resales, falling 3.2 percent to 1.800 million homes on the market. On a sales basis, supply is at a very thin 3.9 months following five straight readings at 4.2 months. Supply is a little bit better in the new home market where sales absolutely surged in September. October's new home sales report will open next week's calendar with Econoday's consensus calling for a step back to 620,000 in what would still be a strong annualized rate.


Attention in the coming weeks will increasingly focus on holiday shopping. Consumer sentiment in November edged higher from mid-month but down slightly from October, closing out at a  solid 98.5. This report, like other confidence readings, has been holding firmly at expansion highs all year. The report noted strong certainty among consumers for gains in income and employment. Looking at components, current conditions end November at 113.5 which is slightly below October's 116.5. This is a marginal decline and doesn't point to acceleration for consumer spending which is important given the start of holiday shopping. The expectations index also edged lower to 88.9.


The consistently best news on the economy continues to come from employment. Demand for labor remains unusually strong with initial jobless claims, after spiking following this year's run of hurricanes, now holding near historic lows, down 13,000 in the November 18 week to 239,000. Puerto Rico, still recovering from Hurricane Maria in September, continues to inflate the total but only modestly, remaining about three times as high as normal but contained, at 6,944 vs 6,690 in the prior week. Continuing claims are also holding at lows, at 1.904 million with the unemployment rate for insured workers ticking 1 tenth higher but also remaining near historic lows, at only 1.4 percent. Puerto Rico is not a part of monthly payroll data so the outlook for the November employment report points to another month of strong growth.


Markets: Froth for the holidays

Stocks aren't the only market having a good year. Bitcoin has jumped over $8,000 and prices at art auctions are exploding with Leonardo da Vinci's latest going for $450 billion. The Dow, even before a possible Santa Claus rally, is up 19.2  percent so far this year with the Nasdaq, getting a special boost from the web economy, up 28.0 percent. How does this compare with actual economic growth? GDP has been holding the 3 percent line the last two quarters and when adding in the inflation rate (let's be generous and call it 2 percent to make the math easier), it comes out to 5 percent. Not bad but does it justify this year's outsized stock gains? Perhaps, if the gains are in anticipation of major acceleration in the coming years. Well, the Keynesian juice of fiscal stimulus never did make an appearance this year but a big corporate tax cut still could. But if taxes don't come through we really shouldn't expect the outsized gains to go on forever, especially if the Fed continues to raise interest rates.


Markets at a Glance Year-End Week Ended Week Ended Year-To-Date Weekly
2016 17-Nov-17 24-Nov-17 Change Change
DJIA 19,762.60 23,358.24 23,557.99 19.2% 0.9%
S&P 500 2,238.83 2,578.85 2,602.42 16.2% 0.9%
Nasdaq Composite 5,383.12 6,782.79 6,889.16 28.0% 1.6%
Crude Oil, WTI ($/barrel) $53.71 $56.58 $58.97 9.8% 4.2%
Gold (COMEX) ($/ounce) $1,152.50 $1,294.10 $1,292.60 12.2% -0.1%
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% 1.73% 1.74% 53 bp 1 bp
10-Year Treasury Yield 2.45% 2.35% 2.34% –11 bp –1 bp
Dollar Index 102.26 93.67 92.76 -9.3% -1.0%


The bottom line

Indications have been scrambled a bit from the hurricanes but the consistent theme from the economic numbers is strength. Not all data are moving higher but none are moving lower. The outlook for a very successful holiday shopping season, one underpinned by the labor market, appears to be in place.


Week of November 27 to December 1

A week that ends on December 1 will be busy but will not include the November employment report which will be posted the following week. Wednesday's testimony from Janet Yellen, who has been repeating the need for an extended series of gradual rate hikes, will be a focus of the week as will Wednesday's Beige Book from the Federal Reserve, a report that has been underlining indications of labor scarcity. Housing, a hesitant sector that may be picking up steam, will be a feature of the week with new home sales on Monday followed by pending home sales on Wednesday and construction spending on Friday. Home price data, both FHFA and Case-Shiller, will be posted on Tuesday. Anecdotal reports on the factory sector will be released through the week beginning with the Dallas and Richmond reports on Monday and Tuesday and ending on Friday with the ISM. And ending the week will be unit vehicle sales which will offer the first tangible indication on consumer spending during November.




New Home Sales for October

Consensus Forecast, Annualized Rate: 620,000

Consensus Range:  600,000 to 650,000


The new home sales report is known for its volatility which was apparent once again in September as the annualized rate surged to 667,000 for an 18.9 percent monthly gain. This was the largest percentage gain in 28 years and the highest level in 10 years. A big step back in October wouldn't be a surprise and, given the strength of September, wouldn't necessarily dim what is an increasingly positive outlook for the housing sector. The consensus for October new home sales is a 620 ,000 annualized rate.


Dallas Fed General Activity Index for November

Consensus Forecast: 24.5

Consensus Range: 20.0 to 28.0


Hurricane Harvey proved to have little effect on the Dallas Fed general activity index which has remained throughout. New orders have been especially positive and layoffs unusually low. Econoday's consensus for November's general activity index is 24.5.




International Trade In Goods for October

Consensus Forecast, Month-to-Month Change: -$65.0 billion

Consensus Range: -$66.0 to -$63.0 billion


The goods deficit in October is expected to widen to a consensus $65.0 billion vs $64.1 billion in September. Looking back at September, imports rose 0.9 percent on increases for capital goods, industrial supplies and food products. Exports rose 0.7 percent but strength was isolated to industrial supplies with capital goods, consumer goods, and vehicles all down. Also released with the report will be advance October data for both wholesale inventories and retail inventories which, like net exports, are also GDP inputs.


FHFA House Price Index for September

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

Consensus Range: 0.4% to 0.7%


Appreciation in home prices has been one of this year's best economic stories and proved unusually strong in August for the FHFA house price index which jumped 0.7 percent. Forecasters see the index nearly matching that strength in September with a consensus 0.6 percent gain.


Case-Shiller, 20-City Adjusted Index for September

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

Consensus Range: 0.3% to 0.5%


Case-Shiller, 20-City Unadjusted Index

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

Consensus Range: 0.4% to 0.5%


Case-Shiller, 20-City Unadjusted Index

Consensus Forecast, Year-on-Year Change: 6.2%

Consensus Range: 6.0% to 6.3%


Case-Shiller home prices, like the FHFA index, moved higher in August and another gain is expected for September. Econoday's consensus is calling for a 0.4 percent increase in the 20-city adjusted index following August's 0.5 percent rise. The consensus for the unadjusted monthly index is also 0.4 percent with the consensus for the year-on-year rate at 6.2 percent.


Consumer Confidence Index for November

Consensus Forecast: 124.3

Consensus Range: 123.0 to 126.5


Consumer confidence, at 125.9, is coming off a 17-year high in October when assessments of employment and income expectations were unusually strong. The Econoday consensus is calling for 124.3 in November.


Richmond Fed Manufacturing Index for October

Consensus Forecast: 15

Consensus Range: 11 to 16


New orders and employment have been key positives for the Richmond Fed's manufacturing index which like other regional reports has been running at some of the hottest levels on record. The index did cool in October to 12 with forecasters calling for re-acceleration in November to 15.




Real GDP: 3rd Quarter, 2nd Estimate, Annualized Rate

Consensus Forecast: 3.3%

Consensus Range: 2.8% to 3.5%


Real Consumer Spending, Annualized Rate

Consensus Forecast: 2.5%

Consensus Range: 2.4% to 3.0%


GDP Price Index

Consensus Forecast: 2.2.%

Consensus Range: 2.1% to 2.2%


The second estimate for third-quarter GDP is expected to come in at a 3.3 percent annualized rate vs 3.0 percent in the first estimate. Consumer spending is one of the expected pluses, seen at 2.5 percent vs the first estimate's 2.4 percent. The GDP price index is expected to remain unchanged at 2.2 percent.


Pending Home Sales Index for October

Consensus Forecast, Month-to-Month Change: 1.0%

Consensus Range: 0.6% to 2.0%


No change in September's pending sales index failed to predict final sales of existing homes in October which proved strong. Yet this index has been a generally accurate gauge for what has proven to be a modest year for the resale market. The Econoday consensus for the October pending sales index is a sharp gain of 1.0 percent.


Beige Book

Prepared for the December 12 & 13 FOMC Meeting


"Modest-to-moderate" was once again the assessment of the last Beige Book released in early October. The report did cite some wage pressures but concerns over inflation were nevertheless limited. Consumer spending got a downgrade to slow growth while the report said both employment and housing were constrained by low inventories.




Initial Jobless Claims for November 25 week

Consensus Forecast: 240,000

Consensus Range: 235,000 to 245,000


Initial claims are expected to come in at 240,000 in the November 25 week vs 239,000 in the November 18 week. Data throughout this report are near historic lows though claims from Puerto Rico have been elevated.


Personal Income for October

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

Consensus Range: 0.2% to 0.4%


Consumer Spending

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

Consensus Range: 0.2% to 0.5%


PCE Price Index

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

Consensus Range: 0.1% to 0.3%


PCE Price Index

Consensus Forecast, Year-on-Year Change: 1.5%

Consensus Range: 1.5% to 1.7%


Core PCE Price Index

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

Consensus Range: 0.1% to 0.3%


Core PCE Price Index

Consensus Forecast, Year-on-Year Change: 1.4%

Consensus Range: 1.4% to 1.5%


Income and especially spending both rose in September but failed to give much lift to the Federal Reserve's core PCE price index and much of the same is expected for October. Personal income is seen rising 0.3 percent in October vs a 0.4 percent gain in September while consumer spending is expected to slow to 0.3 percent vs September's post-hurricane auto surge of 1.0 percent. The PCE price index is expected to rise only 0.1 percent for a year-on-year rate of 1.5 percent with the core PCE price index, which excludes both food and energy, seen up 0.2 percent for a yearly rate of only 1.4 percent.


Chicago PMI for November

Consensus Forecast: 64.0

Consensus Range: 61.0 to 66.5


No regional report has been stronger than the Chicago PMI which, at 66.2 and 65.2 in October and September, appears to be at risk of overheating. The one weakness in October was hiring which was down, not because of demand, but due to a lack of available labor to employ. For November, forecasters are calling for only limited slowing, to a still 60-plus consensus at 64.0.




PMI Manufacturing for November, Final

Consensus Forecast: 54.5

Consensus Range: 53.8 to 54.9


PMI manufacturing slowed slightly in November's flash to 53.8 but details remained very strong with new orders and backlogs on the rise. Business optimism was also a major plus showing the most strength since early last year. Price pressures were also prominent. Forecasters see a step up for final November with the consensus at 54.5.


ISM Manufacturing Index for November

Consensus Forecast: 58.4

Consensus Range: 57.5 to 59.5


The ISM manufacturing index has been surging this year, having beaten Econoday's consensus for five of the last six months. New orders including export sales were major positives in the last report as was employment. The Econoday consensus for November calls for modest slowing, to 58.4 from 58.7.


Construction Spending for October

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

Consensus Range: 0.4% to 0.8%


Construction spending has been mixed all year rising 0.3 percent in September with October's consensus increase at 0.5 percent. Nonresidential construction has been the weak link but not residential construction which, with strength centered in single-family homes, has been rising at a nearly double-digit pace.


Total Unit Vehicle Sales for November

Consensus Forecast, Annualized Rate: 17.6 million

Consensus Range: 17.2 to 18.0 million


Domestic-made Unit Vehicle Sales

Consensus Forecast, Annualized Rate: 13.7 million

Consensus Range: 13.5 to 14.0 million


Vehicle sales have been on fire following the heavy hurricane season and the need to replace vehicles. But forecasters see this effect easing though the November consensus for total unit sales is still strong at a 17.6 million annualized rate. Domestic-made vehicles are expected to slow to a 13.7 million rate from 14.2 million in October.


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