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Tariffs give manufacturing fast Q2 start, housing stumbles
Simply Economics - May 25, 2018
By Mark Pender, Senior Editor



Last month's Beige Book raised the question whether tariffs could actually be giving a lift to the factory sector, at least a short-term one. The Fed's book warned that tariffs had sparked sometimes "dramatic" increases in metal prices that were being fed through to at least some degree. It also noted stockpiling and cited anecdotal reports that domestic metal manufacturers were reopening their facilities and calling back workers. This week we'll look at some of the very first hard evidence of tariff effects as well as turn our attention to a sector that continues to underperform, housing.


The economy

Tariff-related price inflation may be driving up dollar totals in manufacturing which, based on the April advance durable goods report, is off to a very strong start for the second quarter. Forget the 1.7 percent headline decline in April, one due entirely to an understandable swing lower for what have been very strong aircraft orders. Excluding aircraft and other transportation equipment, durable goods orders rose 0.9 percent to beat Econoday's consensus by 3 tenths. Other readings included a third straight strong rise for total unfilled orders, up 0.5 percent in April, and a useful 0.3 percent build for total inventories. The graph tracks the ex-transportation data in dollar totals, at $161.4 billion for April orders and $163.9 billion for shipments.


New orders for primary metals, where tariffs on steel and aluminum are in effect, came in at $21.7 billion in April for a 1.3 percent jump on top of March's 4.6 percent surge when tariffs were first imposed with inventories climbing 0.4 and 1.0 percent the last two months. And unfilled orders are also higher, up 1.6 and 2.1 percent in April and March. When throwing in fabricated metals, which are indirectly affected by tariffs, new orders rose 2.0 percent following March's 1.2 percent gain with both inventories and especially unfilled orders on the climb. Primary and fabricated metals together make up more than 20 percent of total durable orders and if these gains continue, the factory sector could quickly emerge as the economy's pivotal player.


Another area of strength in the April durable goods report is in capital goods in what is auspicious news for second-quarter business investment. Core orders, which exclude aircraft, rose a monthly 1.0 percent with core shipments, which are direct inputs into fixed nonresidential investment, up 0.8 percent. Strength has been centered in electrical equipment and also computers and communications equipment. Machinery, oddly, has not been showing much strength. Though inconsistent as seen in the graph, gains for the core have been tangible and speak to the strength of business confidence.


The momentum in the factory sector, however, is being offset by housing which is off to a slow start this year. The first indications on the second quarter and the Spring selling season are not pointing to any acceleration. Sales of existing homes fell 2.5 percent in April to an annualized rate of 5.460 million which came in below Econoday's low estimate. Sales of new homes came in 15,000 short of consensus, at a 662,000 annualized rate with revisions pulling down the prior two months by a total of 30,000. Housing data can be volatile making it important to look at 3-month averages. Here new homes, at a 664,000 average, are doing best in a curve that does continue to climb though existing home sales, at a sales average of 5.533 million, remain dead flat.


What may also be flattening are home prices. The FHFA house price index rose only 0.1 percent in data for March for the lowest result in more than three years. And after two months above 7 percent, the year-on-year rate fell 7 tenths to 6.7 percent as tracked in the graph's blue bars. Weakness is also appearing in the price data of the new and existing home sales reports. For new homes, price discounting may already be underway as April's median fell a very steep 6.9 percent to $312,400 for a year-on-year gain of only 0.4 percent. Relative to sales of new homes, which are up 11.6 percent year-on-year, prices look like very soft. For resales, the median did rise 3.2 percent in the month to $257,900 but the yearly rate, in contrast to FHFA or Case-Shiller data which are near 7 percent, fell 5 tenths to 5.3 percent for the lowest showing since September. Some of this downturn reflects less pressure out West where price gains, which are far and above anywhere else in the country, are now back under double digits.


Housing overall has not been contributing much to economic growth with first-quarter residential investment dead flat and the consumption & housing component of the national activity index still pulling down the total. Yet this index, at a 3-month average of 0.46 as tracked on the graph, is posting its best run of the 9-year expansion due to a large degree to manufacturing which gets us back to tariffs. Production, which includes manufacturing, contributed to roughly half of this index's growth in April and if tariff effects are indeed boosting the factory sector, further strength may be in store for May and June as well. Yet whether this risk is inflationary is still another question. The national activity index still has a way to go before it begins signaling inflation risk, at least based on its stated methodology which has 1.00 as the overheating red zone -- a reading, however, that was last posted way way back in 1984.


Like housing, consumer spending has been unexpectedly soft so far this year and a bit of sagging is now underway in consumer sentiment as well. The index ended May at 98.0 which was one full point under Econoday's consensus. Current conditions fell to 111.8 vs 113.3 at mid-month and down from 114.9 in April. The decline hints at weakness for May's jobs market and in turn also for May's consumer spending. Expectations also eased, to 89.1 from 89.5 at mid-month and 88.4 from April. This decline hints at less confidence in the jobs and income outlook. These results will hold down expectations for the upcoming May consumer confidence report which has also been showing less traction.


More important for Fed policy than consumer confidence are inflation expectations and these too are flat. Year-ahead inflation expectations in the consumer sentiment report, as tracked in the blue line, are only inching up at most, to 2.8 percent in May for a 1 tenth gain from April but no higher than it's been in recent years. Business expectations, the green line, are mixed with expectations spiking to a record high of 2.3 percent in April after tariffs were announced but then immediately falling back this month to 2.0 percent. These results, though uneven, will likely offer comfort to Federal Reserve officials as they now begin to guard the upside of their symmetric inflation target.


Markets: Ending the 3 percent alarm

Demand for bonds was reawakened in the week with the 2-year yield down 6 basis points to 2.48 percent and especially the 10-year which fell 14 basis points and is back under 3 percent in style, at 2.93 percent. These results were not due to rotation out of stocks where demand was steady during the week and they suggest that recent selling had lifted bonds to attractive yields. Lower yields pose less competition to gold which doesn't pay a yield and which rebounded 1.1 percent in the week and back over $1,300 at $1,305. The Dow, at 24,753, ended the week slightly higher with oil failing at $70, falling 5.1 percent in the week to $67.71.


Markets at a Glance Year-End Week Ended Week Ended Year-To-Date Weekly
2017 18-May-18 25-May-18 Change Change
DJIA 24,719.22 24,715.09 24,753.09 0.1% 0.2%
S&P 500 2,673.61 2,712.97 2,721.33 1.8% 0.3%
Nasdaq Composite 6,903.39 7,354.34 7,433.85 7.7% 1.1%
Crude Oil, WTI ($/barrel) $60.15 $71.35 $67.71 12.6% -5.1%
Gold (COMEX) ($/ounce) $1,305.50 $1,291.20 $1,305.70 0.0% 1.1%
Fed Funds Target 1.25 to 1.50% 1.50 to 1.75% 1.50 to 1.75% 25 bp 0 bp
2-Year Treasury Yield 1.89% 2.54% 2.48% 59 bp –6 bp
10-Year Treasury Yield 2.41% 3.07% 2.93% 52 bp –14 bp
Dollar Index 92.29 93.65 94.18 2.0% 0.6%


The bottom line

The factory sector is picking up steam and is showing no immediate negatives and possibly positives from tariffs, How long tariff effects can give a lift to the data is very uncertain and there's still plenty of suspicions that they could trigger foreign retaliation and slow manufacturing in the long run. But for the second quarter, manufacturing looks to be an increasing contributor to economic growth in contrast to housing and also perhaps in contrast to consumer spending as well.


Week of May 28 to June 1

A week shortened by Monday's Memorial Day is expected to show spots of economic strength but not very much inflation at all. Case-Shiller opens the week on Tuesday and slowing in year-on-year home appreciation is the call. But strength is the expectation for Tuesday's other releases, consumer confidence and especially for the Dallas Fed manufacturing report where forecasters see acceleration at high levels. The second estimate for first-quarter GDP comes out Wednesday in a report that probably won't offer any surprises but may well offer a reminder that consumer spending flopped at the start of the year. And the first major inputs into second-quarter GDP arrives on Thursday with expectations calling for only a moderate gain in April consumer spending and barely any gain at all for core PCE prices. The week's other major inflation gauge, average hourly earnings, are also not expected to show much life in a Friday employment report where solid job growth is otherwise the consensus. Friday also includes construction spending, where a sharp bounce back gain is expected, and unit vehicle sales which are expected to hold at a modest-to-moderate growth rate.




Case-Shiller, 20-City Adjusted Index for March

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

Consensus Range: 0.6% to 0.8%


Case-Shiller, 20-City Unadjusted Index

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

Consensus Range: 0.2% to 0.6%


Case-Shiller, 20-City Unadjusted Index

Consensus Forecast, Year-on-Year Change: 6.4%

Consensus Range: 6.3% to 7.0%


The Case-Shiller 20-city index had been pushing toward 7 percent annual growth, at 6.8 percent in the last report for February. But after significant slowing in FHFA's March data, forecasters do not see extending strength for Case-Shiller's year-on-year rate with the consensus at 6.4 percent. Yet monthly estimates are solid, up 0.7 percent for the adjusted rate and up 0.5 percent for the unadjusted rate.


Consumer Confidence Index for May

Consensus Forecast: 128.1

Consensus Range: 125.5 to 130.0


Most confidence readings, whether for consumers or businesses, have been topping off but not the consumer confidence index which forecasters, at a May consensus of 128,1, see holding onto this year's gains. This index began to test the 130 level back in February on the strength of employment assessments and income prospects.


Dallas Fed General Activity Index for May

Consensus Forecast: 23.2

Consensus Range: 20.0 to 27.0 


Regional factory surveys have been strong so far in May and another month of exceptional growth is the call for the Dallas Fed's report. Forecasters see the general activity index firming slightly to a consensus 23.2 vs 21.8 in April. Orders have been very strong in this sample accompanied, however, by signs of capacity stress including rising utilization and a multi-year high for input costs.




ADP, Private Payrolls for May

Consensus Forecast: 186,000

Consensus Range: 180,000 to 225,000


Econoday's consensus for ADP's private payroll estimate in May is 186,000 which would compare with 204,000 in ADP's April estimate and against 168,000 in the government's data for April. ADP has been running far stronger than actual payrolls.


Real GDP: 1st Quarter, 2nd Estimate, Annualized Rate

Consensus Forecast: 2.2%

Consensus Range: 2.1% to 2.6%


Real Consumer Spending, Annualized Rate

Consensus Forecast: 1.2%

Consensus Range: 1.1% to 1.2%


GDP Price Index

Consensus Forecast: 2.0%

Consensus Range: 2.0% to 2.0%


The second estimate for first-quarter GDP is expected to come in at a 2.2 percent annualized rate vs 2.3 percent in the first estimate. The contribution from inventory growth may be pulled back offset by a possible upgrade to consumer spending where expectations are looking for a 1.2 percent rate vs the first estimate's 1.1 percent rate. The GDP price index is seen unchanged at a 2.0 percent rate.


International Trade In Goods for April

Consensus Forecast, Month-to-Month Change: -$71.0 billion

Consensus Range: -$73.7 to -$68.0 billion


The goods deficit is expected to widen to a consensus $71.0 billion in April vs $68.3 billion in March (revised from an initial $68.0 billion). April's report will offer the first indications on second-quarter net exports and possible updates on tariff effects and the bilateral deficit with China.


Wholesale Inventories for April

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

Consensus Range: 0.2% to 0.5%


Wholesale inventories are expected to rise 0.3 percent in April following a 0.3 percent build in March and a large 0.9 percent build in February. Inventories in this sector have been climbing but so have sales.


Beige Book

Prepared for the June 12 & 13 FOMC Meeting


The long refrain of "modest-to-moderate" economic growth was once again the assessment of all 12 districts in the Beige Book for May. Tariffs were the feature of the last report with warnings that "dramatic" increases in metal prices were being passed through to customers. Yet for inflation as a whole, the verdict was once again "modest-to-moderate." Yet any upgrades in this report, whether for employment or inflation, would heighten rate-hike expectations.




Initial Jobless Claims for May 26 week

Consensus Forecast: 224,000

Consensus Range: 217,000 to 230,000


Initial claims are expected to come in at 224,000 in the May 26 week in what would be a 10,000 decrease from 234,000 in the prior week. The 4-week average in the prior week, at 219,750, is just off a 49-year low.  Low readings in this report are consistent with strong demand for labor.


Personal Income for April

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

Consensus Range: 0.2% to 0.5%


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: 0.2%

Consensus Range: 0.2% to 0.4%


PCE Price Index

Consensus Forecast, Year-on-Year Change: 2.0%

Consensus Range: 2.0% to 2.2%


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: 1.8%

Consensus Range: 1.8% to 2.1%


Personal income is seen rising a moderate 0.3 percent in April while consumer spending, in what will be the first major input into second-quarter GDP, is also expected to increase 0.3 percent. The core PCE price index, which excludes both food and energy and which is the most closely watched of all inflation readings, is seen rising very marginally, only 0.1 percent higher on the month for yearly deceleration to 1.8 percent vs March's 1.9 percent.


Chicago PMI for May

Consensus Forecast: 58.1

Consensus Range: 56.6 to 59.4 


Easing in orders helped pull down the Chicago PMI to 57.6 in April in what, especially for this sample, was probably a blessing given deepening signs of capacity stress that included a 7-1/2 year high for input costs. Scarcity of steel, following tariffs, was a tangible factor for this sample in April. For May's result, forecasters see the index rising slightly to 58.1.


Pending Home Sales Index for April

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

Consensus Range: 0.3% to 1.0%


Pending home sales are expected to increase 0.7 percent in April after rising 0.4 percent rise in March. More homes have been coming into the market which has been a plus for resales where trends, however, remain flat.




Nonfarm Payrolls for May

Consensus Forecast: 185,000

Consensus Range: 155,000 to 215,000


Unemployment Rate

Consensus Forecast: 3.9%

Consensus Range: 3.9% to 4.0%


Private Payrolls 

Consensus Forecast: 185,000

Consensus Range: 150,000 to 205,000


Manufacturing Payrolls 

Consensus Forecast: 18,000

Consensus Range: 8,000 to 25,000


Participation Rate

Consensus Forecast: 62.8%

Consensus Range: 62.8% to 62.9%


Average Hourly Earnings

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

Consensus Range: 0.2% to 0.3%


Average Hourly Earnings

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

Consensus Range: 2.6% to 2.8%


Average Workweek

Consensus Forecast: 34.5 hours

Consensus Range: 34.5 to 34.5 hours


Following a solid April, nonfarm payrolls are expected to extend their strength to May where Econoday's consensus is calling for a 185,000 rise. The unemployment rate, down 2 tenths to 3.9 percent, was the highlight of the April report with May's rate seen holding at 3.9 percent. A surprise in the April report was a lack of wage pressures and only marginally higher readings are expected for May, at 0.2 percent for monthly growth in average hourly earnings and a 1 tenth climb in the year-on-year rate to 2.7 percent. Private payrolls are also expected to rise 185,000 with manufacturing payrolls seen increasing 18,000. The workweek is seen unchanged at 34.5 hours and the labor participation rate slipping 1 tenth in the month to 62.8 percent.


PMI Manufacturing for May, Final

Consensus Forecast: 56.6

Consensus Range: 56.6 to 57.0


The PMI manufacturing index is expected to come in at a final of 56.6 in May, unchanged from the mid-month flash. Orders have been running at multi-year highs and, in a sign of capacity stress, delivery times have been lengthening sharply.


ISM Manufacturing Index for May

Consensus Forecast: 58.4

Consensus Range: 57.5 to 60.0


Forecasters see new acceleration for the ISM manufacturing index, to 58.4 vs 57.3 in an April report that however did show another month of strong growth for new orders. Input costs and delivery delays are at rare highs consistent with capacity stress for this sample.


Construction Spending for April

Consensus Forecast, Month-to-Month Change: 0.8% 

Consensus Range: 0.5% to 2.0%


Construction spending is often a very volatile report, swinging lower in March and expected to swing back higher in April, at a consensus 0.8 percent gain. Spending on single-family homes fell back in March with non-residential spending holding steady.


Total Unit Vehicle Sales for May

Consensus Forecast, Annualized Rate: 17.1 million

Consensus Range: 16.6 to 17.3 million


Domestic-made Unit Vehicle Sales

Consensus Forecast, Annualized Rate: 12.8 million

Consensus Range: 12.7 to 13.1 million


A 17.1 million annualized rate is the consensus for unit vehicle sales in May, a respectable outcome that would compare with 17.2 million in April and hint at a constructive month for retail sales and consumer spending in general.


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