Economic Update

(-) Wholesale inventories came in weaker than expected for May, falling -0.5% versus an anticipated gain of +0.3%.  Auto inventories were flat (in contrast to making positive contributions in recent months), while machinery and nondurable goods fell nearly a percent each.  The inventory-to-sales ratio declined to its lowest level in the last year, which is not necessarily a bad thing—and represents either sales rising (which they have been) and inventory build-up remaining tempered and not overshooting demand.

(0) Producer price inflation (PPI) for June rose +0.8%, compared to a forecast of +0.5% (taking the year-over-year headline number to +2.5%).  The core component of the index sans energy and food rose +0.16%, which just surpassed the expected +0.1% (+1.7% year-over year).  The headline number was dictated by a +7% rise in seasonally-adjusted retail gasoline prices, while auto prices rising +1% underpinned core inflation results.  While a bit higher than in previous months as of late, these price measures remain contained.

(0) Import prices fell -0.2% for June, relative to a forecast of no change, making this the fourth straight month of declines.  The key areas of consumer and capital goods both declined slightly in keeping with the broader number; the primary factor appeared to be a substantial drop in prices from Japanese imports due to a weaker yen.

(-) The University of Michigan consumer sentiment survey fell from the final June number of 84.1 to 83.9 in July (compared to consensus expectations of 84.7), but remained near post-recession highs.  Consumer assessments of current conditions improved quite a bit; however, future expectations deteriorated.  Underlying these thoughts, three-quarters of consumers now believe interest rates will rise over the next year (previously, only half thought so), which may play a factor in consumer home buying before rates are expected to rise—according to anecdotal comments from the survey, as well as what makes logical sense from an economic standpoint.  Inflation expectations for the coming year ticked up to 3.3%, which is just above the long-term 3% baseline, but expectations for the longer-term beyond one year stayed around that median.  We look at this because ‘inflation expectations’ can be an important, yet sporadic, predictor of consumer behavior.

(-) The NFIB small business optimism survey ticked down from 94.4 in May to 93.5 in June, compared to a forecasted 94.9 result.  Declines were seen across the board, through decreased plans to increase inventories and lower expectations for sales; however, expectations for increasing employment rose.  While the survey level is back to where it was before the drop late last year, it still remains below the high of the last business cycle recovery.  Business owners noted an increase in loan interest rates over recent months, while credit availability was little changed.

(+) The government JOLTs report rose to 3,828k in May, which surpassed the forecasted 3,800k figure by a bit.  In the report’s detail, job openings remain high relative to the overall level of employment.  The hiring rate edged up slightly, but continues to hover at a low level.  The quit and layoff/discharge rates were unchanged, and near normal.

(-/0) Initial jobless claims for the July 6 week jumped to 360k—higher than the consensus call for 340k.  However, much of this looks to be due to July seasonal adjustment factors related to summer auto plant retoolings that are especially difficult for Labor Department to model.  Continuing claims for the June 29 week came in at 2,977k, which was a bit higher than the 2,955k expected, and were little changed from the prior week.  These are now consistently coming in at below the 3,000k range.

(0) Despite the controversial ‘taper talk’ after the meeting, the June FOMC minutes were not of much help in providing any additional information about the Fed’s intentions.  These days, in an era of increased Fed transparency, changes to a single descriptive word in the post-meeting Fed statement can move markets.

During the meeting, it seemed participants were torn about how much communication to share regarding the idea of ‘tapering’ (clearly, in hindsight, concerns about market reactions were valid), in order to preserve Fed flexibility in tapering purchase up or down as needed to react to economic and employment conditions.  Roughly half of participants (not all voting members) felt that ending purchases this year made sense, while the other portion (including Bernanke and other leading members, most likely) felt 2014 was a more appropriate ending point based on current data.  So, the membership itself is split about how much QE continues to be needed.

That question is regarding the QE tapering issue only.  When we look at potential outcomes for actual Fed Funds rate increases, the timeline is significantly further out (as in several years) unless conditions strengthen much more quickly and significantly than seen in recent quarters.  To do so implies putting the ‘brakes’ on a fast-heating economy—something we seem to be far from needing at this point, anyway.  In a separate speech to the NBER last week, Bernanke reiterated the same message, in that accommodation will be needed for some time yet and that the 6.5% unemployment rate itself (communicated previously as a target) may not be the sole measure of labor market improvement.  Bottom line:  despite the need for an end to QE at some point, the Fed is balancing a need for transparency with flexibility.  In doing so, expect its communication program to be adjusted accordingly.

Period ending 7/12/2013

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