LSA Connect

Economic Update:

(-) Retail sales for January came in a bit underwhelming, down -0.4% on the month, versus an expected flat reading.  Additionally, December sales were revised down from +0.7% to +0.3%, which cast a negative tone on the report.  The ‘core’ part of the January series (which is used in government GDP assumptions, so arguably more important) was down a similar -0.3%, which also underperformed the forecast—calling for +0.2%.  This report was also blamed on bad weather, since nothing like snow/ice does as good of a job in keeping people from getting out to buy things.  This was seen in the details of the data, which showed weakness in auto sales (-2.1%), department stores and sporting goods (each down about -1.5%) as well as restaurants/bars (declined about half a percent).  At the same time, though, online retail showed some weakness, and was also down a half-percent, albeit better than the brick-and-mortar variety.  The sole positive numbers came from building materials and gas stations, which gained over a percent.  While the report and prior month revision were disappointing, it is difficult to say how much of the negativity is weather-related.  Stock market participants watch retail sales quite closely, so February’s report (assuming weather isn’t a factor again, which it might be) will perhaps carry additional weight.  Month-to-month retail results can be volatile; it’s the multi-month trend that is most important.

Click for graph of Retail and Food Services Sales

(0) Wholesale inventories for December rose +0.3%, which fell short of the +0.5% forecast.  Durable goods inventories rose +1.3%, which was offset by non-durables, which fell -1.3%.  Inventory growth is relevant as it relates to GDP contribution.  Business inventories for December rose +0.5%, which was slightly higher than the +0.4% expected.  This broader measure includes manufacturing, wholesale and retail inventories, the latter of which increased the most over the month (due to auto inventories rising +1.3%).

(-) Industrial production fell more than expected for January, down -0.3%, compared to expectations of a +0.2% gain.  The manufacturing production component of this fell -0.8%, which was also a disappointment relative to an expected slight +0.1% gain.  The Fed noted that ‘severe weather’ took a toll on national production, so another winter issue perhaps, as has been the case throughout the reporting season.  Auto production fell -5%, which had a strong effect on the overall report, but other areas on net were also poor with the exception of utilities, which gained +4%, as they often do when cold weather hits.  Capacity utilization was far lower than the anticipated 79.3%, coming in at 78.5%.

(0) Import prices for January rose +0.1%, compared to an expected -0.1% decline.  Since petroleum imports fell a percentage point and auto prices fell a marginal amount, the difference originated from higher prices in consumer and capital goods.  On a rolling 12-month basis, prices have fallen -1.5%, which again shows a lack of imported inflation.  Imported goods prices from the Middle East (mostly oil) fell -6%, which is exactly what the pro-fracking political contingent likes to see.

(0/+) The Univ. of Michigan consumer sentiment survey for February came in at 81.2, which was unchanged from January but one point higher than expected.  Consumer assessments of current conditions deteriorated a bit, while expectations for the future improved by a few points.  Inflation expectations for the coming year rose a few tenths to 3.3% interestingly, while the longer term 5-10 year guesses remained just below the long-term average at 2.9%.

(+) The NFIB small business optimism survey didn’t change much from December’s 93.9 to 94.1 for January, but still remained better than consensus that called for an unchanged reading.  Expectations for higher real sales and plans to boost employment moved upward several points; however, earnings trends lost ground.  In terms of inventories, conditions looked relatively normal, and relatively not that different from neutral, so no excesses apparent.  The measure overall remains strong for this cycle, but weaker compared to prior cycles.

(0) The JOLTs job openings report for December came in at 3,990k, which surprised on the upside, relative to expectations calling for 3,980k, but was still lower than the 4,033k revised November number.  The details behind the headline were also a bit weaker, as the hiring rate fell a tenth to 3.2% and the layoff/discharge rate rose a tenth to 1.2%.  The quit rate fell a tenth as well, to 1.7%, the latter measure being one closely watched as a proxy for job market confidence.

(-) Initial jobless claims for the Feb. 8 ending week rose by 8k over the prior week to 339k, which was slightly above the expected 330k.  Continuing claims for the Feb. 1 week fell by 18k or so to 2,953k, which was lower than the 2,964k expected.  These continue to be somewhat lackluster, albeit likely affected by year-end activity and perhaps weather carryover.

Lastly, Janet Yellen gave her inaugural monetary policy testimony to Congress last week.  Everything generally went as expected.  Unsurprisingly, some analysts/economists look fairly deeply into the words spoken at these meetings in an effort to gauge some additional meaning.  One view we encountered used text mining to generate ‘word clouds’ (which takes the most common words used and highlights/bolds/enlarges them based on frequency of use, or vice versa, onto a graphical grid—we’re sure you’ve seen this done before on the national news or after political speeches).  Bernanke’s communications had most often referenced ‘financial,’ ‘purchases’ (i.e. QE) and ‘inflation’ (the latter being his academic focus), while Yellen’s comments last week highlighted ‘economy,’ ‘banks’ and ‘jobs’ (the latter being her academic focus).  In short, markets were soothed by the consistent message carried over from the prior leadership, but the underlying niche focus of each chairperson seems to ultimately seep out in their language.  This may mean absolutely nothing in terms of policy, or it could indicate a subtle push, as much of her commentary was centered on continued labor market slack.

Economic Update

The week’s economic data was generally disappointing, as reports covering the January time period were likely held back by the extreme winter weather over much of the nation.  The magnitude of weather impacts can be hard to measure precisely, but as they’re also noted specifically in anecdotal comments, there was an effect to at least a certain degree.

(-) The ISM manufacturing index fell more than expected, from December’s 56.5 reading to 51.3 for January (compared to a forecasted 56.0).  In fact, this was the sharpest decline since May 2011.  In the details, new orders, production and employment were all down, as were inventories; and the prices paid component (likely natural gas-related) rose on the month, which was an additional headwind for manufacturers.  However, it should also be noted that weather was indicated as an anecdotal reason for some of the poor numbers.  So, we had growth, but it was far below the acceleration expected, and markets reacted sharply to the negative by selling first and asking questions later.

(0) The January non-manufacturing ISM report, at 54.0, was less of a disappointment than the manufacturing version, as it both improved on the December number of 53.0 and came in largely in line with expectations of 53.7.  Under the hood, business activity, employment and new orders all improved, as did inventories.  It appears poor weather played less of an impact on non-manufacturing activity than on manufacturing activity during the past few weeks, which, due to the nature of the various businesses being measured, makes more intuitive sense (computers don’t stop working just because of bad weather, although strength was also seen in retailing and professional services, which could have some tempered impacts from bad weather).  Anecdotal references to activity also appeared more optimistic on the service side. Continue reading →

After the much-anticipated taper in December, what could the Fed possibly do now to follow-up?  Turns out, more taper.  This is despite economic data in recent weeks looking a bit less robust than in the weeks prior (however, there may be natural seasonal volatility associated with this, not to mention extreme weather).  The magnitude of the updated tapering pace is an additional $10 billion in bonds per month, split equally between Treasuries and mortgage-backed securities, which brings the monthly purchases down to $65 bill./mo., from the $85 bill./mo. initial level.

Other Fed wording referenced economic activity having ‘picked up in recent quarters (compared to the ‘moderate pace’ used in December), as well as faster business fixed investment and household spending.  Commentary has also suggested ‘mixed’ indicators but improved employment conditions, albeit still a trouble spot.  The anticipated moderate economic improvement and interest rate modelling are generally unchanged from trend (with expected Fed Fund rate hikes in 2015, although some economists doubt it will happen this quickly).  So, policy remains data-dependent, but a bit more reflective of underlying improvement than meetings in 2013.

We mention this frequently, but there are a few key metrics to watch if one is interested in taking guesses at Fed policy (not always a wise game to bet on):  unemployment, inflation and economic growth.  The first two are the direct mandates the Fed is beholden to, while the last naturally affects impacts their direction.  Continue reading →

Economic Update

(+) We discussed this already in depth via the mid-week ‘Fed Note,’ but the FOMC elected to taper—on the order of $10 bil. in total (taking the monthly $85 bil. purchases down to $75 bil.).  Per the official statement and Ben Bernanke’s Q&A afterwards (his last as Fed Chair), the focus was on ‘forward guidance,’ which referred to the current intentions of the Fed to keep rates as low as possible for even longer than previously anticipated, despite the tapering, and likely beyond the point where the 6.5% unemployment target is reached—inflation permitting.  This was a change from the previous meeting, and the item which spurred a positive market reaction as expectations for simple tapering either now or in a few months already seemed to be a foregone conclusion, as was the expectation for QE bond-buying to be completed by 2014.  Based on current economic and employment forecasts, the first round of rate hikes appear to be slated for late 2015 to early 2016.

(+) Industrial production was stronger than anticipated for November, showing a gain of +1.1% versus an expected +0.6%.  On the headline side, utilities production rose +4% due to especially cold weather, so can be discounted somewhat.  Manufacturing as a component of overall industrial production (essentially the series without the mining and utilities segments) rose +0.6%, which outperformed forecast by two-tenths of a percent and was led by +3% gains in motor vehicle output, although the non-autos elements themselves gained a half-percent—considered strong across the board.  The October report for manufacturing was also revised upward by +0.5%, which is a positive.  Capacity utilization for November reached 79.0% relative to a median forecast of 78.4%, which is actually the highest level since 2004. Continue reading →

The Federal Reserve Open Market Committee completed their final meeting of 2013 a few minutes ago, and while some economists called for the closely-watched tapering decision to be put off until 2014, a $10 billion/month program was announced (with tapered amounts evenly split between agency MBS and Treasuries, so monthly purchases in the amounts of $35 bil. for the former and $40 bil. for the latter will continue).  No doubt, we’re sure you are as tired of hearing about and discussing tapering as we are, so this provides a bit of closure to the question, although there is a long road ahead.  Probabilities for this happening had risen over the past week, although there were plenty of well-regarded economists who called for it to begin in January or March of next year.

Why the change?  The economy continues to be growing at a ‘moderate’ pace, according to the committee.  However, since October, better labor numbers and improved capex spending added a few points in the positive category, while flattened housing figures offset that somewhat.  Also, inflation remains quite low and below the committee’s target, which they are quite sensitive to (given Ben Bernanke’s focus on this area).  Continue reading →