Thursday, July 19, 2018

Today's Data Support Yesterday's Message On Housing, And An Important Note Regarding the Fed

Yesterday we reported on weak data from the housing market and suggested that -- while we are indeed taking note -- factors other than waning demand may be the culprits.

This morning's data releases support that notion:

Jobless claims at a near 50-year low:
Jobless Claims
Released On 7/19/2018 8:30:00 AM For wk 7/14, 2018

                                  Prior Revised  Consensus  Consensus Range  Actual
New Claims - Level        215K             220K          215 K to 225 K       207 K
The labor market keeps tightening as initial jobless claims fell 8,000 in the July 14 week to a 207,000 level that is the lowest since December 1969. The July 14 week was the sample week for the July employment report and a comparison with the sample week of the June employment report, when claims came in at what was a very low 218,000, is modestly favorable. But the signal from the comparison of 4-week averages is flat, at 220,500 in the latest week vs 221,000 back in mid-June.

The Index of Leading Economic Indicators came in at the high end of expectations:

Leading Indicators
Released On 7/19/2018 10:
00:00 AM For Jun, 2018

                                                  Prior Revised  Consensus  Consensus Range  Actual
Leading Indicators - M/M chg         0.0%                0.4%         0.3% to 0.5%        0.5 %
June was a month of broad strength for the index of leading economic indicators which rose 0.5 percent following no change in May (revised downward from an initial 0.2 percent gain). Building permits are the only weakness with the new orders index of the ISM manufacturing report the leading strength in a report that points to steady economic growth ahead.

And the Philadelphia Fed Survey crushed expectations. Although this one also strongly reflects the go-forward concerns we've been expressing with regard to the present trade environment:

Philadelphia Fed Business Outlook Survey

Released On 7/19/2018 8:30:00 AM For Jul, 2018

                                                                        Prior  Consensus  Consensus Range  Actual
General Business Conditions Index - Level    19.9        22.0           18.0 to 24.5          25.7

The sharpest rise in input costs since July 2008 -- and no doubt tariff related -- leads an overheated Philly Fed report for July. The general business conditions index, at 25.7, tops Econoday's consensus range but it's the prices paid index that takes the headline, surging more than 11 points to 62.9 which is one of the very highest on record.
Some of these costs are being passed through as selling prices are up more than 3 points to 36.3 which is also among the highest on record. But not all the costs are being passed through which may explain a noticeable decline in the 6-month outlook, down nearly 6 points to 29.0 and a 2-year low.
But orders just keep pouring in for this sample, at 31.4 for a 13.5 point gain from June with unfilled orders very strong, at 11.0 for a nearly 14 point gain. Whether this sample can keep up with the business is a legitimate question given continuing lengthening in delivery times and the tariff-related dislocations, as detailed in yesterday's Beige Book report, surrounding metals and lumber.
Scarcities and rising prices were already evident in the regional reports even before tariffs were put in place. Now tariffs are adding to the pressure and are a wildcard playing out right now in the nation's manufacturing sector where growth, nevertheless, appears to be very strong.

Note: A headline just crossed my screen that says a very high-ranking official is not at all happy about the Fed hiking interest rates. Trust me on this one folks, before the next recession arrives the Fed will need to substantially restock its monetary ammunition. Raising short-term rates at this juncture accomplishes two objectives:

1: It serves as a headwind against rapidly rising inflation. And, per the last data point above, this is something we absolutely have to keep our eyes on!

2: Given recent tax cuts and increased federal spending, one has to wonder how much fiscal stimulus the government will be able to bring to bear come the next recession. Therefore, the next downturn, perhaps more so than many of the past, will require a strong response from the Fed. Or, let me say (in that my economic biases inspire me to oppose top-down intervention), the markets will require a strong response form the Fed. Therefore, given the size of its balance sheet (after doing battle with the 2008 recession) and the still historically low interest rates, the Fed really needs to make hay (get rates to a higher level) while the making's good... 

History justifies my concern:    emphasis mine...
"While it’s been many years, the White House has also been known to exert other forms of pressure. In December 1965, Lyndon Johnson famously summoned Fed Chairman William McChesney Martin to his ranch in Stonewall, Texas, to confront him over Martin’s decision to lift rates. Martin held his ground.
The same couldn’t be said for Arthur Burns under Richard Nixon. Oval Office tapes later revealed that Nixon demanded Burns goose the economy with low rates ahead of the 1972 election. When Burns didn’t immediately cooperate, the White House planted a false story in the press that Burns was seeking a big pay raise, according to a book by Nixon speech writer William Safire. Eventually Burns relented, aiding Nixon but also helping to feed runaway inflation that dogged the U.S. economy for nearly a decade."

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