Wednesday, July 30, 2014

FOMC Continues Taper Pace, Rate Raise Timeline Unknown

The Federal Reserve will continue its current pace of tapering, reducing purchases by $10 billion per month. The Fed will now purchase mortgage-backed securities at a pace of $10 billion per month rather than $15 billion per month, and purchase longer-term Treasury securities at a pace of $15 billion per month rather than $20 billion per month.

The FOMC did not offer additional forward guidance as to when rates will rise. The press release noted that, “The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.” The FOMC said rates are likely to remain low due to underemployment, but they are beginning to see pressure from inflation. Inflation rose in the second quarter, the Committee commented that, “the likelihood of inflation running persistently below 2 percent has diminished somewhat.”

The Committee noted that economic progress is improving, particularly the labor market. Despite a declining unemployment rate, “there remains significant underutilization of labor resources.” Moreover, the FOMC found that the housing market recovery is sluggish and inflation is moving towards the Committee’s longer-tern goals.

The market reacted positively to the release, gaining 47 basis points in the 30 minutes immediately following the release.

Read the full FOMC statement below. Read the Federal Reserve release.    

ADP: Private Sector Added 218,000 Jobs in July

According to the ADP’s National Employment Report, the private sector added 218,000 jobs in July. While less than in June, the figure remained above 200,000, indicative of a healthy and growing labor market. Moreover, July’s report included positive revisions to May and June’s headline numbers.

The ADP report suggests that Bureau of Labor Statistics data to be released on Friday will also show slowing job growth.

Job gains continued to be centered in the service sector, which added 202,000 in July, down from 238,000 the month prior – still the second highest reading this year. Professional and business services declined slightly, to 61,000 jobs added, which was slightly below the second quarter average of 66,000 per month.

The goods producing sector was weaker in July, adding just 16,000 jobs, the second lowest reading this year and well below the second quarter monthly average of 34,000. Manufacturing was also weaker, only adding 3,000 jobs, compared to 10,000 in June.

Read the ADP release.

U.S. Economy Grew 4.0% in the Second Quarter

Real GDP growth jumped in the second quarter at a 4.0% seasonally adjusted annual rate. The jump was anticipated, following negative growth in the first quarter. However, the magnitude was larger than expected. Inventory growth accelerated, driving the growth along with strong consumption. Net exports also improved noticeably from the first to second quarter.

The strong second quarter followed a decline of 2.1% in the first quarter, revised from 2.0%.

Consumption picked up heavily from the first quarter, contributing 1.69% to GDP growth compared to 0.8% in the first quarter. Inventories grew considerably, contributing 1.7% to GDP growth, a drastic change from the negative 1.2% growth the quarter prior.

A reduction in imports reduced this drag on the economy to 0.6%. The government sector contributed 0.3% to growth, as state and local government spending grew but federal government fell.

Read the BEA release.

Tuesday, July 29, 2014

Annual Home Price Appreciation Slows in May

According to the Case-Shiller 20-city index, home price appreciation remained at 1.1% in May, the same as the month prior. Year-over-year growth continued to slow, improving 9.3% for the 20-city index, down from 10.8% in April. However, last month’s post on Case-Shiller noted that, “Cold weather in the first two months of the year likely held demand low, causing a rebound in March and April. Next month’s report should normalize, and therefore might reveal a slightly lower pace of growth.”

All 10 metropolitan areas saw home prices improve from the previous month. Moreover, every metropolitan area continues to see prices above year-ago levels. San Diego saw the slowest gain, growing 0.5%. San Francisco had the strongest growth at 1.6%. Notably, the range of growth has narrowed, indicative of a normalizing market. Las Vegas continues to see the largest year-over-year growth, at 16.9%.

Read the S&P release.

Thursday, July 24, 2014

New Home Sales Sharply Decline in June

New home sales declined sharply in June to an annualized pace of 406,000 units. May’s headline index was revised down by 62,000 units. June’s pace was 8.1% below May’s, and is the second slowest pace all year. June’s report was 11.5% below year ago levels.

The declines in June were broad-based, with all four regions declining. However, due to the stronger gains in May, only two of the four regions are below the pace from April. The Northeast posted the sharpest decline at 20.0%. The South, Midwest and West declined 9.5%, 8.2% and 1.9% respectively.

Due to depressed sales in June, the supply of homes increased to 5.8 months, the highest value since October 2011.

The median price of a new home shrank 1.1% to $276,700. However, the median price is 5.3% above year ago levels.

Read the Census report.

Tuesday, July 22, 2014

Existing Home Sales Surpass 5 Million Mark

Existing home sales improved 2.6% in in June, reaching an annualized pace of 5.04 million units. The pace is above 5 million for the first time since last October. May’s pace was revised upward, indicating an improving housing market.

All four regions improved in June. The Midwest had the strongest monthly growth at 6.2%. The Northeast, West and South followed respectively at 3.2%, 2.7% and 0.5%. Aside from the South, sales declined in the other three regions compared to year ago levels.

Housing inventory remained the same in June at 5.5 months, while below April’s level, housing inventory is nearing the 6-month mark that indicates a balanced market.

The national median existing-home price was $223,300 in June. House price appreciation is slowing, and declined to a year-over-year growth of 4.3%. Stabilizing housing prices, low interest rate environment and stronger job growth creates an environment of housing affordability and a positive outlook for an active housing market.

Read the NAR release.

Consumer Prices Rose 0.3% in June

Prices rose by 0.3% in June, a slightly slower pace than the month prior. The increase from year-ago levels remained at 2.1%, the same as the month prior and just above the Federal Reserve’s 2.0% target. The most recent minutes from the Federal Reserve’s FOMC meeting noted that inflation is rising faster than anticipated for the medium run. However core inflation, the focus of the FOMC, rose 1.9% over the year, slightly below the Fed’s target.

Energy prices surged 1.6% in June, the largest monthly increase in 6 months. A 3.3% increase in seasonally adjusted gasoline prices was the driver behind the energy gain. Food prices grew 0.1%, a much slower pace than the 0.5% the month prior. The slower pace dropped the annual growth rate of food to 2.4%.

Core prices grew 0.1%, the slowest growth since January. The slower growth was driven by services, which saw its smallest monthly gain in 6 months. Goods prices grew 0.1%, consistent with the previous month.

Read the BLS report.

Thursday, July 17, 2014

Housing Starts Dropped 9.3% in June, Record Decline in South

Housing starts in June are at their slowest pace since September 2013 and saw the biggest monthly decline in 5 months. Notably, the decline was concentrated in the South. The South fell 29.6%, a record monthly decline. The Midwest and Northeast saw strong growth. Starts in the West grew modestly. The decline in residential GDP investment helps explain the housing start decline, as a lack of investment in the first quarter creates fewer housing starts in the second quarter.

New residential construction slowed in June, reaching an annual rate of 893,000 units, down from a revised 985,000 in May. April was revised down as well. Housing starts are currently running 7.5% above their pace one year ago. Both multi-family and single-family starts contributed to June’s decline. Multi-family starts declined 9.9% over the month and single-family declined 9.0% over the same period.

Permit issuance was also weaker in June, declining 4.2%. Multi-family permit issuance declined 14.9%. Single family permit issuance was a bright spot, rising 2.6% over the month to a pace of 631,000 permits per year.

Despite the weak June report, overall the second quarter improved from the first quarter. Housing starts remain well below the long-run average of 1.5 million units.

Read the Census report.

Wednesday, July 16, 2014

Beige Book: U.S. Economy Grew at “Moderate to Modest Pace”

The Federal Reserve’s Beige Book, released today indicated that economic expansion is continuing at a “moderate to modest pace,” a slight slowdown from the previous report. Reports from Boston, New York, Chicago, Minneapolis, Dallas and San Francisco all indicated moderate growth. Philadelphia, Atlanta, Cleveland, Kansas and St. Louis districts saw the pace of growth improve modestly, while the pace slowed slightly in the Boston and Richmond districts.

Consumer spending expanded in every district, a positive sign for second quarter GDP growth. Vehicle sales remained strong, with several districts reporting robust and strong auto sales. Summer tourism was strong as, “tourism activity expanded in all reporting Districts, with growth ranging from slight in Philadelphia to very strong in Boston.” The districts are more optimistic for future growth.

Manufacturing also expanded in each district. The two strong segments to improve were metal and auto industries and the energy sector.

Loan volumes increased since the last reporting period. San Francisco was the only district to note a slight decline in credit quality. Notably, Philadelphia and Chicago mentioned that competitive pressures were leading some financial institutions to add more loans to their portfolios.

The report noted that market conditions improved in all the districts. Continuing a recent trend, many districts report difficulty filling qualified workers for high-skilled positions. Notably, the districts reported upward wage pressures, a positive sign of a growing economy. Moreover, the wage pressure was generally for lower skilled positions, which have the stickiest wages since the recession.

Most districts reported modest price increases. Price raises were highest for meat, dairy products, construction materials, and some metals (namely steel, copper, and nickel).

Read the Federal Reserve release.

Industrial Production Improved 0.2% in June

Industrial production rose 0.2% in June, following a revised 0.5% increase in May. Manufacturing and mining contributed to June’s growth, moderately offset by a decline in utilities.

Manufacturing growth improved 0.1% in June. Motor vehicle parts and non-durable goods each declined 3.0% in June. High-tech drove manufacturing growth at 4.0%.

Mining production grew 0.8% in June. Utilities production decreased 0.3%, declining for the fifth month in a row. The capacity utilization ratio remained the same in June at 79.1%.

Read the Federal Reserve release.

Producer Prices Rose 0.4% in June

Produce prices appreciated 0.4% in June, reversing a decline from the month prior. March’s gain was driven heavily by energy goods. Producer price appreciation from one year ago declined slightly to 1.9%, but is still near the 2.0% target of the Federal Reserve.

Prices for finished energy goods improved 2.1% in June, a rebound from the previous month’s decline. The finished foods index decline by 0.2%, the second consecutive monthly decline.

Prices at earlier stages of production showed similar patterns. Processed intermediate food declined 0.1% and unprocessed intermediate food dropped 3.0%. Total processed intermediate goods grew by 0.4%, but unprocessed intermediate goods shrank 0.9%.

Read the BLS report.

Tuesday, July 15, 2014

Retail Sales Rose a Modest 0.2% in June

Retail sales improved modestly in June, growing 0.2% from the month prior. However, June’s report included an upward revision to May’s headline number. Excluding automobile and gasoline sales, retails sales increased 0.4%. Year-over-year growth was 4.3%, down 0.3% from the previous month’s revised value.

Retail gains in June were led by general merchandisers, which saw sales increase by 1.1%. The decline in sales was limited to a few select segments, including motor vehicle and parts. The largest monthly decline in sales occurred for building materials, which dropped 1.0% in June. However, the drop did not fully offset the large gains seen the prior three months.

The outlook for future growth is positive. Year-over-year growth has remained above 4% for four consecutive months, the first time since last summer.

Read the Census report.

Friday, July 11, 2014

Survey: HSAs Rising in Value as Consumer Financial Tool

Consumers with health savings accounts are actively using them to manage their health spending, according to the third survey from ABA’s HSA Council and America’s Health Insurance Plans. The numbers indicate that HSAs offer bank customers the flexibility to plan for routine and unexpected medical expenses with tax-favored savings.

Tracking 1.4 million HSAs managed by five bank custodians in 2012, the survey found that 52 percent of account holders spent over 80 percent of their HSA savings for health care that year. HSAs have also been growing rapidly, with 64 percent of accounts open at the end of 2012 having been opened in the previous three years.

“This study confirms that HSAs are being used as they were designed: to pay for routine health care needs and to save towards future medical expenses,” ABA SVP Kevin McKechnie said. “HSAs have the advantage of offering consumers greater choice and control over their health care.”

View the results.

Thursday, July 10, 2014

Bank Card Delinquencies Fall Significantly in First Quarter

Bank card delinquencies declined significantly in the first quarter, falling 16 basis points to 2.44 percent of all accounts as consumers continue to improve their financial situations, according to results from the American Bankers Association’s Consumer Credit Delinquency Bulletin. Delinquencies for bank cards are well below their 15-year average of 3.82 percent.

This news comes after ABA’s Credit Card Market Monitor found that an increasing number of credit card users are using their cards as a transactional tool rather than as a form of debt.

“Bank card delinquencies remain at surprisingly low levels even as credit card spending increases,” said James Chessen, ABA’s chief economist. “More and more consumers are using their credit cards as a payment vehicle, paying off or paying down their balances each month.”

Following two quarters of record lows, the composite ratio, which tracks delinquencies in eight closed-end installment loan categories, edged slightly higher in the first quarter, rising 4 basis points to 1.63 percent of all accounts - - well under the 15-year average of 2.33 percent. The ABA report defines a delinquency as a late payment that is 30 days or more overdue.

Chessen noted that consumers continue to responsibly manage their finances, and are better able to manage their debt as the economy improves.

Read the full release. See the economic charts.

Wednesday, July 9, 2014

QE3 to End in October

The Federal Reserve will end its Quantitative Easing program in October, according to the minutes released today from the June 17-18 Federal Open Market Committee meeting. The Federal Reserve has been tapering the pace of purchases by $10 billion per meeting. If economic conditions continue to improve as expected, it will continue this pace until October, when it will reduce the pace by $15 billion, ending asset purchases altogether.

The FOMC wants to develop new plans to communicate forward guidance before rates begin to rise. The minutes stated that, "[It] was observed that it would be useful for the Committee to develop and communicate its plans to the public later this year, well before the first steps in normalizing policy become appropriate." The FOMC is still undecided how to reduce its balance sheet, and when it should stop reinvestment.

The concrete end date of tapering was well received by the markets. The U.S. stock market rose following the release, with the S&P 500 improving 0.4%.

Read the FOMC minutes.

Consumer Credit Grew $19.6 Billion in May

Consumer credit increased $19.6 billion in May. May’s gains continue to be driven by demand for student loans and auto lending captured in non-revolving credit. Revolving credit also contributed to the gain, but was not as strong as the surge seen the month prior. The annualized credit growth dropped to 7.4%, from 10.0% in April.

Revolving credit grew $1.8 billion. It’s well below the large $8.8 billion growth from the month prior, and below the $4.3 billion average growth seen in the last three months. Non-revolving credit grew by $17.8 billion, as consumers continue to finance large ticket items. Vehicle sales have remained at or above 16 million units SAAR and student loan growth continues to expand.

Read the Federal Reserve release.

Tuesday, July 8, 2014

Small Business Optimism Declined in June

The NFIB’s Small Business Optimism index dropped 1.6 points to 95.0 — the first decline in 4 months. Declining expectations for the economy to improve heavily contributed to the fall.

Financing continues to be the least cited concern holding back small business conditions, with 3% of respondents citing it as the single more important problem. Taxes remained in the top spot, with 22% of respondents citing it as the single most important problem. Government requirements and red tape remained number two at 20%.

The details of the report were mixed. Six of the ten index components shrank. Expectations for the economy to improve took the biggest hit, dropping 10%.

On a bright note, plans to increase employment and current job openings both increased 2%. Twelve percent of owners reported adding an average of 3.3 workers per firm, producing a net gain of 0.05 workers per firm in June. The skills gap is noticeable — 53% of respondents tried or did hire in the last three months, however 43% found that there weren’t qualified applicants.

Read the NFIB release.

Thursday, July 3, 2014

ISM Nonmanufacturing Index Dropped Slightly in June

The ISM nonmanufacturing index declined by 0.3 points in June to 56.0. However, the index is still the second highest reading all year and has been above its expansionary threshold of 50 for over year now. The details of the report were generally strong, aside from business output.

The employment index increased 2.0 points to 54.4. Following a strong June jobs report, the index should see gains next month as well. New orders increased 0.7 points to 61.2. Exports improved 2.0 points to 55.0. This helps the nominal trade deficit, and GDP.

There still was one weak spot in the report. Business output dropped to 57.5. However it still remains in expansionary territory. Moreover, due to large gains the previous two months, June’s decline may in part be an adjustment back.

Read the ISM report.

Trade Deficit Dropped to $44.4 Billion in May

The U.S. trade deficit dropped by 6% in May to $44.4 billion, due to both increased exports and decreased imports. This is the first month all year the deficit has shrunk.

The report is generally positive. Exports grew 1.0% in May, to $195.5 billion. Exports are at an all-time high, driven by large gains in the goods exports. Imports declined 0.3% to $239.8 billion.

The real goods deficit, which is important for the calculation of GDP, declined to $52.0 billion. The declining real goods deficit points to an improved 2Q14 GDP.

Read the Census report.

Job Growth Surged in June and Unemployment Rate Dropped to 6.1%

Total nonfarm payroll employment rose by 288,000 jobs in June and the unemployment rate dropped to 6.1%, according to the U.S. Bureau of Labor Statistics. June’s report included upward revisions to April and May’s headline number, notably bringing April’s total job gains over 300,000. Last month the economy regained all the jobs lost from the recession, however the economy has yet to fully recover when accounting for population growth.

“While the jobs report is very positive, it will not materially change the timing of the Fed’s tapering this year or the interest rate increases, which we believe will begin the middle of next year,” said ABA Chief Economist Jim Chessen.

The private sector, particularly the services industry, continues to drive job growth. The services sector alone added 262,000 jobs, more than the total jobs added the month prior and the fastest pace since February 2013. Gains in the service sector were broad based. Professional and business services lead the growth with a 67,000 job gain.

The goods producing sector, while above last month’s pace, is below the average from the end of last year. Government employment increased by 26,000, a sizeable increase given no improvement the month prior. However, the growth may be a one-time shock, because gains were driven by a 18,000 increase in public education, likely due to the extended school year.

The unemployment rate dropped to 6.1% and the labor force participation rate remained the same, signaling that the job gains were real. Moreover, the number of long term unemployed, defined as those who have been out of work for over 26 weeks, declined by 293,000 people.

Despite the positive report, 275,000 people in June became part time for economic reasons, signaling that there is still a mismatch between job seekers and employers. While the type of jobs lost in the nation and across the region were middle-skill jobs, the types of jobs that have been recovered are typically higher-skilled jobs and lower-skilled jobs, illustrating a decades-long trend of job polarization.

Read the BLS report.

Wednesday, July 2, 2014

June Auto Sales at Fastest Pace in 8 Years

Auto sales increased 1.2% in June. The annualized selling rate reached 16.98 million, the largest pace since July 2006. The GM recall and the shortened month of June did not damper auto sales, a positive sign for future growth.

Stronger job growth, increased consumer confidence and improving consumer finances all contributed to the auto gains. Moreover, auto loans are easier to obtain as banks ease lending standards.

ADP Employment Added 281,000 Jobs in June

According to the ADP’s National Employment Report, the private sector added 281,000 jobs in June, above expectations and the largest monthly gain since November 2012. June’s report included a slight downward revision to April’s headline number. The strong ADP headline number signals that the job growth data released tomorrow by the U.S. government should be positive and above expectations.

Job gains continue to be centered in the service sector, which added a strong 230,000 jobs in June, up 82,000 jobs from the month prior. Professional and business services added 77,000 jobs, the bulk of the jobs added in June and a vast improvement from a weak May.

Goods producing employment rose from May, with 51,000 new goods producing jobs in June. Manufacturing added 12,000 jobs, the strongest growth all year.

Read the ADP release.

Tuesday, July 1, 2014

Construction Spending Up 0.1% in May

Construction spending grew modestly in May, rising 0.1%, according to the Census Bureau. May’s level was 6.6% above the year-earlier level. In addition, the figure for April was revised upward, more than offsetting a negative revision for March. Private non-residential construction and government construction contributed to the gains.

Overall private construction declined 0.3% in May, driven by a 1.9% reduction in spending on residential improvements. However, private non-residential construction increased 1.1% in May and 10.7% from the year-ago level.

Government spending improved 1.0% and was up 1.2% from May 2013, indicating that local governments have begun spending again.

Read the release.

ISM Manufacturing Declined Slightly in June

The ISM manufacturing index declined slightly in June, by 0.1 to 55.3. June’s level is the second highest all year, yet still below levels seen at the end of last year. The index has been above its expansionary threshold of 50 for 13 months. Details of the ISM report point to future growth.

New orders improved to 58.9 from 56.9, the best all year. Inventories remained at 53.0. The gap between new orders and inventories – a proxy for future growth – grew to 5.9 from 3.9 in May.

The employment index remained at 52.8. Half of the 18 manufacturing industries reported employment growth. Five reported declines, including plastics/rubber, primary metals and chemical products.

Production declined slightly to 60.0.

Read the ISM release.