Friday, August 29, 2014

Consumer Sentiment Improved in August

According to the University of Michigan Consumer Sentiment index, consumer sentiment rose in August to 82.5, fully erasing the decline from the previous month.

Current expectations jumped to 99.8, a seven year high. Future expectations declined slightly to 71.3, the lowest reading since March. The gap between current and future expectations remained. Consumers are less optimistic about the future in comparison to the present.

The report indicated that inflationary expectations slightly changed from the month prior, calling for 3.2% inflation over the next year and 2.9% over the next 5 years.

Personal Consumption Dropped in July

Personal consumption declined 0.1% in July, the first monthly decline since January, which was due to the cold weather. Personal income grew a modest 0.2%, the slowest increase this year.

Wage growth grew 0.2% and disposable income improved a slight 0.1%. Real personal income dropped 0.2% in July, the only decline all year. Dividend income, usually the driver of income growth, slowed considerably. Real personal income grew a modest 0.1%.

The savings rate increased to 5.7 months, as both consumption declined and income increased.

Inflation remained tame; the PCE deflator rose 0.1% in July and was 1.6% above year-ago levels. This was below the 2.0% target of the Federal Reserve.

The Federal Reserve noted this past week that, “the likelihood of inflation running persistently below two percent has diminished somewhat.” However, Janet Yellen said last week that, “If progress in the labor market continues to be more rapid than anticipated by the Committee or if inflation moves up more rapidly than anticipated . . . then than the Committee currently expects and could be more rapid thereafter.” However, she also noted that rates could raise later than anticipated if the data disappoints.

Read the BEA release.

Thursday, August 28, 2014

ABA Statement on FDIC’s Second Quarter Bank Earnings Report

ABA's Chief Economist James Chessen said, “We continue to see a strong, steady improvement for America’s banking industry, headlined by a sharp increase in business loans and a dramatic improvement in the quality of bank portfolios. Banks are well positioned to continue their role as critical economic drivers, supporting job growth and business expansion. Banks have ample capacity and are ready and willing to meet increased loan demand as business and consumer confidence improves.”

Read the full release.

Second Quarter GPD Revised Up to 4.2%

Real GDP growth for the second quarter was revised up to 4.2% in the BEA’s second estimate. The upward revision was driven primarily by higher fixed investment growth than initially forecast, and secondarily by a lower drag from net exports. Growth in the second quarter jumped following the decline in the first quarter. Despite the growth, second quarter GDP was held back by slower contributions from inventory accumulation and lower government spending.

Consumption remained the strongest component of growth, contributing 1.7% to second quarter growth, the same in the previous estimate. Fixed investment jumped from its previous reading of 0.9% to 1.3%. Inventories contributed 1.4% in the second quarter, following a 1.2% decline in the first quarter. Inventories tend to be highly volatile. The government went from dragging growth by 0.2% in the first quarter to contributing 0.3% growth in the second.

The healthy growth of the economy in the second quarter is due to several factors. Firstly, the harsh winter is over and the second quarter rebounded as a result. Moreover, the government’s austerity measures are no longer negatively weighing on GDP growth.

Read the BEA release.

Tuesday, August 26, 2014

Annual Home Price Appreciation Slows in June

According to the Case-Shiller 20-city index, home price appreciation slowed to 1.0% in June. Notably, year-over-year growth has steadily declined from 13.1% in January to 8.1% in June, a trend that will likely continue. The 10-city index followed a similar pattern, as year-over-year growth slowed from 13.4% in January to 8.1% in June.

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 Francisco had the slowest growth at 0.3%, but it came off the strongest growth the previous month. New York accelerated the fastest in June, improving 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 15.2%.

Read the S&P report.

Monday, August 25, 2014

New Home Decline for Second Consecutive Month in July

New home sales declined in July to an annualized pace of 412,000 units. June’s headline index was revised up by 16,000. July’s pace was 2.4% below June’s. July’s report was 12.3% above year ago levels.

Three of the four regions annual pace declined. Only the South improved 8.1% in July. The Northeast saw two consecutive months of double digit declines. The West and Midwest declined 15.2% and 8.8% respectively.

Due to depressed sales in July, the supply of homes increased to 6.0 months, the highest value since October 2011.

The median price of a new home fell 4.8% to $269,900. However, the median price is now 3% above year ago levels.

Read the Census report.

Friday, August 22, 2014

Yellen: Increase in the Federal Funds Rate Could Come Sooner

In a speech today, Federal Reserve Chairwoman Janet Yellen said that the federal funds rate rise could occur sooner than the Federal Reserve had originally planned. She stated that, “If progress in the labor market continues to be more rapid than anticipated by the Committee or if inflation moves up more rapidly than anticipated . . . then than the Committee currently expects and could be more rapid thereafter.” However, she also noted that rates could raise later than anticipated if the data disappoints.

The nuanced speech walked a fine line between airing a more dovish or hawkish stance on monetary policy. She concluded that, “I believe that our assessments of the degree of slack must be based on a wide range of variables and will require difficult judgments about the cyclical and structural influences in the labor market.”

The comments mark a notable shift from Yellen’s position earlier this year that highlighted the underemployment that still exists in the U.S. economy. “With the economy getting closer to our objectives, the [Federal Open Market Committee’s] emphasis is naturally shifting to questions about the degree of remaining slack, how quickly that slack is likely to be taken up, and thereby to the question of under what conditions we should begin dialing back our extraordinary accommodation,” she said.

Yellen’s speech appeared to shift her focus from propping up a recovering economy with an underutilized labor force to when interest rates will rise.

Read the full speech.

Top 10 Money Tips Every Freshman Should Know

As college students head to campus for the fall semester, money management should be on their personal syllabus, according to the American Bankers Association. The organization has released ten money-saving tips to help college students get an early start on securing their financial future.

“It’s important for college students to take control of their financial future by saving wherever and whenever they can,” said Frank Keating, ABA president and CEO. “They should treat personal finance like a second major and avoid unnecessary expenses now to reduce financial burden when they graduate.”

ABA offers tips to help college students form a strong foundation for money management. Read the tips here.

Thursday, August 21, 2014

Existing Home Sales Continued Upward Trend in July

Existing home sales increased for the fourth consecutive month in July, to an annualized pace of 5.15 million units. July’s pace is 2.4% above a revised June. July’s pace is the first time sales surpassed 5.1 million since October 2013. Total sales are down by 4.3% compared to year-ago levels.

Three of the four regions saw growth, while the Northeast remained stagnant. The South saw the largest improvement and grew 3.4% from the month prior. Compared to year ago levels, all regions are down aside from the South.

The market supply remained the same as the prior two months, at 5.5 months.

The median house price increased to $222,900, the highest median price in at least a year. Moreover, the median price increased 4.9% over year ago level and is the 29th consecutive month of year-over-year price gains. However, growth from a year ago is slowing the pace of growth, indicating a market returning to normal. The proportion of distressed sales dropped to 9%, the first time distressed sales entered single digits since the NAR started tracking distress sales in October 2008.

Read the NAR release.

Wednesday, August 20, 2014

Guest Commentary: Economic Outlook

By Dr. Alan Blinder

I’ve been saying in this space for months that the Federal Reserve would be boring for a while, which it certainly was again after its July 29-30 meeting. There were no surprises. There weren’t even many changes in wording. Markets barely budged.

The FOMC statement no longer calls the unemployment rate “elevated.” But it notes, in new prose, that “a range of labor market indicators suggests that there remains significant underutilization of labor resources.” (You have heard that before from Fed Chair Janet Yellen.) And inflation, which had been characterized for months as “running below the Committee’s longer-run objective,” now “has moved somewhat closer to the Committee’s longer-run objective.” Subtle changes, to be sure, but indicative of an FOMC that is thinking more seriously about when it should start raising interest rates.

Speaking of higher rates, the heat is starting to rise in the Committee — the first sign being the dissent from the Philadelphia Fed’s Charles Plosser, a well-known hawk. Up to now, Plosser and the other hawks have been content to go along with gradual “tapering” of the path of the Fed’s asset purchases by $10 billion per month at each meeting. But on Wednesday, Plosser dissented from the FOMC’s 9-1 decision, objecting to continued use of the phrase — which has been central to the Fed’s forward guidance for months — that the FOMC will likely “maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends.” (That end will be announced in October.) Plosser wants interest rates raised sooner, and you should be prepared for more such clamoring in the coming weeks and months.

Explicit monetary policy won’t be changed for months to come; Yellen and the FOMC majority are far from ready. But there will be plenty of talk about higher rates — starting now. And as markets have come to understand, talk is policy.

Fed Funds Rate Hike Will Be "Relatively Prompt"

The Federal Reserve could begin raising the federal funds rate earlier than anticipated, according to the minutes released today from the July 29-30 Federal Open Market Committee meeting. The minutes also revealed that interest paid on excess reserves will be the primary tool that they use to move the Federal Funds rate.

The Federal Reserve will end its asset purchase program following the October meeting, and may begin to raise interest rates more quickly than it had initially anticipated. The FOMC minutes note that, “Labor market conditions and inflation had moved closer to the Committee's longer-run objectives in recent months, and most anticipated that progress toward those goals would continue. Moreover, many participants noted that if convergence toward the Committee's objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated.”

The minutes also stressed that some FOMC members, “Viewed the actual and expected progress toward the Committee's goals as sufficient to call for a relatively prompt move toward reducing policy accommodation to avoid overshooting the Committee's unemployment and inflation objectives over the medium term.” Given a previous statement by Janet Yellen, the markets assumed the Federal Reserve would begin rate hikes 6 months after tapering ends, around April of next year. However, rate hikes may occur sooner than originally thought.

Moreover, the minutes reveal the tool the Fed plans to use to normalize rates. “Participants agreed that adjustments in the IOER rate would be the primary tool used to move the federal funds rate into its target range and influence other money market rates.”

The FOMC plans to provide the public more information later this year in regards to monetary policy normalization. Upon the release of the minutes, stocks generally dipped and the dollar increased.

Read the FOMC minutes.

Tuesday, August 19, 2014

Housing Starts Rebound Above 1 Million Unit Pace in July

Housing starts rebounded in July, to an annualized rate of 1.093 million units. July’s pace grew 15.7% from the positively revised June rate. July’s growth was due to both single family and multi-family construction improvements. The pace of new construction is now 8.3% higher than a year ago.

Of the four regions, only the Midwest did not contribute to the overall gain. The South, which had a record decline in June, rebounded in July. Multifamily starts jumped 28.9% in July, bringing the annual pace to 437,000 units. Single family starts also improved by 8.3% to an annual rate of 656,000 units.

Permit issuance was also stronger in July. Overall housing permits increased 8.1%, driven by a 21.5% monthly growth in multi-family permits. It’s the largest monthly growth since February.

Despite the strong July report, housing starts remain well below the long-run average of 1.5 million units.

Read the Census report.

Consumer Prices Rose 0.1% in July

Prices rose by 0.1% in July, a slightly slower pace than the month prior. The increase from year-ago levels was 2.0%, consistent with the Federal Reserve’s 2.0% target. The most recent minutes from the Federal Reserve’s FOMC meeting noted that the likelihood of inflation running persistently below 2% has diminished somewhat. However core inflation, the focus of the FOMC, rose 1.9% over the year, slightly below the Fed’s target.

Energy prices dropped 0.3% in July, the largest monthly decrease since February. Gasoline prices fell 0.3%, contributing to the decline. Food prices grew 0.4%, a 30 basis point increase from the month prior. The faster pace increased the annual growth rate of food to 2.6%.

Core prices grew 0.1%, in line with the previous month. Airline fare, decreasing by 5.9%, had the most drastic decline, followed by gasoline prices. Goods prices grew 0.1%, consistent with the previous month.

Read the BLS report.

Friday, August 15, 2014

Industrial Production Increased 0.4% in July

Industrial production improved 0.4% in July, the same growth seen during the previous month. Manufacturing and mining contributed to July’s growth, moderately offset by a decline in utilities.

Manufacturing growth improved 1.0% in July, led by a 10.1% jump in motor vehicle and parts. Manufacturing grew at the fastest pace since February. Manufacturing is the core component of industrial production and does not fluctuate like mining and utilities. As such, growth in manufacturing demonstrates that the core of industrial production is improving.

Mining production increased 0.3% in July, a slowing of the pace compared to the previous 4 months. Utilities production declined 3.4%, the biggest drop since April for the highly volatile index. The capacity utilization ratio improved in July, rising 1 basis point to 79.2%.

Read the Federal Reserve release.

Producer Prices Rose 0.1% in July

Producer prices increased a modest 0.1% in July, driven by a strong 0.4% increase in energy prices. Producer prices improved 1.7% from year ago levels, a slowing of the year-over-year growth compared to the previous three months.

Earlier stages of production saw similar increases, with intermediate goods prices rising 0.1% in July. Intermediate energy prices declined 0.3% while the remaining categories all improved in July. The crude goods index sharply declined in July, dropping 2.7%. The decline was led by a 6.4% decrease in energy prices.

Prices for the headline index increased 0.1% in July, compared to a 0.4% increase the month prior. Finished energy prices took the biggest hit, declining 0.6% over the month, the largest monthly decline since last November. Finished food and transportation and warehousing saw the biggest monthly improvements, growing 0.4% and 0.5% respectively.

Read the BLS report.

Wednesday, August 13, 2014

Federal Deficit through July Lowest Since 2008

According to data released by the Treasury Department, the deficit thus far for fiscal year 2014 is at the lowest level since 2008. The decline in the deficit is due solely to increased revenues.

The Federal Government earned $211 billion in revenue during July, a 5% increase from year ago levels. Federal spending has also increased, but at a slower pace. The government spent $305 billion in July, a 3% increase from year ago levels.

A large portion of Government revenue came from the Federal Reserve, which paid Treasury $4 billion more in July 2014, as compared to July 2013. The Congressional Budget Office attributed the larger payment to a larger Federal Reserve portfolio with higher yields.

Retail Sales Growth Was Flat in July

In July, retail sales growth was stagnant. Excluding automobile and gasoline sales, retails sales increased a modest 0.1%. Year-over-year growth was 3.7%, down 0.6% from the previous month. July is the third consecutive month of decline for the year-over-year growth figure.

Despite the overall stagnant growth, some categories of retail sales showed improvement. Clothing and accessories had the strongest monthly growth at 0.4%. Food and beverages followed at 0.3%. The largest monthly drop occurred for general merchandisers. The drop more than offset the gain from the month prior.

Despite weaker growth in July, future outlook is strong. The steady improvements in the labor market should drive spending higher.

Read the Census report.

Tuesday, August 12, 2014

Small Business Optimism Edges up in July

The NFIBs Small Business Optimism index rose to 95.7 in July from 95.0. July’s uptick was mainly seen in the rise of the index components that relate to future plans and expectations. The most substantial increases from the previous month came from expectations that the economy will improve and expected improvements in credit conditions allowing expansion.

Financing continues to be the least cited concern holding back small business conditions, with 2% of respondents citing it as the single more important problem. Taxes shared the top spot with government requirements and red tape, each rising 1% to 22%, followed by poor sales with 13%.

Six of the ten index components improved slightly, three components declined and one component, earnings trends, was unchanged. Expectations that the economy will improve increased 4 points to -6%, an improvement from the 10 point drop the previous month.

Current job openings took the biggest hit, dropping 2 points to 24%. However, July was the tenth consecutive positive month in terms of employment gains, and the best string of gains since 2006.

The percent of owners reporting higher nominal sales in the past 3 months compared with the prior 3 months fell 1 point to -3%, albeit still one of the best readings since 2007.

Read the NFIB report.

Thursday, August 7, 2014

New Federal Reserve Report on Economic Well-Being of U.S. Households

The Federal Reserve released a new report on the economic well-being of U.S. households. The data for the report was collected in September 2013, covering topics such house housing, credit availability, education borrowing, savings, retirement, and medical expenses.

The report found that, “Overall… many households were faring well, but that sizable fractions of the population were at the same time displaying signs of financial stress.” Notably, 34% of respondents felt they were worse off financially than before the recession and 61% expect their income to remain the same in the next 12 months.

Read the press release. Read the key findings. Read the report.

Consumer Credit Advanced at Slower Pace in June

Consumer credit increased by $17.3 billion in June. However, the growth is the slowest seen in the last four months. Both revolving and non-revolving credit improved in June, albeit a slower pace from the month prior. Consumer credit grew at an annual pace of 6.5%, a decline in the pace from the month prior.

Revolving credit grew $0.9 billion, the slowest pace in five months and well below the prior three month average of $3.8 billion. Households are still tepid taking on higher debt levels.

Non-revolving balances grew $16.3 billion, strong growth considering that balances last month grew at the fastest pace in over a year. Non-revolving balances consist mostly of student and auto loans. Non-revolving balances have now increased consecutively since 2011 and are well above their pre-recession peak.

Read the Federal Reserve release.

Wednesday, August 6, 2014

Trade Deficit Dropped to $41.5 Billion in June

The U.S. trade deficit shrank for the second consecutive month in June, dropping 7.0% to $41.5 billion. The deficit is the lowest it has been in 5 months. Both increasing exports and decreasing imports contributed to the overall decline in the trade deficit.

The report beat expectations, particularly given rising global political tensions. Exports improved 0.2% to $195.9 billion. Imports declined 1.2% to $237.4 billion. The goods and petroleum deficits shrank while the services surplus remained the same from the previous month.

The real goods deficit, which is important for the calculation of GDP, shrank to $48.8 billion.

Read the Census report.

Tuesday, August 5, 2014

ISM Nonmanufacturing Index at Highest Level Ever

In July, the ISM nonmanufacturing index reached the highest level ever since the index’s inception in January 2008. The index was 58.7 in July, a 2.7 point increase from the month prior. Any reading above 50 indicates industry expansion and July is the 54th month the index has increased.

The employment index saw strong growth, improving 1.6 points to 56.0. It is the highest reading since January. The employment gains in July coincide with a strong employment reading released last week by the Bureau of Labor Statistics. Without any major upcoming economic hurdles, employment index should maintain its healthy path.

Business output shot up to 62.4, the highest recording since February 2012. New orders also saw robust gains in July, settling at 64.9, and the highest reading since January 2011. However, exports declined 2.0 points, which may hurt the nominal trade deficit, and GDP.

Read the ISM report.

Monday, August 4, 2014

Bank Lending Standards Easing

Over the past three months, banks loosened lending standards while loan demand rose slightly over the prior three months, according to the July Federal Reserve’s Senior Loan Officer Survey.

Overall, 10.7% of the responding banks reported easing standards for commercial and industrial (C&I) lending to large and medium sized borrowers, and a net 8.3% loosened standards for small business loans. Stronger loan demand for medium-to-large borrowers was reported for a net 30.7% of the banks, but a net 25.0% reported weaker demand from small borrowers.

The survey found that C&I and CRE lending generally increased to firms of all sizes, while CRE loan standards remained unchanged since the April report.

Credit card, auto and nontraditional closed-end mortgage loans to households saw unchanged loan standards since the last report. There was stronger demand for prime residential mortgages for the first time in a year.

Read the release.

Friday, August 1, 2014

Construction Spending Plunged 1.8% in June

Construction spending decline 1.8% in June – the largest negative since January 2013 –according to the Census Bureau. Nonetheless, the level was 5.5% higher than a year earlier.

All three components on construction spending – private residential, private non-residential and public construction – declined.

Public construction led the decline, shrinking 4.0% in June and 2.9% from a year ago. The decrease in spending on highway and street construction led the decline.

The drop in spending on new single-family homes was the sole reason for the decline in private residential construction, which shrank 1.4%. Multifamily and residential improvement construction spending increased in June by 2.5% and 0.2% respectively. However, all components improved on an annual basis.

Private non-residential construction decline 1.6%, led by a 3.6% decline in construction spending on power and utility structures.

Read the Census Bureau report.

ISM Manufacturing Index Reached Highest Level All Year in July

The ISM Manufacturing Index reached 57.1 in July, its highest level since last November. The index has been above its expansionary threshold of 50 for 14 months. The ISM report points to future growth.

The details of the report were strong. The New Orders Index surged to 64.3, the highest level in over 3 years. The Inventory Index shrank 4.5 points to 48.5, below the expansionary threshold. As a result of new orders improving and inventories shrinking, the gap between new orders and inventories – a proxy for future production – surged 9.9 points to 15.8.

The Employment Index also spiked 5.4 points to 58.2. Job growth in June was the strongest all year, according to a BEA report today. While employment remained strong in July, fewer jobs were added so this index will likely decline in next month’s ISM report.

While the Export Orders Index dropped 1.5 points to 53.0, the Import Index saw a greater magnitude of decline, losing 5.0 points and settling at 52.0, positively impacting GDP growth.

Read the ISM release.

Consumer Confidence Dipped in July

Consumer sentiment dipped in July to 81.8, in line with expectations, according to the University of Michigan Consumer Sentiment Index.

Consumers are less optimistic about the future compared to the present. Current expectations improved slightly in July, growing to 97.1, as consumers noted slightly stronger finances. Future expectations declined 2.4 points to 71.1.

The report indicated that inflationary expectations were little changed from the prior month, calling for 3.3% inflation rate over the next year and 2.6% over the next 5 years.

Personal Income and Consumption both Grew 0.4% in June

Personal income grew 0.4% in June, as in May, according to the Bureau of Economic Analysis. Personal consumption also improved 0.4%, compared to 0.3% the month prior.

Dividend income led income growth, a pattern seen the last four months. Both wage growth and disposable income also grew 0.4%, as in May. Real personal consumption and real personal income both grew 0.2%, an uptick from 0.1% in May. Future consumer spending should benefit from positive wage growth and strong job creation.

While both durable and non-durable consumption contributed to overall consumption growth, durable contributed more, with a 0.5% increase.

Person income and consumption grew at the same pace, explaining why the savings rate remained at 5.3%. However, the BEA report included upward revisions to the savings rate for the past three years.

Inflation remained tame; the PCE deflator rose 0.2% in June and was 1.7% above year-ago levels. This was below the 2.0% target of the Federal Reserve, but overall second quarter inflation was higher than the previous quarter, indicative of a healthier economy. The Federal Reserve noted this past week that, “the likelihood of inflation running persistently below two percent has diminished somewhat.” However, the Federal Reserve noted that, “economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”

Read the BEA release.

Payrolls Rose by 209,000 in July, Unemployment Rate Edges up to 6.2%

Total nonfarm payroll employment rose by 209,000 jobs in July, the sixth consecutive month of at least 200,000 jobs being created. The unemployment rate rose slightly to 6.2%, according to the U.S. Bureau of Labor Statistics. June’s report included upward revisions of 15,000 jobs to May and June’s headline number. The labor force participation rate edged up to 62.9%, still lower than year-ago levels.

The private sector, particularly the service industry, continues to drive job growth. The service sector added 151,000 jobs, lower than the 200+ gains the past three months but above year-ago levels. Gains in the service sector were led by professional and business services, which grew by 47,000 jobs.

The goods producing sector continues to edge back up, growing by 58,000 jobs. Government employment increased by 11,000, less than half of the growth seen the prior month.

The unemployment rate edged higher, signaling that new jobs created were not numerous enough for the number of new entrants into the labor market. The number of long term unemployed, defined as those who have been out of work for over 27 weeks, edged up by 74,000 people to 3.2 million — accounting for almost 33% of all unemployed individuals.

Read the BLS report.