Data Provide Mixed Bag of News

Economic growth decelerated in August, but the economy still grew at a healthy rate.

No one should be surprised about slower growth in August, because July’s economic data were among the strongest of the last two years. The reports for August activity were released in September, so now we can take a comprehensive look and analyze them.

There is good news in the data. Despite the reduction in growth, the economy still is growing, and at a faster rate than a few years ago. Also, the slowdown was not widespread across the economy.

In each of the previous four months, more economic reports were better than the previous month’s reports. That’s a sign of accelerating growth. A majority of the reports for August were below July’s levels, giving a sign of decelerating growth. This measure of reduced growth was the worst it has been since January. The message from this data is not that August was weak but that the economy has been strong through most of 2018.

Inflation was one area that showed a deceleration. In recent months, inflation accelerated enough that most indicators finally topped the Fed’s target of 2% or more over 12 months. But all of the inflation indicators for August were less than July’s numbers, and most were the lowest in two months or longer.

Higher inflation is associated with stronger economic growth. Lower inflation is taken as a sign that the economy is weaker, though other factors can cause short-term restraint in prices.

Most of the data measuring consumer activity also were weaker. This is not to say the consumer sector is weak. The sector’s been so strong that it didn’t take much of a slowdown to bring August’s numbers below July’s results.

Measures of both consumer income and spending were lower for August. But consumer confidence remains high, and average hourly earnings increased.

Manufacturing is very strong by all measures. It continues the acceleration the sector has been achieving for longer than a year.

Housing continues to be mixed. Most of August’s housing data was better than July’s results. But that’s partly because housing was rather weak in July and the months preceding it.

The employment market continues to be very strong. Most of the measures are near historic levels of strength. The only weakness is earnings. Earnings growth still is low for this stage of the economic cycle, but it is much higher than a couple of years ago.

Overall, growth slowed a bit in August, but the economy still is growing faster than during most of this economic recovery. The economy isn’t giving any warning signs of an impending recession.

As you’ll see in some of the data below, the pause might have ended. Some sectors of the economy accelerated in September.

The Data

Consumer sentiment, as measured by the University of Michigan, rose to 100.1 from 96.1. That’s only the third time since January 2004 that the index exceeded 100. Households with incomes in the bottom third of the survey are the major reason for the rise in sentiment. That indicates the recovery finally is beginning to benefit those with lower incomes.

The services sector of the economy is booming, according to the ISM Non-Manufacturing Index. It rose to 61.6 from 58.5 and was well above expectations. This is the highest level for the index, which began in 2008. The employment and business activity components of the index also were at or near their highest levels. All components of the index were very strong and indicate this sector could be overheating.

The PMI Services Index also indicated the sector is growing, but not as rapidly as earlier. The index was reported at 53.9, compared to 54.8 last month. This is an eight-month low for this index. But it still indicates the service sector is growing. The survey indicated many businesses have capacity constraints and can’t increase output to match new orders.

Personal Income increased a modest 0.3% for the month. The measure has increased 0.3% or 0.4% in each of the last five months.

Personal consumption increased 0.3%. That’s down from the 0.4% to 0.5% rate of recent months.

The Fed’s preferred inflation indicator, the PCE Price Index, increased only 0.1% for the month. Excluding food and energy, it increased just above 0.0%.

The Chicago PMI declined to 60.4, its lowest reading in five months. Both production and new orders led the decline.

The ISM Manufacturing Index declined a little to 59.8 from 61.3. That level indicates a high level of growth and is the 113th consecutive month of economic growth, according to this index. New orders and production led the decline, while order backlogs continued to expand.

The Kansas City Fed Manufacturing Survey found that solid growth continued in that region. The index was reported at 13, down a little from last month’s 14. But in July, the index was at 23. Tariffs and trade remain the major concerns of manufacturers.

The Durable Goods Orders report, however, might be a sign that manufacturing is slowing. The headline number was a 2.3% increase, the biggest gain in almost a year. And last month’s number was revised higher to reflect only a 0.5% decline instead of a 0.8% decline.

But a big part of the headline number was due to aircraft orders. Core capital goods, a better measure of business investment in equipment, declined 0.9%. That could be a one-month dip, but we’ll have to watch closely.

The labor market continues to be strong, according to the new job reports that precedes tomorrow’s Employment Situation reports. The ADP Private Payrolls report showed 230,000 new jobs were created in the private sector in September. That’s well above estimates and last month’s 168,000 new jobs.

New unemployment claims declined by 8,000 to 207,000. The four-week average of continuing claims is at a 45-year low.

The Markets

The S&P 500 rose 0.63% for the week ended with Wednesday’s close. The Dow Jones Industrial Average gained 1.58%. The Russell 2000 declined another 1.23%. The All-Country World Index lost 0.36%. Emerging market equities fell 2.23%.

Long-term treasuries fell 2.05% for the week. Investment-grade bonds declined 0.57%. Treasury Inflation-Protected Securities (TIPS) lost 0.62%, the same as last week. High-yield bonds edged up 0.19%.

On the currency front, the dollar rose 1.60%.

Energy-based commodities jumped 4.99% for the week. Broader-based commodities rose 4.42%, while gold climbed 0.44%.

Bob’s News & Updates

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