Negative Surprises in the Economic Data

Markets are more volatile after a placid summer, and economic data are a major cause.

The recent economic data have been full of negative surprises and reports that are not as good as investors expected. Early in the summer, it appeared that manufacturing had found its low point and might even start recovering. But most of the latest data on manufacturing showed a new decline. Granted, the latest recent declines are mild compared to what happened in 2015, but the numbers still were negative when investors expected flat or slightly positive numbers.

In each of the last two months, retail sales were flat or negative, after months of strong increases. The housing data, while still generally positive, mostly are not as strong as earlier in the year or last year. Investors also are looking overseas and seeing that Europe and Japan aren’t responding much to the latest monetary easing. China remains in its slower-growth mode. On top of all this, many members of the Fed continue to talk about raising interest rates.

Investors are asking whether the recent data indicate a fresh downward trend in the economy, possibly leading to a recession, or are merely the usual wiggles and fluctuations in established trends.

The two leading indicators of recessions are real retail sales data and the unemployment rate. Neither indicator is close to warning about a recession. Also, consumer sentiment surveys, which can be timely indicators of changes in household spending and incomes, remain within a range that indicates positive growth. New unemployment claims continue to be near historic lows.

Growth in wages, salaries and household income have their monthly ups and downs, but trends over several months are at or above their average rates of this recovery. Home prices continue to increase, though at a slower rate than earlier in the recovery. Stock prices, despite their fluctuations, are adding to household wealth.

Business investment remains the weak spot in the economy. Several factors cause that weakness, and those are stabilizing or improving. The worst effects of the decline in commodity prices probably are behind us. International economic growth is stabilizing or improving. The dollar appears to be nearing the end of its strong surge that began in mid-2014.

Of course, the negative data also seem to change the Fed’s plans and investors’ perceptions of what the Fed will do. This further increases volatility and uncertainty in the markets.

The economy is on the same path it has been on for the last few years. We are likely to see modest growth with short-term ups and downs. The biggest risk to the U.S. economy continues to be that the Fed could tighten monetary policy too fast, too soon. Though a majority of the Fed’s voting members clearly want to increase rates and tighten monetary policy, so far they have refrained from doing so because the United States and global economies are fragile. There still is the risk that the Fed could tighten more than investors expect. We wouldn’t be on this roller coaster of wondering what the Fed and other central banks will do next if other policymakers implemented pro-growth fiscal policies. Perhaps that will happen after the election.

The Data

As we’ve been anticipating, the Consumer Price Index is showing some signs of inflation in the economy. For several years, falling commodity prices have offset price increases in the service sector. Now, commodity prices aren’t providing that powerful offset. Last month’s flat CPI report was a surprise. It was revised higher to 0.1%, and the CPI for August was 0.2%. That increases the 12-month change to 1.1% and, after excluding food and energy, the 12-month increase in the CPI is 2.3%. We’ve been saying for several months that inflation is likely to rise higher than what has been priced into the markets.

New home building figures continue to be positive. The NAHB Housing Market Index rose sharply to 65 after being around 60 for months. Anything above 50 indicates growth. This is the best report since October 2015, and some of the components of the survey had their best numbers since October 2005.

Yet, housing starts declined 5.4% in August. Permits for new home construction also declined, but by only 0.4%. Hidden in the reports is the good news that permits for new single family homes increased 3.7%. Single-family homes are considered to contribute more to economic growth than other types of housing, so an increase in permits here should bode well for future growth.

Home prices increased 0.5% in July, according to the FHFA House Price Index, and June’s increase was revised a tenth of a percent higher to 0.3%. That puts the 12-month price increase at 5.7%.

Existing home sales declined another 0.9% in August, and July’s decline was revised down another 0.2% to 3.4%. Over 12 months, existing home sales increased 0.8%. A major factor restraining sales is the lack of inventory for sale. There are 3.3% fewer existing homes for sale in August than in July.

A positive surprise this month was the Kansas City Fed Manufacturing Index. The index has been relentlessly negative for about a year and a half because of the problems in the energy sector. But September’s index came in at 6, the second positive number in 2016 and the best since December 2014. We’ll wait to see if this is a one-month blip or the start of a new trend.

Consumer Sentiment, as measured by the University of Michigan, was unchanged in the mid-month flash reading.

New unemployment claims declined by 8,000, bringing the weekly number and four-week average close to the historic lows reached earlier in 2016.

The Markets

The S&P 500 returned 1.77% in the week ended with Wednesday’s close. The Dow Jones Industrial Average increased 1.43%. The Russell 2000 rose 1.80 %. The All-Country World Index increased 2.25%. Emerging market equities rose 4.73%.

Bonds were flat most of the week but rose after the Fed’s announcement that it wouldn’t raise rates this month. Long-term treasuries and high-yield bonds both were up about 1%. Investment-grade bonds increased 0.6%. Treasury Inflation-Protected Securities (TIPS) increased 0.25%.

The dollar was flat most of the week but declined after the Fed’s announcement, losing 0.3%.

Broad-based commodities increased 3.2%. Energy-based commodities rose 2.8%. Gold rose 1.8%.

Bob’s News & Updates

Don’t forget the new MoneyShow Dallas is coming up October 20-21. I’ll be speaking there. Registration is free.

If you read and enjoyed the second edition of my book, “The New Rules of Retirement“, consider adding to the list of five-star and four-star reviews on Amazon.com. One recent reviewer said, “Thorough and very clearly written. It has changed my plan for retirement in a significant way.”

Some Reading for You

This report says Social Security doesn’t do a good job of helping Americans make decisions about taking their retirement benefits.

A couple of recent posts around the web explore reasons why young men aren’t employed.

Here’s some surprising history of the rise and fall of bowling in the U.S.

This article explores problems in some Washington, D.C., area condos, but the issues and cautions apply to all condo developments.

I comment and link to these and other items on my public blog at http://www.bobcarlson.net.