Last Friday’s jobs data filled most investors with confidence going into the second half of the year. This week, notwithstanding some disconcerting nuclear brinksmanship, markets remain calm.
Along with the improving employment situation, let’s take a look at other important economic data and see how it all adds up. Investor confidence doesn’t obviate the need for due diligence.
The headline non-farm payroll number grew by 209,000 jobs versus an expectation of 178,000, marking the second month in a row of strong growth. The headline unemployment rate fell to 4.3%, as ex
pected. The labor participation rate ticked higher to 62.9%, though it’s still historically low. And, finally, wages grew 0.3% month over month, as expected, and 2.5% year over year.
Manufacturing data is improving, as shown by a couple data points last week. The important Institute for Supply Management (ISM) manufacturing index was a little higher than expected, and all components showed strength or growth, including employment and orders. And, according to Friday’s jobs report, manufacturing employment grew by 16,000 versus a forecast of 3,000, which seems to confirm the improving ISM data.
New home sales were steady at a 610,000 annualized rate, though that’s still about half of what sales were back in 2005. Prices were down 4.2% on the month, with a median of $310,800.
Existing home sales missed expectations, declining by 1.8% to an annualized rate of 5.52 million. Prices, though, were up 6.5% from a year ago.
The most comprehensive measure of economic growth is gross domestic product (GDP). After a rather disappointing 1.4% growth rate in the first quarter, the second quarter met expectations with a healthier 2.6% rate. However, as has been the case for all the other inflation data we’ve seen, the GDP price index grew below expectations at 1%.
The June Personal Income and Outlays figures were somewhat disappointing again. Income rose 0.1% against a forecast of 0.4% growth. Personal spending grew at a tepid 0.1% but was in line with the consensus forecast. The Personal Consumption Expenditure Index (PCE Index) was up 0.1%, as expected.
The PCE Index, the Federal Reserve’s preferred inflation indicator, is still running far below the central bank’s 2% target at a year-over-year rate of 1.5%.
Last month’s Federal Open Market Committee statement, as expected, included no policy changes. The target range for the federal funds rate remains 1% to 1.25%. And we’re still wondering if and when the Fed will begin to unwind its $4.5 trillion balance sheet.
The FOMC’s statement didn’t give us a tapering date, but officials are now hinting it will start after the September or the December meeting. The policy statement noted that inflation is falling but also that the economy continues to grow at a moderate pace, with solid employment as well as growth in spending and business investment.
The Fed has hiked the overnight federal funds rates twice this year and, according to Fed Chair Janet Yellen’s Senate Banking testimony, another hike this year is still likely.
Yellen and her cronies at the Fed believe falling inflation is temporary, wages will rise, and consumers will spend.
I’m not a fortune teller, and I don’t own a crystal ball. But I’m not so sure I can agree with Chair Yellen. If the economy is sluggish now (and evidence suggests it is), it certainly won’t be helped along with another rate hike and a reversing of quantitative easing through the reduction of the Fed’s bloated balance sheet.
Stocks are near all-time highs, but fewer stocks are accounting for the move up. And the bond market remains cautious. The yield curve shows that expectation for future economic growth is lacking because it’s flattening. Just in the last three months, longer-term interest rates have fallen and shorter-term rates have risen.
But, so far, the curve hasn’t inverted.. When that happens – short-term rates are higher than long-term rates –we are or we will be in a recession.
The bottom line is that the data seems to be improving, but inflation is still low and wage growth isn’t putting pressure on prices yet.
The Fed can probably justify hiking rates one more time this year to get ahead of possible future inflation. The Fed can also try and get markets used to the idea of gradually reducing its monstrous balance sheet. So far, however, markets haven’t reacted much to Fed moves or talk.
Our central bankers are walking a tightrope, and their desire to control economic booms and busts are in the balance. Sooner or later markets will react, and it won’t be pretty. Stocks have been buoyed by easy money, while bonds are expressing caution and low expectations for future growth.
A misstep by the Fed or an overreaction to surprise economic data could really shake markets, and that’s good for my Treasury Profits Accelerator readers! Greater volatility usually means more opportunities to make money.
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Editor, Treasury Profits Accelerator