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Your Bank > News

CNB Economic Comments May 12

May 15, 2017


From: Gregory S. MacKay, Economist

The May 2-3 Federal Open Market Committee (FOMC) meeting stated the obvious about the first quarter’s economy, and slowed the thinking that some balance sheet adjustment at the Fed would be forthcoming soon. While citing a stronger job market and firming business spending, the FOMC balanced the overall view by suggesting household spending increases were modest, and both market-based and survey-based inflation levels were not worrisome. While some chatter had developed on the size of the Fed’s balance sheet, the May 3rd press release said reinvestment of principal and payments on bonds and rollover of maturing bonds would continue. There were no dissenting votes.

The less than robust first quarter GDP number was also confirmed by the latest productivity data from the Department of Labor. Productivity dropped 0.6% in the first quarter for the first loss in a year, while output rose a mediocre 1%, and hours worked increased 1.6%. Since 2013, annualized productivity gains have been around 1%, about half the pace set over the past couple of decades. The slow growth has pressured unit labor costs upward. They rose 3% in the first quarter of 2017, after averaging about 1.75% annual gains since 2013. There will have to be considerable firming of both consumer and business spending to bring these levels back to more normal levels.

The latest Institute for Supply Management (ISM) Business Reports offered a split decision on business activity. The manufacturing report, while still positive, indicated a slowing in the rate of manufacturing gains. Somewhat troubling, were the sharp declines in new orders and employment, which seem to suggest that factory orders might be headed for a slow start in the second quarter. Offsetting the manufacturing was the non-manufacturing (services) report, which indicated faster growth in production, new orders, backlogs, and export orders for the month of April. With some kind of pickup in manufacturing (autos and other durables), the second quarter can make a good recovery.

The employment picture continues to be mildly positive. The economy added 211,000 jobs in April, yielding a three month average of 174,000 per month. That number keeps the unemployment rate shrinking – this month to 4.4%. However, weak auto sales also show up here, as durable goods jobs were lost this past month. As usual, the lion’s share of the job gains (89%) were in the service industries. There was strength in financial activity jobs, professional and business services, as well as health care, leisure, and government. Average weekly hours were unchanged for the year, and average hourly earnings have climbed 2.5% in the past twelve months. Modest gains across the board here, that translate to modest economic growth.

Before we discount a June FOMC rate hike, we’d better take a closer look at the latest inflation numbers. While the PCE Index for March fell 0.2%, and the core PCE dropped 0.1%, the April PPI and CPI levels changed direction, indicating some growing inflation. At the wholesale level (PPI) total final demand jumped 0.5% in April as food rose 0.9%, energy rose 0.8%, and services rose 0.4%. That puts final demand at the wholesale level up a lofty 2.5% in the past 12 months, one of the highest levels seen in recent memory. Add in some healthy bumps in energy and services at the intermediate level, and it seems that some wholesale inflation is blooming. At the consumer level, the CPI in April rose 0.2% and the core rose 0.1%. The one-year CPI number was +2.2%, and the core rose 1.9%, both levels that continue to interest the Fed. More telling was the 1.1% one month bump in energy, and the 0.3% increase in shelter. Without declines in new and used vehicles, apparel and medical care commodities, the CPI for April could have been much higher. These levels should sharpen the Fed’s focus in PCE levels due at month end.

We also note that retail sales had a good April, increasing 0.4% and up 4.5% over year earlier figures. Motor vehicles shook off a weak first quarter, and building materials and electronics prospered due to the continued strength of housing. Add in a big jump in internet sales and better restaurant figures, and it’s easy to overlook declines in grocery stores and clothing. Add in the revision of March retail sales to a +0.1% from a -0.2% over February, and we may be seeing a consumer coming back to healthier spending habits.

These inflation and retail data do indicate a slightly better chance for a June federal funds rate increase. Stay tuned.

Large cap stocks generally rested this week, while NASDAQ stays near record levels. At 10:06 a.m., for the week and year:

Index 05/12/17 Weekly Change Year-to-Date Change
Dow Industrials 20893 -0.5% +5.7%
NASDAQ 6114 +0.2% +13.6%
S&P 500 2390 -0.4% +6.7%

Treasury yields moved up fractionally, while municipals were just about flat. The news of a Puerto Rican bankruptcy didn’t seem to affect either Market.

Return Period
U.S. Treasuries Municipal Bonds
05/12/17 04/28/17  05/12/17 04/28/17
2 year 1.30% 1.26% 1.00% 1.01%
5 year 1.86% 1.81% 1.42% 1.45%
10 year 2.34% 2.28% 2.14% 2.16%