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Your Bank > News

CNB Economic Comments October 27

October 30, 2017

To: Everyone
From: Gregory S. MacKay, Economist

Like the first crocuses shooting out of the snow covered ground in the spring, the recovery from the devastating 2017 hurricane season appears underway. A generally weak summer for consumer spending was shaken off in September, as retail sales rose a firm 1.6% for the month and were up 4.4% over September 2016 levels. While some weaknesses in furniture, electronics, and health and personal care stores might have been hurricane related, there was solid growth for the month in auto sales (+3.6%), building materials (+2.1%), restaurants (+.8%), grocery stores (+.8%) and gasoline sales (+5.6% - price driven). Internet sales continued to improve at the expense of most brick and mortar establishments.

Similarly, housing marched forward in September, almost ignoring the hurricanes. Existing home sales rose .7% in September, breaking off a three month losing streak. Lack of supply remained a factor, as inventories were 6.4% below year ago levels and sales were 1.5% below September 2016 figures. As expected, the weakest sales levels were in the South, but the overall median price of $245,100 rose 4.2% in a year. New home sales broke out of a summer long slump, jumping a remarkable 18.9% over August sales and 17% over year ago levels. There was double digit sales growth in all regions but the West, where price and supply issues remain. The median price of $319,700 was 1.6% above August levels and a solid 5.2% above the September 2016 median. Yet some hurricane disconnect remained in housing. Total September housing starts, while up a reasonable 6.1% over September 2016 levels, actually fell an abrupt 4.7% from August 2017 levels. Single family permits have strengthened, up 9.4% from year ago levels, but multifamily permits have fallen an amazing 25% from year ago levels as builders have bet that millennials are moving toward single family housing.

Recent business data also suggested growing strength in the sector. For the second month in a row, durable goods orders were strong (+2.2% in September, +2% in August), and year-to-date are 5.2% above 2016 totals. While civilian aircraft orders have been strong all year, recent months have seen a strong comeback in most types of capital goods spending, which continues to recover from the 2015 oil glut which shut down much business investment. As the global economy improved and the dollar weakened, business spending has improved. The almost 10% rise in industrial production at U.S. mining facilities has demonstrated a spending boom in that industry. Overall industrial production has risen a reasonable 1.6% in the past year, held back only by weakness in utility production due to mostly calm weather nationwide.

The best number this month came from the advance estimate of third quarter GDP growth, which signaled growth of 3%, about the same as the second quarter, but better than the first six months average growth of 2.2%. While the hurricanes did cut personal spending advances to 2.4% from 3.3% (second quarter), turned non-residential structure investment negative and held residential structure investment negative, other business spending picked up the slack. Inventory build-up and a strong increase in exports provided the impetus for a very positive GDP reading – which would have been even stronger except for the hurricane season.

An early look forward to 2018 suggests an economy more heavily politically affected than usual. While the Federal Reserve Board has always prided itself on its separation from politics, 2018 seems destined to be colored by politics. President Trump will be appointing either 3 or 4 (if Federal Reserve Chair Yellen leaves) members of the Federal Reserve Board. While it’s not possible at this time to measure the “Hawk versus Dove” outcome, it is interesting to note that the current FOMC seems comfortable with a 2% growth, 2% inflation, 4-4.5% unemployment range, and a willingness to raise interest rates before inflation hits 2%. The President likes low interest rates and would like to see 3% growth in the economy. He does agree with the FOMC that fiscal stimulus is needed, and is pushing hard for tax cuts. The philosophical battle over raising rates before or after “meaningful” inflation occurs could well predict whether this expansion will continue or be shuttered. For now, the equity markets are celebrating good earnings and are hoping for large tax cuts. Stay tuned.

Stock indices backed off from mid-week highs, but remain near historical highs. At the opening Friday, for the week and year:

Index 10/27/17 Weekly Change Year-to-Date Change
Dow Industrials 23401 +0.3% +18.4%
NASDAQ 6557 -1.1% +21.8%
S&P 500 2560 -0.6% +14.3%

Both Treasuries and Municipal Bonds continue to add yield.


Return Period
U.S. Treasuries Municipal Bonds
10/27/17 10/13/17  10/27/17 10/13/17
2 year 1.62% 1.51% 1.09% 1.04%
5 year 2.07% 1.94% 1.45% 1.39%
10 year 2.45% 2.32% 2.04% 2.00%