Economic Overview Q Quarterly data is as of third quarter 2018

Transcription

1 Economic Overview Q Quarterly data is as of third quarter 2018 Monthly data as of September 30, 2018

2 Gross Domestic Product 2

3 $ in trillions Compounded Annual Percentage Change Economic Overview GDP REMAINS STRONG Real GDP Components and Percentage Net Exports Personal Consumption Expenditures Private Inventory Investment Government Expenditures Real GDP (RH axis) Recession (2) 5 (4) 0 (6) (8) -5 (10) Source: U.S. Bureau of Economic Analysis/FRED Second-quarter (third estimate) Real GDP The third estimate for second-quarter real GDP came in at 4.2%, unchanged from the previous estimation. A downward revision to private inventory investment was offset by small upward revisions to most other GDP components. Imports were revised down slightly. Third-quarter (advance estimate) Real GDP The advance estimate for third-quarter real GDP was 3.5%, a 0.7% decrease compared to the second-quarter (third estimate). The increase reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, state and local government spending, federal government spending, and nonresidential fixed investment that were partly offset by negative contributions from exports and residential fixed investments. Imports increased. The deceleration in real GDP growth in the third quarter reflected a downturn in exports and a deceleration in nonresidential fixed investment. Imports increased in the third quarter after decreasing in the second. These movements were partly offset by an upturn in private inventory investment. 3

4 Prices 4

5 Percent Chg. From Year Ago Percent Chg. From Year Ago Prices: Consumer Price Indices CONSUMER INFLATION CONTINUES TO REACH FED TARGET Personal Consumption Expenditures (PCE) September s price indexes for PCE posted a year-over-year increase of 2.0%, the seventh consecutive month of reaching or exceeding the Fed s target of 2.0%. Goods increased 0.3% due to nondurable goods increasing 1.4% and durable goods decreasing 1.6%. When backing out food and energy, Core PCE was 2.0% for essentially the seventh consecutive month. The Food and Energy Indexes increased 0.6% and 5.1%, respectively. On a month-over-month basis, September s real PCE increased 0.1% which was primarily due to spending for services, posting a 0.2% gain while goods fell 0.1% due to a drop of 0.4% for durable goods and a gain of 0.1% for nondurable goods Personal Consumption Expenditures (Chain-Type Price Index) Recession PCE PCE Less Food and Energy 2.0 Personal income increased by 0.2% while outlays increased 0.4% in September. Personal income increased primarily due to increases in wages and salaries, government social benefits, and rental income. Personal outlays was driven by services increasing 0.3% and goods increasing 0.6%, with durables and nondurables increasing 1.4% and 0.3%, respectively Consumer Price Index (CPI) The all items index rose 2.3% for the 12 months ending September, compared to a 2.3% median annual increase over the past 25 years. On a month-over-month basis, the all items index increased 0.1% in September. The index for shelter continued to rise and accounted for over half of the monthly increase while the food index was unchanged and the energy index declined 0.5%. Source: U.S. Bureau of Economic Analysis/FRED Consumer Price Index Recession CPI CPI: All Items Less Food and Energy The index for all items less food and energy rose 2.2% for the 12 months ending September. The index has been at or above the 25 year median of 2.2% for the past five months. The energy index rose 4.8% over the past year and the food index increased 1.4%. Month-over-month, the index for all items less food and energy increased 0.1% in September. Commodities, new and used vehicles, medical care commodities, and hospital services were the only indexes that were a drag on September s gain Given the Fed officials views on current and projected inflation and employment, the Fed appears ready to continue it s rate hike trajectory for the balance of 2018 and Source: U.S. Bureau of Economic Analysis/FRED 5

6 Comp. Annual Percent Chg. Percent Chg. From Year Ago Prices: Producer Price Indices PRODUCER INFLATION CONTINUES TO CLIMB, OUTPACING CPI Producer Price Index PPI: Final Demand PPI: Final Demand Less Food and Energy Producer Price Index (PPI) The PPI for final demand increased 2.6% for the 12 months ending September (on an unadjusted basis). Month-over-month, the final demand index (seasonally adjusted) increased 0.2% in September. The increase in the final demand index is mostly attributable to a 0.3% advance in prices for final demand services. In contrast, the index for final demand goods decreased 0.1%. Prices for final demand services increased 0.3% in September following two consecutive declines of 0.1%. The broad based advance was led by a 1.8% jump in the index for final demand transportation and warehousing services. - (1.0) Over 33% of the advance in the index for final demand services is attributable to the index for airline passenger services, which rose 5.5%. The indexes for food and alcohol wholesaling; deposit services; outpatient care; apparel wholesaling; and lawn, garden, farm equipment, and supplies retailing also moved higher. Conversely, margins for apparel, jewelry, footwear, and accessories retailing fell 2.5%. The indexes for automotive fuels and lubricants retailing and for traveler accommodation services also declined. (2.0) Source: U.S. Bureau of Economic Analysis/FRED Nonfarm Business Sector: Unit Labor Cost Prices for final demand goods edged down 0.1% in September, the first decrease since a 0.5% drop in May Leading the September decline, prices for final demand energy fell 0.8%. The index for final demand foods decreased 0.6%. In contrast, prices for final demand goods less foods and energy rose 0.2%. Leading the September decline in the index for final demand goods, gasoline prices fell 3.5%. The indexes for electric power; iron and steel scrap; canned, cooked, smoked, or prepared poultry; and fresh and dry vegetables also moved down. Conversely, the index for light motor trucks rose 0.8%. Prices for liquefied petroleum gas, pharmaceutical preparations, and unprocessed and prepared seafood also increased. The PPI for final demand less food and energy increased 2.5% year-over-year, on an unadjusted basis Source: U.S. Bureau of Labor Statistics/FRED 1.2 The annual percentage change for the PPI s key rates continue to outpace consumer prices, which indicates margin compression for businesses until prices are passed on to consumers. Nonfarm Unit Labor Cost Unit labor cost increased 1.2% (preliminary) in the third quarter of 2018, reflecting a 3.5% increase in hourly compensation and a 2.2% increase in productivity. Unit labor costs increased 1.5% over the last four quarters. The manufacturing sector labor productivity increased 0.5% in the third quarter of 2018, as output increased 3.4% and hours worked increased 2.9%. Over the last four quarters, total manufacturing sector productivity increased 1.3%, as output increased 3.4% and hours worked increased 2.1%. Unit labor costs in manufacturing increased 0.9%. An overall unit labor cost of 3.0% and above is widely seen as feeding overall inflation. 6

7 Dollars per Gallon Dollars per Barrel Prices: Oil & Gas PRICES AND DEMAND CONTINUE TO INCREASE The U.S. Energy Information Administration (EIA) reported that U.S. crude oil production averaged 11.1 million barrels per day (b/d) in September, up slightly from August levels. Total U.S. crude oil production averaged 9.4 million b/d in 2017 and the EIA projects that U.S. crude oil production will average 10.7 million b/d in 2018, which would mark the highest annual average in U.S. crude oil production level, surpassing the previous record of 9.6 million b/d set in EIA forecasts that 2019 crude oil production will again increase, averaging 11.8 million b/d Crude Oil Prices: West Texas Intermediate (WTI) - Cushing, Oklahoma 70.2 Brent crude oil spot prices averaged $79 per barrel in September, up $6 per barrel from the August average. EIA forecasts Brent spot prices will average about $74 per barrel in 2018 and $75 per barrel in West Texas Intermediate (WTI) crude oil prices are expected to average $6 per barrel lower than Brent prices in 2018 and in NYMEX WTI futures and options contract values for January 2019 delivery that traded during the five-day period ending October 4, 2018, suggest a range of $60 per barrel to $93 per barrel encompasses the market expectation for January 2019 WTI prices at the 95% confidence level. U.S. regular gasoline retail prices averaged $2.84/gallon in September, unchanged from August. EIA expects that 2018 monthly average gasoline prices peaked in May and forecasts prices to decline gradually in the coming months. EIA expects regular gasoline retail prices to average $2.76/gallon in 2018 and $2.77/gallon in Source: US. Energy Information Administration/FRED US Regular All Formulations Gas Price Source: US. Energy Information Administration/FRED 7

8 Employment 8

9 Change Percent Employment EMPLOYMENT CONTINUES TO IMPROVE The September unemployment rate declined to 3.7% and the number of unemployed decreased by 270,000, to 6.0 million, month-overmonth. Over the year, the unemployment rate and the number of unemployed persons declined by 0.5% and 795,000, respectively Unemployment and Underemployment Rate Recession Unemployment Underemployment The number of long-term unemployed (those jobless for 27 weeks or more) increased by 52,000 month-over-month to 1.38 million in September and accounted for 22.9% of the unemployed, up from 21.5% in August. Year-over-year, the number of long-term unemployed was down by 349,000. The underemployed rate, or the U-6 rate, ticked up 0.1% to 7.5% in September. It remains at pre-recession levels and well below the historical median level of 9.7%; recording began in January Source: U.S. Bureau of Labor Statistics/FRED All Employees: Total Nonfarm Payrolls The initial total nonfarm payroll employment for September increased by 134,000, compared with an average monthly gain of 201,000 over the prior 12 months, a total of 2.54 million over the last 12 months Source: US. Bureau of Labor Statistics/FRED The primary drivers were in professional and business services, health care, and transportation and warehousing. Professional and business services increased by 54,000 and has risen by 560,000 over the year. Health care grew by 26,000, with hospitals adding 12,000 jobs and ambulatory health case services adding 10,000 jobs, and has increased by 302,000 over the year. Transportation and warehousing grew by 25,000 jobs and has increased 309,000 over the past 12 months. Nonfarm employment in July was revised up from 147,000 to 165,000 and August was revised up from 201,000 to 270,000. 9

10 Number Percent Employment EMPLOYMENT CONTINUES TO IMPROVE Civilian Labor Force Participation Rate The labor force participation rate, at 62.7%, unchanged monthover-month and is 0.3% lower from 12-months ago. The employment-population ratio (not shown in graphs), at 60.4%, is unchanged and has been essentially flat since February At the current participation rate and population growth rate, maintaining an unemployment rate of 3.7% suggests the economy needs to add 109.4k jobs on average each month. (Source: Federal Reserve Bank of Atlanta/Jobs Calculator) Source: US. Bureau of Labor Statistics/FRED The 4-week moving average for initial claims was 213,750 as of the week ending November 3, 250 lower than the previous week s revised level. The historic low was set in October 2018, when the reading was 206, Week Moving Average of Initial Claims The weekly initial claims for the week ending November 3, was 214,000, a decrease of 1,000 from the previous week s revised level Source: U.S. Employment and Training Administration/FRED 10

11 Consumer 11

12 Index 1966:Q1=100 Percent Chg. From Year Ago Consumer RETAIL SALES AND CONSUMER CONFIDENCE IS STRONG Advance estimates of U.S. retail and food services sales, which is adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, for September posted an increase of 0.1% month-overmonth, a 4.7% increase year-over-year. Retail trade sales were up 0.4% month-over-month and 4.4% year-over-year. Gasoline stations and nonstore retailers drove the charge with both posting year-over-year gains of 11.4% Retail and Food Services Sales 4.7 The University of Michigan s Surveys of Consumers stated that Consumer Sentiment remained very favorable in September, with the Index topping for only the third time since January Most of the September gain was among households with incomes in the bottom third, whose index value of 96.3 was the highest since November In contrast, the Index among households with incomes in the top third lost a total of 8.1% during the past seven months since reaching its cyclical peak of in February This difference is of some consequence since the top third of the income distribution account for just over half of all consumer spending. Importantly, while the survey recorded losses among upper income households, their economic expectations were still optimistic. This divergence across income subgroups has been observed in the past economic cycles and indicates that the expansion has now benefitted nearly all population subgroups Source: US. Bureau of the Census/FRED University of Michigan: Surveys of Consumers All households held very optimistic expectations for improved personal finances in the year ahead, 44% of all consumers expected improved finances, the most favorable financial prospects since 2004, a record high of 49% was set in Gains in household wealth were cited by near record numbers, primarily due to increases in stock holdings and rising home values. Consumers anticipate larger real income gains during the year ahead. Despite a lessening in September of the expected size of gains in nominal incomes, inflation expectations also declined, acting to offset concerns about declining living standards. The single issue that was cited as having a potential negative impact on the economy was tariffs. Concerns about the negative impact of tariffs were cited by nearly one-third of all consumers in September Recession Consumer Sentiment Current Economic Conditions Consumer Expectations Consumers views of buying conditions for homes, vehicles, and durables grew more optimistic in September mainly due to greater certainty of job and income prospects. In addition, consumers were slightly more likely to favor advance buying ahead of anticipated increases in interest rates and prices favored by 20% for durables, 13% for vehicles, and 25% for homes. 0.0 Source: University of Michigan/FRED 12

13 Percent Percent Chg. From Year Ago Consumer INCOME STRENGTHENS, SAVINGS CONTINUES ABOVE LONG RUN AVERAGE Real disposable personal income was $14,411.9 billion dollars as of September, a 0.1% increase from the prior month and a 2.9% increase year-over-year Real Disposable Personal Income Source: U.S. Bureau of Economic Analysis/FRED Personal Saving Rate 6.2 Personal savings was $975.7 billion in September, down $28.7 billion month-overmonth and down $2.1 billion compared to 12- months prior. The personal savings rate was 6.2%, down 0.2% month-over-month and 0.4% lower compared to a year ago, above the 30-year average of 5.7%. 0.0 Source: US. Bureau of Economic Analysis/FRED 13

14 Housing 14

15 Thousands of Units Housing HOUSING APPEARS TO BE SOFTENING Building permits, which lead housing starts by 1-3 months and are subject to less volatility, in September were at a seasonally adjusted annual rate of 1,241,000, 0.6% below the revised August rate and 1.0% below the September 2017 level. Single-family building permits were at a rate of 851,000, 2.9% above the revised August rate and 2.4% higher year-over-year. Building permits for 5+ units decreased significantly in September posting a rate of 351,000, 9.3% lower than August and 9.3% lower than the September 2017 level. Housing starts in September were at a seasonally adjusted annual rate of 1,201,000, 5.3% below the revised August rate and 3.7% above the September 2017 rate. Single-family housing starts in September were at a rate of 871,000, 0.9% below the revised August rate and 4.8% higher year-over-year. Housing Starts for 5+ units was 324,000, 12.9% lower than the August rate and 4.5% higher than the September 2017 level. New home sales in September 2018 were at a seasonally adjusted rate of 553,000, 5.5% below the revised August rate and 13.2% below the September 2017 rate. The median sales price of new houses sold in September 2018 was $320,000. The average sales price was $377,200. The seasonally adjusted estimate of new houses for sale at the end of September was 327,000, which represents a supply of 7.1 months at the current sales rate. Existing-home sales (not graphed), as reported by the National Association of Realtors, fell 3.4% in September, or a seasonally adjusted annual rate of 5.15 million. Sales are now 4.1% below a year ago. The median price for existing-home sales was $258,100, up 4.2% from a year ago. September s price increase marks the 79 th straight month of year-over-year gains. Supply declined 1.6% to 1.88 million and is up 1.1% from one year ago. Relative to sales, supply is at 4.4 months vs. 4.2 months a year ago. According to Freddie Mac, the average commitment rate for a 30-year, conventional, fixed-rate mortgage increased to 4.63% in September from 4.55% in August. The average commitment rate for all of 2017 was 3.99%. Existing-home sales in the Midwest remained the same in September as last month but are down 1.5% year-over-year. The median price was $200,200, up 1.9% from a year ago. Sales in the West declined 3.6% in September and is 12.2% lower yearover-year. The median price was $388,500, up 4.1% year-over-year. 2,500 Housing Permits, Housing Starts, and New Home Sales 2,000 Recession Housing Permits Housing Starts New Home Sales 1,500 1, Source: US. Bureau of the Census/FRED 15

16 Market Indices 16

17 Percent S&P 500 CBOE VIX Market Indices STOCK MARKET CONTINUES ITS VOLATILE TREND, YIELD CURVE FLATTENS S&P 500 closed September at 2,902, 16.4% higher than 12- months prior. The CBOE Volatility Index, a measure representing the market s expectation of stock market volatility, indicates that the market expects the range of movement, up or down, in the S&P 500 index over the next year to be less than 12.9%. 3-Month LIBOR (not graphed) also ended September at 2.35%. 3,500 3,000 2,500 2,000 S&P 500 and CBOE VIX S&P 500 CBOE VIX (Right Axis) Short-term rates are on the rise and long-term rates remain relatively low as the yield curve continues to flatten. The 10-year Treasury Note minus 2-year Treasury Note spread fell to 0.23% on September 30 and remains below the 32 year median of 1.08%. With potential rate hikes on the horizon, modest inflation, and geopolitical issues looming, how will the short and long end of the curve react? 1,500 1, Year - 2 Year Treasury Yield Curve Steepness Source: S&P Dow Jones Indices LLC/Chicago Board Options Exchange/FRED Recession 10Y-2Y TSY Spread 32 Year Spread Median (2Y-10Y) Source: Board of Governors of the Federal Reserve System (US)/FRED 17

18 Economic Activity 18

19 Percent of Capacity Percent Chg. From Year Ago Economic Activity INDUSTRIAL PRODUCTION CONTINUES TO STRENGTHEN Industrial production increased 0.3% in September, about the same rate of change as the prior two months, and posted a 5.1% increase year-overyear. Output growth in September was held down slightly by Hurricane Florence, with an estimated effect of less than 0.1%. Its subcomponents, manufacturing, mining, and utilities, posted month-over-month changes of 0.2%, 0.5%, and 0.0%, respectively. Year-over-year, manufacturing, mining, and utilities increased 3.5%, 13.4%, and 5.4%, respectively Industrial Production Index 5.1 Manufacturing makes up the bulk of the industrial sector and posted its fourth consecutive monthly increase. In September, the index for durable goods advanced 0.6% (4.1% year-over-year), while the production of nondurables declined 0.1% (3.6% increase year-over-year). All major industry groups within durables, except for nonmetallic mineral products; electrical equipment, appliances, and components; and miscellaneous goods, posted advances. However, all major industry groups within nondurables, except for paper and plastics and rubber products, declined Mining continues to post solid gains and has posted eight consecutive monthly gains. The index has advanced about 24% from its trough in 2016, supported by gains in the oil and gas sector. -20 The utilities index was unchanged in September, as a decline in electric utilities offset an increase in natural gas utilities. Source: Board of Governors of the Federal Reserve System (US)/FRED Capacity Utilization: Total Industry 78.1 Capacity utilization was 78.1% in September, a rate that is 1.8% below its long run average. The manufacturing component was at 75.9% in September, a rate that is 2.4% below its long-run average. The operating rate for durables increased to 76.3%, slightly below its long-run average of 76.9%, and nondurables slipped to 77.0%, well below its long-run average of 80.1% Utilization for mining dropped to 92.1% in September but continues to run hot at 5.1% above its long-run average. 0 The utilization rate for utilities was at 77.7%, well below its long-run average of 85.3%. Source: Board of Governors of the Federal Reserve System (US)/FRED 19

20 Money Supply and Velocity 20

21 Ratio Money Supply & Velocity 3 rd QUARTER VELOCITY OF MONEY SEES SLIGHT IMPROVEMENT BUT REMAINS NEAR ALL-TIME LOWS The velocity of M2, which includes M1 and savings deposits, CDs, and money market deposits, is the most common measurement referenced for the velocity of money and provides some insight into how quickly the economy is spending versus saving when compared to the velocity of M1. The velocity of M2 is slowly ticking up but remains near an all-time low at 1.46, indicating that money isn t changing hands and consumers continue to save. The velocity of M1, which is the money supply of currency in circulation and represents everyday short-term consumption transactions, is 5.59 versus the peak reading of in the 4 th quarter The latest reading is near the lowest reading since 3 rd quarter The velocity of MZM, which is the broadest money supply and helps determine how often financial assets are changing hands, is 1.33 and remains near the lowest reading in the history of this measurement which started in January Velocity of Money Stock Recession Velocity of M1 (LH axis) Velocity of M2 (RH axis) Velocity of MZM (RH axis) Source: Federal Reserve Bank of St. Louis/FRED 21

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