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By HaleStewart October 22, 2017 7:18 am
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US Economic Week in Review: Good Numbers Continue

            This week’s news continued to show the US economy is expanding at a consistently modest pace.  The latest Beige Book describes broadly positive economic news.  Industrial production – a key coincident indicator – expanded, although this should be seen in the broader context of a fairly weak numbers for this expansion.  Two key leading indicators (building permits and initial unemployment claims) were sound while existing home sales ticked slightly higher. 

            On Wednesday, the Fed released the latest Beige Book, which contained the following overview to the US economy:

Reports from all 12 Federal Reserve Districts indicated that economic activity increased in September through early October, with the pace of growth split between modest and moderate. The Richmond, Atlanta, and Dallas Districts reported major disruptions from Hurricanes Harvey and Irma in some areas and sectors, including transportation, energy, and agriculture. Manufacturing activity and nonfinancial services expanded modestly to moderately in most Districts. Retail spending rose slowly, while vehicle sales and tourism increased in most Districts. Residential construction continued to increase, and growth in commercial construction was up slightly on balance. Low home inventory levels continued to constrain residential sales in many areas, while nonresidential real estate activity increased slightly overall. Loan demand was generally stable to modestly higher. Growth in the energy sector eased slightly. Agricultural conditions were mixed; while some regions were reporting better-than-expected harvests, low commodity prices continued to weigh down farm incomes.

Their description of retail sales as “slow” was a bit perplexing, as the Y/Y percentage increase has been consistent this year:

But aside from this characterization quibble, the Fed’s assessment is accurate; the economy, at the macro level, continues to expand at a modest pace.

            This week, the Federal Reserve released the latest industrial production report.  Let’s place these into a historical context:

The industrial production index (top chart) reached its first post-recession peak at the beginning of 2014, dipped and then moved higher at the beginning of this year.  Unlike the other major coincident indicators, it has yet to move meaningfully above its pre-recession highs.  The second chart explains why; only mining (in green) has grown since the end of the recession.  Manufacturing (in blue) and utility output (in red) has been more or less level since 2015. 

            The latest report was strong.  Industrial production rose .3% M/M and 1.6% Y/Y.  Most of the major market groups grew: consumer goods .5%, business equipment +.8%, and construction +1.9%.  Only materials declined, and then by a small .2%.

            Building permits were off 4.5% M/M, but this was largely caused by a 17.4% decline in 5+ unit numbers, which comprise 30% of the overall index.  1-unit permits rose 2.4% Y/Y.  Overall, this series has printed between 779 and 830 since 12/16:

The internals were strong (all numbers Y/Y): Northeast permits rose 32.1%, Western permits increased 14.9%, Midwest permits were up 8.8% while Southern permits were up 4.2%.

            Initial unemployment claims have returned to their pre-hurricane levels:

The two states that caused the most short-term damage (Texas and Florida) are returning to their pre-hurricane levels as well:

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This is good news, as initial claims are a highly predictive leading indicator.

            Finally, existing home sales increased .7%.  But the market is a bit weaker than desired:

Overall, this number has declined for most of 2017 (left chart) largely due to constrained inventory (right chart).  There is also the increasing problem of affordability:

Lawrence Yun, NAR chief economist, says closings mustered a meager gain in September, but declined on an annual basis for the first time in over a year (July 2016; 2.2 percent). “Home sales in recent months remain at their lowest level of the year and are unable to break through, despite considerable buyer interest in most parts of the country,” he said. “Realtors® this fall continue to say the primary impediments stifling sales growth are the same as they have been all year: not enough listings – especially at the lower end of the market – and fast-rising prices that are straining the budgets of prospective buyers.”  

15 and 30 year mortgage rates are still moving lower, which should help overall.

            Looking forward to next week, we’ll see a light news flow.  Durable goods and new home sales are out on Tuesday.  On Friday, we’ll get an initial read on 3Q GDP.

 

Hale Stewart is a tax attorney in Houston, Texas and a financial adviser with Thompson Creek Wealth Advisors.  He is also the author of the Lifetime Income Security Solution.

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