Description
Raymond James
Economic Research
Retail sales edged up 0.1% in October, following no change
in August and September (up just 1.7% y/y). That sounds weak,
but these figures partly reflect the drop in gasoline prices (exgasoline, sales rose 0.1% in October and were up 4.1% from a
year ago. It’s not unusual to see a brief slow patch every now
and then. Job growth has been relatively strong over the last
year and aggregate wage gains should be supportive for
spending.
The drop in gasoline prices has helped, but the benefit to consumer spending growth has fallen short of expectations. That may be because those in the bottom half of the income scale tend to drive less and are facing higher rents. U.S. Foreign Trade, $bln 250 250 240 240 230 230 220 220 210 210 Imports Exports 200 200 190 190 180 180 170 170 Source: Census Bureau 160 160 11 12 13 14 15 16 Industrial production fell 0.2% in October, following a similar decrease in September, but that decline reflected mild temperatures (the output of utilities fell 2.5%) and a further contraction in energy exploration.
Manufacturing output rose 0.4% (+1.9% y/y) – mixed, but up moderately across industries. The strong dollar and softer global growth has restrained U.S. exports, but the decline has not been especially steep. Fed policymakers came very close to raising short-term interest rates in September, but delayed, citing concerns about the possible impact of overseas economic and financial developments on the U.S. economy. Two months later, the downside risks from the rest of the world have not gone away, but they appear to be a lot less worrisome. The Fed sets monetary policy based on where the economy is expected to be in 12 to 18 months.
Inflation has been low, but Fed officials expect that it will move back toward the 2% goal as the transitory effects of a strong dollar and low commodity prices fade. Labor market slack has been reduced and there should be a lot less slack a year from now. Hence, most Fed officials believe that it will be appropriate to begin the normalization process soon.
The minutes of the policy meeting in late October indicate that officials felt that the conditions for a rate hike “could well be met” by the time of the December policy meeting, but officials also generally believed that it was important to “leave policy options open.” A December rate hike is seen as more likely than not, but the financial markets have not completely factored in a December move. Technically, a 25-basis-point increase in federal funds target range shouldn’t have a big impact on the economy, and officials have continued to stress their expectation that the pace of tightening beyond the first move will be gradual. Looking ahead, developments in the rest of the world are likely to remain an important factor for investors. China’s transition is expected to be lengthy and bumpy.
Other emerging economies should eventually improve, but many could get a bit worse in the near term. The strong dollar and softer global growth have restrained earnings, but the domestic economy is expected to hold up relatively well. While forecasts suggest a smooth path for consumer spending and business investment, growth is more likely to be uneven across quarters. GDP ( contributions) consumer durables nondurables & services bus.
fixed investment residential investment Private Dom Final Sales government exports imports Final Sales ch. in bus. inventories 4Q14 2.1 0.4 2.4 0.1 0.3 3.9 -0.3 0.7 -1.6 2.1 0.0 1Q15 0.6 0.1 1.0 0.2 0.3 2.0 0.0 -0.8 -1.1 -0.2 0.9 2Q15 3.9 0.6 1.9 0.5 0.3 3.9 0.5 0.6 -0.5 3.9 0.0 3Q15 1.5 0.5 1.7 0.3 0.2 3.2 0.3 0.2 -0.3 3.0 -1.4 4Q15 2.3 0.3 1.6 0.4 0.3 3.1 0.2 0.0 -0.3 2.6 -0.2 1Q16 2.6 0.3 1.5 0.4 0.2 2.9 0.2 0.2 -0.3 2.6 0.0 2Q16 2.6 0.3 1.5 0.4 0.2 2.9 0.2 0.2 -0.3 2.6 0.0 3Q16 2.7 0.3 1.5 0.4 0.2 2.8 0.3 0.2 -0.3 2.7 0.0 4Q16 2.6 0.3 1.5 0.4 0.2 2.8 0.2 0.2 -0.3 2.6 0.0 2014 2.4 0.4 1.4 0.1 0.3 3.2 -0.1 0.4 -0.6 2.4 0.1 2015 2.5 0.4 1.7 0.4 0.3 3.4 0.1 0.2 -0.8 2.4 0.1 2016 2.5 0.3 1.6 0.4 0.2 3.0 0.2 0.2 -0.3 2.7 -0.2 2017 2.5 0.3 1.4 0.4 0.2 2.7 0.2 0.2 -0.3 2.5 0.0 Unemployment, % NF Payrolls, monthly, th. Cons.
Price Index (q/q) excl. food & energy PCE Price Index (q/q) excl. food & energy 5.8 324 -0.9 1.5 -0.4 1.0 5.6 195 -3.1 1.7 -1.9 1.0 5.4 231 3.0 2.5 2.2 1.9 5.1 171 1.6 1.7 1.2 1.3 5.0 185 0.9 2.1 0.8 1.6 4.9 185 1.8 1.8 1.6 1.6 4.8 185 1.8 1.8 1.7 1.7 4.7 180 1.9 1.8 1.8 1.7 4.7 175 1.9 1.9 1.8 1.7 6.2 260 1.6 1.7 1.4 1.5 5.3 196 0.2 1.8 0.3 1.3 4.8 181 1.7 1.9 1.5 1.6 4.8 163 1.9 1.9 1.8 1.7 Fed Funds Rate, % 3-month T-Bill, (bond-eq.) 2-year Treasury Note 10-year Treasury Note 0.10 0.0 0.5 2.3 0.11 0.0 0.6 2.0 0.13 0.0 0.6 2.2 0.14 0.0 0.7 2.2 0.18 0.1 0.9 2.4 0.42 0.4 1.3 2.7 0.65 0.6 1.5 2.9 0.92 0.9 1.8 3.1 1.18 1.2 2.0 3.2 0.09 0.0 0.5 2.5 0.14 0.1 0.7 2.2 0.80 0.8 1.7 3.0 1.80 1.8 2.4 3.3 © 2015 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC.
All rights reserved. International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863 2 .
The drop in gasoline prices has helped, but the benefit to consumer spending growth has fallen short of expectations. That may be because those in the bottom half of the income scale tend to drive less and are facing higher rents. U.S. Foreign Trade, $bln 250 250 240 240 230 230 220 220 210 210 Imports Exports 200 200 190 190 180 180 170 170 Source: Census Bureau 160 160 11 12 13 14 15 16 Industrial production fell 0.2% in October, following a similar decrease in September, but that decline reflected mild temperatures (the output of utilities fell 2.5%) and a further contraction in energy exploration.
Manufacturing output rose 0.4% (+1.9% y/y) – mixed, but up moderately across industries. The strong dollar and softer global growth has restrained U.S. exports, but the decline has not been especially steep. Fed policymakers came very close to raising short-term interest rates in September, but delayed, citing concerns about the possible impact of overseas economic and financial developments on the U.S. economy. Two months later, the downside risks from the rest of the world have not gone away, but they appear to be a lot less worrisome. The Fed sets monetary policy based on where the economy is expected to be in 12 to 18 months.
Inflation has been low, but Fed officials expect that it will move back toward the 2% goal as the transitory effects of a strong dollar and low commodity prices fade. Labor market slack has been reduced and there should be a lot less slack a year from now. Hence, most Fed officials believe that it will be appropriate to begin the normalization process soon.
The minutes of the policy meeting in late October indicate that officials felt that the conditions for a rate hike “could well be met” by the time of the December policy meeting, but officials also generally believed that it was important to “leave policy options open.” A December rate hike is seen as more likely than not, but the financial markets have not completely factored in a December move. Technically, a 25-basis-point increase in federal funds target range shouldn’t have a big impact on the economy, and officials have continued to stress their expectation that the pace of tightening beyond the first move will be gradual. Looking ahead, developments in the rest of the world are likely to remain an important factor for investors. China’s transition is expected to be lengthy and bumpy.
Other emerging economies should eventually improve, but many could get a bit worse in the near term. The strong dollar and softer global growth have restrained earnings, but the domestic economy is expected to hold up relatively well. While forecasts suggest a smooth path for consumer spending and business investment, growth is more likely to be uneven across quarters. GDP ( contributions) consumer durables nondurables & services bus.
fixed investment residential investment Private Dom Final Sales government exports imports Final Sales ch. in bus. inventories 4Q14 2.1 0.4 2.4 0.1 0.3 3.9 -0.3 0.7 -1.6 2.1 0.0 1Q15 0.6 0.1 1.0 0.2 0.3 2.0 0.0 -0.8 -1.1 -0.2 0.9 2Q15 3.9 0.6 1.9 0.5 0.3 3.9 0.5 0.6 -0.5 3.9 0.0 3Q15 1.5 0.5 1.7 0.3 0.2 3.2 0.3 0.2 -0.3 3.0 -1.4 4Q15 2.3 0.3 1.6 0.4 0.3 3.1 0.2 0.0 -0.3 2.6 -0.2 1Q16 2.6 0.3 1.5 0.4 0.2 2.9 0.2 0.2 -0.3 2.6 0.0 2Q16 2.6 0.3 1.5 0.4 0.2 2.9 0.2 0.2 -0.3 2.6 0.0 3Q16 2.7 0.3 1.5 0.4 0.2 2.8 0.3 0.2 -0.3 2.7 0.0 4Q16 2.6 0.3 1.5 0.4 0.2 2.8 0.2 0.2 -0.3 2.6 0.0 2014 2.4 0.4 1.4 0.1 0.3 3.2 -0.1 0.4 -0.6 2.4 0.1 2015 2.5 0.4 1.7 0.4 0.3 3.4 0.1 0.2 -0.8 2.4 0.1 2016 2.5 0.3 1.6 0.4 0.2 3.0 0.2 0.2 -0.3 2.7 -0.2 2017 2.5 0.3 1.4 0.4 0.2 2.7 0.2 0.2 -0.3 2.5 0.0 Unemployment, % NF Payrolls, monthly, th. Cons.
Price Index (q/q) excl. food & energy PCE Price Index (q/q) excl. food & energy 5.8 324 -0.9 1.5 -0.4 1.0 5.6 195 -3.1 1.7 -1.9 1.0 5.4 231 3.0 2.5 2.2 1.9 5.1 171 1.6 1.7 1.2 1.3 5.0 185 0.9 2.1 0.8 1.6 4.9 185 1.8 1.8 1.6 1.6 4.8 185 1.8 1.8 1.7 1.7 4.7 180 1.9 1.8 1.8 1.7 4.7 175 1.9 1.9 1.8 1.7 6.2 260 1.6 1.7 1.4 1.5 5.3 196 0.2 1.8 0.3 1.3 4.8 181 1.7 1.9 1.5 1.6 4.8 163 1.9 1.9 1.8 1.7 Fed Funds Rate, % 3-month T-Bill, (bond-eq.) 2-year Treasury Note 10-year Treasury Note 0.10 0.0 0.5 2.3 0.11 0.0 0.6 2.0 0.13 0.0 0.6 2.2 0.14 0.0 0.7 2.2 0.18 0.1 0.9 2.4 0.42 0.4 1.3 2.7 0.65 0.6 1.5 2.9 0.92 0.9 1.8 3.1 1.18 1.2 2.0 3.2 0.09 0.0 0.5 2.5 0.14 0.1 0.7 2.2 0.80 0.8 1.7 3.0 1.80 1.8 2.4 3.3 © 2015 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC.
All rights reserved. International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863 2 .
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