January 17, 2020 — There are many factors that have held back widespread economic growth over the past year or so, but perhaps nothing has unsettled the situation more than the tensions over U.S. trade policies with China, the EU and our partners in North America (and elsewhere). Tit-for-tat tariff volleys and real concerns that more would come created not only a difficult business climate, but also one that engendered pessimism around the globe. It may be that this is the week where those blues began to lift.
The U.S. and China signed off on the so-called “Phase One” trade agreement this week, and while by no means an all-encompassing deal, it is a start. For example, there are still levies on some $370 billion of Chinese goods coming into the U.S., which probably will be used as leverage at some point when any “phase two” discussion get serious. That said, having any agreement in place means that businesses can begin to work within the new structure, and this can help inject some certainty into both day-to-day and longer-term planning, and certainty helps build confidence in the business environment.
At the same time, the Senate signed off on the replacement for NAFTA, the U.S.-Mexico-Canada-Agreement (USMCA), so it looks as though we’ll also have a new trade pact in place with our largest trading partners before long, too. In addition, there appears to be some expectation that a process of tariffs and negotiations with the European Union will be coming at some point, and the Brexit process probably requires new deals to be signed with the U.K. as well.
Still, having an agreement in place between the world’s two largest economies and another in place with our largest trading partners should help brighten the economic skies a bit as we move further into 2020. At present, the U.S. is already doing relatively well economically, at least when compared against any number of developed economies; as such, any lift in growth from the agreements may merely lift us from a “modest-to-moderate” level of growth to a solidly “moderate” one.
The Fed’s latest survey of regional economic conditions (“Beige Book”) did reveal an economy that could stand a little boost. The summary statement noted that the economy continued to “expand modestly” in the six-week period leading up to January 6, with 7 of 12 Fed districts noting “modest” growth, two that did a little better than that and three where growth was said to be “slight”.
Although the December employment report last week revealed that only 145,000 new hires took place, suggesting that the economy was slowing at the end of 2019, the slower pace of hiring doesn’t appear to have been from a lack of job availability, but rather from a lack of qualified workers. The Beige Book summary noted that “Most Districts cited widespread labor shortages as a factor constraining job growth, and, in a few cases, business expansion.” To the extent that the trade deals add aggregate demand, it may be that a relative dearth of workers to fill jobs will result in somewhat higher wages, perhaps firming inflation a bit.
Presently, there isn’t much by way of inflation, or at least not accelerating inflation. Several measures of price pressures were released this week, and there wasn’t much surprise in any of them. Prices of imported goods did rise by 0.3% in December, about as expected, and an increase that was good enough to bring the annual level of import prices back up to a whopping 0.5%. However, that 0.5% was the strongest rate of import goods inflation since March, so perhaps the earlier tariffs and those that remain in place are bleeding their way into the supply chains as we go. Prices of goods headed out of the U.S. dropped in price, falling 0.2% for the month and now show a 0.7% annual decline, so we’re certainly not exporting any inflation at the moment.
Upstream of the consumer, the price changes measured at the producer level managed all of a 0.1% increase in December, half the expected increase and barely moving after a 0% change in November. So-called “core” PPI did nudge up by a tenth of a percentage point, but that was also less than forecasts called for. Regardless, there’s little to be seen here, as headline PPI is rising by just 1.3% over the last year, and core PPI by just 0.7 percent.
At the consumer level, price changes have been fairly steady for months, neither accelerating or decelerating by very much. In December, the Consumer Price Index rose by 0.2%, a little less than expected, but enough to bring the year-over-year level of prices up by 2.3%, still a fairly mild level, if the highest in since October 2018. A surge in energy costs (+3.5% for the month) drove the headline figure higher. However, the “core” measure of CPI (which excludes food and energy costs due to their volatile nature) edged just 0.1% higher, and has rise just 2.2% over the last year. On an annual basis, core CPI has been holding between 2% and 2.4% since March of 2018, with the current 2.2% annual rate right in the middle of that. While firm, there’s been no acceleration in core prices to speak of, and that suggests that the Fed’s preferred measure of inflation (a measure core personal consumption expenditures) is likely to show little change from the 1.6% – 1.7% rate at which it recently has been.
Moods of the members of the National Association of Home Builders remained ebullient in early January, if a touch less so than in December. The NAHB’s Housing Market Index eased one point to 75 for the month, with the measure of current sales of single-family homes sliding three point to a still-very-elevated 81. Expectations for activity in the next six months remained at 79, and the measure of foot traffic at model homes and showrooms rose by another point to rise to 58. You have to back to December of 1998 — more than 21 years ago — to find the last time the traffic measure was this high. So builders are happy, despite challenges of tight labor markets and other factors, including levies on a range of materials used in home construction.
Warm weather in December probably also helped to keep homebuilders cheery, as it allowed for a faster pace of home construction. Residential housing starts rose by 16.9% during the month to an annualized 1.608 million units started. Single-family starts rose by 11.2% to 1.055 million (annualized) units getting started, the highest single-family figure since June 2007. Multifamily starts also kicked in their share, rising 29.8% to 553,000 annualized units started during the month. The surge in starts probably is sufficient to cover demand for the near term, though, and permits for future activity slipped by 3.9% to 1.416 million units, a figure that is still elevated relative when compared against levels just six or seven months ago.
As is often the case after the holidays, applications for mortgages has leapt of late. In the week ending January 10, the Mortgage Bankers Association of America reported a 30.2% increase in applications placed with lenders, improving on a 13.5% jump to kick off 2020. As might be expected given the low-rate climate, applications for refinances led the way with a stout 42.7% jump, but those for purchase mortgages were no laggards, either, with a 15.5% increase of their own. The pent-up demand should start to settle out of applications in the next couple of weeks, but the climate for mortgages remains pretty favorable at the moment.
A couple of localized measures of factory activity were encouraging. In the regions covered by the New York and Philadelphia Federal Reserve Banks a gain in activity was seen to start January. The NY Fed’s Empire State Manufacturing index rose by 1.5 points to 4.8; while still a very modest level of activity, it nonetheless was the best since last summer and a seventh consecutive positive reading. A submeasure covering new orders rose by 4.9 points to a value of 6.6, also a fair gain, while one tracking employment was slightly softer at 9, a 1.4-point slide but still the second-highest figure since last April. Activity perked up to a greater degree in the area served by the Philly Fed. A 14.6-point bounce in their headline indicator put the figure at 17 for January, a 7-month high. The measure of new orders here added 7.1 points to a fair 18.2, and the employment tracker rose by 2.5 to 19.3 for the month. Taken together, there is just a hint of improvement to be seen, perhaps from the U.S.-China trade agreement announcement in December. If so, perhaps there will be some additional follow through in the coming months with the USMCA getting done, too.
Overall industrial production was down by 0.3% in December, but that decline can be discounted a bit. Of the components, manufacturing activity actually expanded by 0.2% (after a 1% rise in November), and mining output rose by 1.3%, rebounding after a minor dip. The drag in the headline figure was utility output, but this wasn’t due to a falloff in business use but rather simple due to a warmer-than-usual December across the U.S. lessening heating needs. Still, the softer output meant that somewhat less of available production floors needed to be active, so the measure of industrial capacity usage eased 0.4% to stop at a flat 77% of production capacity in active use. We’d have to see usage get above 80% to start to have concerns about capacity bottlenecks having effect on price pressures, and we remain a good deal away from that level.
Although conditions may be poised to improve somewhat, business activity still remains fairly muted, so it’s again up to the consumer to drive economic growth forward. In December, retail sales expanded smartly, rising 0.3% overall for the month, driving the annual rate of sales growth back up to a solid 5.8%. So-called “core” retail sales were actually a bit stronger; this measure, one that excludes sales at auto dealers and gasoline stations due to their unpredictable influence rose 0.5% for the month, lifting the annual core rate of sales from a soft 2.7% in November to a robust 5.7% in December.
While there can always be reasons for pessimism, consumers remained very optimistic in early January. The University of Michigan survey of Consumer Sentiment dipped by 0.2 points to start the month, easing to 99.1 in the initial report to start 2020. Current conditions were assessed slightly more favorably, with this index posting a 0.3 point rise to 115.8, while one tracking expectations stepped back a little, shedding six tenths of a point to slide to 88.3 for the month so far. Sentiment is holding up well despite the increase in tensions with Iran and the ongoing impeachment theatre in Washington. Pocketbook issues rule the day as they usually do, and with unemployment low and wages rising optimism will likely continue to remain elevated.
If optimism among business interests here and in other developed economies can start to improve, the prospects for faster growth will also improve. Certainly, getting trade deals in place will help to some degree, but improvements will likely be gradual and may not amount to much for a while. Until we start to see this (and followed by improving growth in a widespread fashion) there’s little reason for interest rates to move very much. Certainly, that’s likely to be the case again next week; U.S. markets get a Monday holiday followed by a fairly light calendar of new data, so little change to mortgage rates is expected again. The underlying currents that influence mortgage rates are pushing and pulling with about equal strength at the moment, but we might just see a couple of basis point decline in the average offered rate for a conforming 30-year FRM reported by Freddie Mac next Thursday morning