Saturday, August 31, 2019

People keep buying, so the economy keeps moving....for now

With the bond market flashing recession signs and the stock market moving wildly in August, what does the actual economy tell us in the last week?

Thursday also gave us a few early indications on that 3rd quarter outlook. One report showed the US’s trade deficit for goods narrowed a bit in July.
The international trade deficit was $72.3 billion in July, down $1.8 billion from $74.2 billion in June. Exports of goods for July were $137.3 billion, $0.9 billion more than June exports. Imports of goods for July were $209.7 billion, $0.9 billion less than June imports.
I’d throw a bit of caution on that export number, as the raw amount of exports dropped, but since they usually drop in July, it’s listed as an increase with a seasonal adjustment. So let’s wait for future months to see if any trend is in place.

On the flip side, the same report showed inventories on the rise.
Wholesale inventories for July, adjusted for seasonal variations but not for price changes, were estimated at an end-of-month level of $679.4 billion, up 0.2 percent (±0.2 percent)* from June 2019, and were up 7.1 percent (±1.1 percent) from July 2018. The May 2019 to June 2019 percentage change was unrevised at virtually unchanged (±0.2 percent)*.

Retail inventories for July, adjusted for seasonal variations but not for price changes, were estimated at an end-of-month level of $666.1 billion, up 0.8 percent (±0.2 percent) from June 2019, and were up 4.5 percent (±0.7 percent) from July 2018. The May 2019 to June 2019 percentage change was unrevised at down 0.3 percent (±0.2 percent).
Not a great sign, and somewhat surprising given the strong retail sales figure for July. But short-term, it likely gives a boost to Q3 GDP, and is an OK thing if consumer demand follows to clear those inventories.

There also was this odd number from the housing market.
Pending home sales fell 2.5% in July month to month and were 0.3% lower compared with July 2018, according to the National Association of Realtors. Pending sales are signed contracts to buy existing homes, so it is a future indicator of closed sales for August and September.

This weaker-than-expected result came after two months of sales gains and may be a sign of just how sensitive today’s borrowers are to even the smallest moves in mortgage rates.

The average rate on the 30-year fixed fell from around 4.2% at the start of May to around 3.8% at the start of July, according to Mortgage News Daily.

That brought a late surge of buyer interest to the spring market. The rate then reversed course and rose as high as 3.95% by mid-July. It then fell back to around 3.85% at the end of the month and fell more sharply through August.
This is basically a snapback from a good June, so not much to be drawn yet. But as the article hints, let’s see if the lower interest rates of this month causes the pending home sales to go back up. If not, then we’ll be seeing evidence that the economic concerns are bleeding into consumer behavior.

On Friday we got other evidence showing that consumers still spent in other areas for July in the face of slowing growth in other areas.
Americans boosted spending in July on recreational goods and vehicles as well as energy to run their air conditioners, but inflation remained low enough to give the Federal Reserve room to cut interest rates next month.

Consumer spending jumped 0.6% last month, the government said Friday, matching the MarketWatch forecast.

Incomes rose just 0.1%, however, marking the smallest gain in nearly a year. Americans had to dip into their savings to cover their expenses….

Americans spent more in July on new cars and trucks, especially recreational vehicles. They also ate out more and incurred bigger bills for gas and electricity during an especially hot month.

To pay for their purchases Americans cut back on what they saved. The savings rate fell to 7.7% from 8% — the lowest level since last November.
It’s worth mentioning that in July, the stock market was hitting record highs amid “trade optimism”….right before the DOW dropped 1,400 points in a week after that optimism crashed back into reality.

Sure enough, another report on Friday showed that consumers were shaken by August’s stock market volatility and other signs that recession may be on the way.
The numbers: A measure of how Americans view the strength of the economy fell to the lowest level in almost four years, reflecting growing worries about the U.S. trade war with China that’s led to higher and higher tariffs.

The final consumer sentiment survey fell to 89.8 in August from an early estimate of 92.3 and a 98.4 reading in July, the University of Michigan said Friday.

It’s the lowest mark since October 2016. Just a year and a half ago, the index hit 101.4 to mark the highest level since 2004.

What happened: The sharp decline in consumer sentiment stemmed from increasingly negative views of the one-third of respondents that brought up the tariffs on their own. They worry the dispute will increase inflation, reduce incomes and raise unemployment.
It’s going to be intriguing to see what wins out over the next month as August’s economic reports come out. Does the low consumer sentiment and weakness in income growth cause people to slow down their spending spree, which would make a recession almost imminent? Or does the strong consumer spending continue, which may allow for businesses to keep pumping out products to meet that demand, and keep the economy moving ahead?

This week, markets seemed soothed by more indications of “trade optimism”, so stocks gained back around 1/2 of the losses that had been compiled in the first 3 weeks of August. Except that much of those reports of optimism have been was largely BS, driven by the Trump Administration’s desire to keep stocks )and his re-election chances) afloat.

Going forward, let’s trust the fundamentals, folks. Not the rumors that oligarchs and coked-up hedge funders want us to believe.

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