Inflation Slows In June – Market Update

People keep spending and yet inflation is coming down if you look at the numbers. What’s the Federal Reserve going to do, and could we get that soft landing?

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As always, the analysis in this report is aided by our friends at Econoday.¹ Let’s get into it!

Retail Sales

Overall retail sales were up 0.3% in May, said the Census Bureau. When vehicles were taken out of the mix, sales were up 0.1%, but they rose 0.4% when further removing gas.

Turning to individual categories, sales of motor vehicles and their products were up 1.4% in May. Sales were down 2.6% at gas stations on lower fuel prices. Miscellaneous retailers saw their sales decline 1%.

Most other categories were positive. But there was a 2.2% increase in sales at building material and garden supply stores that really helped spur things. Sales at furniture and home furnishing establishments were also up 0.4%.

Industrial Production

According to the Federal Reserve, industrial production fell 0.2% compared to the prior month in May. The good news is that manufacturing output was up 0.1%. Meanwhile, 79.6% of productive capacity was being used across the economy.

There was a 0.4% downturn in coal mining to go along with a 1.8% drop in utilities production, perhaps related to milder May weather. Indeed, natural gas production was down 2.1%. Electric output remained flat.

On the manufacturing side, durable goods orders were up 0.3%, while nondurable were down 0.1%. There was a 0.2% rise in motor vehicle production that helped the overall manufacturing number.

Housing Market Index

In June, sentiment among builders was up 5 points at 55, finally breaking above the breakeven number. People who are buying new houses in June may have been approved for financing in April or May when rates were lower.

Because builders can close financing on projects that haven’t even started yet, these buyers can take advantage and get a more favorable rate while not moving in for a while.

Underlying the overall number reported by the National Association of Home Builders, correct single-family home sales were up 5 points at 61 in June in terms of future sales taking place over the next 6 months, these were up 6 points. Finally, traffic of prospective buyers going through homes is up 4 points at 37.

New Residential Construction

This report is a joint release from the Department of Housing and Urban Development (HUD) and Census Bureau looking at residential construction fundamentals all the way from permits to completions. We’ll start with completions because the closest to inventory hitting the market.

Completions of construction projects were up 9.5% since April at a seasonally adjusted annual rate 1.518 million. This is 5% higher than May last year. Single-family completions were up 3.9% at 1.009 million. Multifamily unit completions in buildings with 5 units or more came in at 493,000.

Turning to starts, shovels were put in the ground at a rate of 1.631 million on a seasonally adjusted annual basis in May. This is up 21.7%, up 5.7% since last year. Single-family starts were up 18.5% from April at 997,000. Meanwhile, there were 624,000 multifamily units started.

Finally, permits being called were up 5.2% at 1.491 million annually. This is 12.7% lower than last year at the same time. Meanwhile, single-family permits were up 4.8% from April hundred 97,000. Multifamily starts came in at 542,000.

Existing Home Sales

Existing home sales rebounded very slightly in May, up 0.2% to 4.3 million, said the National Association of REALTORS^® (NAR). This is down 20.4% since the same time a year ago. 4.7% at 450,000 units. Meanwhile, prices rose 2.6% to a median of $396,100. However, it’s down 3.1% from $408,600 last year.

Finally, that’s just 3 months’ worth of inventory on the existing homes market, up slightly for the month.

Durable Goods Orders

Durable goods orders were up 1.7% overall in May according to the Census Bureau. When transportation was taken out, orders were up 0.6%, while there was a 0.7% uptick in core capital goods, which takes out defense capital goods and aircraft orders.

In key drivers, there was a 32.5% increase in orders of non-defense-related aircraft, with a 2.2% uptick in orders of motor vehicles and parts. This is offset slightly by the fact that nondefense aircraft orders were down 35.4%.

Looking at other indicators, order backlogs for up 0.8%, so manufacturers should be staying plenty busy. Orders of primary metals were up 0.5%, even as fabricated metals were unchanged. Orders of missionary were up 1%, while orders of computers and electronics rose 0.3%. Electrical equipment orders are up 1.7%

Case-Shiller Home Price Index

The Case-Shiller index is a rolling 3-month average of home prices on completed transactions in 20 cities across the country. Prices were up 0.9% on a seasonally adjusted basis in April. Meanwhile, they’ve gone up 1.7% overall on the year. It’s worth noting these prices are down 1.7% since last April.

Miami and Chicago have the highest rate of price appreciation in the index, with Atlanta and Charlotte, North Carolina following close behind. The West Coast was Exhibit A of a hot housing market not so long ago. Now Seattle and San Francisco bring up the rear of the index.

FHFA House Price Index

Unlike its Case-Shiller counterpart, this index from the Federal Housing Finance Agency looks only at prices for homes closed with conventional loans backed by Fannie Mae or Freddie Mac. It’s also not a rolling average. However, it does cover all regions of the country.

Prices were up 0.7% in April across the index. When looking at this compared to April last year, prices are up 3.1%. This is quite a convergence from the Case-Shiller index and certainly something to keep an eye on.

Consumer Confidence

Consumer confidence was up 7.2 points overall at 109.7, said the Conference Board, handily beating consensus estimates. Assessments of the present situation were up 7.4 points to 155.3. Meanwhile, expectations were up 7.8 points at 79.3.

Turning first to the present situation, slightly fewer people are saying jobs are hard to get, down 0.2% to 12.4%. The real headline here is that the number of people who think jobs are plentiful was up 3.5% at 46.8%. Meanwhile, business conditions are good at 23.7%.

When it comes to future business conditions, consumer see improvement coming. More people seem more jobs ahead and there was a better than 5% decrease in those who see fewer jobs on the horizon at just 16%. People also generally see incomes going up, so spirits are high.

Another big indicator of how people are feeling this the stock market because people tend to invest more in stocks if they think things are going to be better. People who are bullish now outnumber those who think the stock market is more likely to go down 34.7% to 30.2% following a 4.5% uptick in June.

New Home Sales

Sales of new homes were up 12.2% in May at a seasonally adjusted annual rate of 763,000 according to the Census Bureau and HUD. Even better, the sales rep 20% compared to last year. There is enough scarcity in the existing home sales market that people are willing to pay a premium for new construction.

Supply is down at 6.7 months, well off the April number of 7.6 months based on the pace of sales. Limited supply helped push prices up. The median sales price rose to $402,400, up 3.5% from April, but having fallen 7.6% from last year.

As mentioned earlier, home buyers are willing to wait longer and longer if it means securing better mortgage rates. Breaking down purchase by stage of construction, 26% hadn’t even been started. Meanwhile, 39% were currently being worked on. The remaining 35% of sales were for units completed.

Gross Domestic Product (GDP)

Overall GDP showed that the economy grew at a rate of 2% in the final reading of the first quarter, according to the Bureau of Economic Analysis. This was 0.7% higher than the previous estimate.

The number was greatly helped by the fact that consumer spending was up 0.4%, growing at an annualized rate of 4.2%. A lower-than-expected trade deficit also played a role.

It wasn’t all flowers and chocolate. Gross domestic incomes were down 1.8% in the quarter, which could be a sign of economic weakness. However, it hasn’t stopped spending, which was boosted by a .2% uptick in services spending. Durable goods spending was slightly lower in the latest revision but is still up 16.3% for the quarter.

Government spending was up 5%. Residential investment was down 4% for the quarter, although in a prior estimate it was down 5.4%. Nonresidential investment was also revised down but was still up 0.6%.

Pending Home Sales Index

The number of homes under contract for sale was down 2.7% in May, with an added index level of 76.5, according to NAR. This is down 22.2% from last May. At the same time, the report also says that there are three offers for each home being listed. So, there are positive signs.

Personal Income And Outlays

Personal incomes were up 0.4%, while expenditures only rose 0.1%. Consumers got a chance to save some money last month. Inflation was only up 0.1% overall for the month, but has risen 3.8% in the year. When looking at core categories, inflation is up 0.3% and 4.6% for the year.

The last inflation number listed there is the most important because it’s the one the Fed uses in making its interest rate decisions. The annual core inflation number is coming down, just not too quickly.

On the income side, there was a 0.5% rise in wages and salaries. Proprietor income is up 0.3% while there was a 4.3% decline in farming income. Government benefits were up 0.3% including a 2.1% decline in unemployment insurance, but a 0.6% increase in veterans benefits paid out.

On the spending side, the Bureau of Economic Analysis report showed that spending and durable goods was down 0.9% and nondurable goods were down 0.3%. Meanwhile, services spending was up 0.4%.

ISM Manufacturing Index

According to the Institute for Supply Management, manufacturing fell further into contraction in June, going from 46.9 to 46 in the latest reading. As a reminder, 50 is the breakeven reading indicating growth. This is the seventh straight month in which the manufacturing sector has shrunk.

New orders did keep shrinking, but it’s happening at a slower pace. This index was up 3 points at 45.6. On the downside, production was down 4.4 points to 46.7. Going hand-in-hand with the downturn in production, employment also slipped, falling 3.3 points to 48.1. This means there were layoffs overall in the sector as it was below breakeven.

Supplier deliveries came in up 2.2 points at 45.7. There’s been some improvement in terms of speed. Manufacturing inventories are down 1.8 points at 44.

International Trade

The overall U.S. trade deficit fell $5.4 billion in May to $69 billion, said the Bureau of Economic Analysis. Goods imports were down $7.2 billion, and imports of services were down $300 million as well.

On the export side, goods exports were down $2.5 billion, but services exports have a $400 million gain, boosted by intellectual property. On the goods side, exports were helped by cars and trucks as well as consumer goods. Meanwhile, food and beverage exports were down by $1.9 billion to $12.4 billion. Industrial supply exports also fell.

Looking at imports, these were down by $3.5 billion for industrial supplies and $4.8 billion for consumer goods. There were also tips for pharmaceuticals and cell phones.

Employment Situation

There were 290,000 jobs added to nonfarm payrolls in June. The unemployment rate fell 0.1% to 3.6% while the labor force participation rate stayed unchanged at 62.6%. There was an uptick of 0.4% and average-only earnings which have gone up 4.4% on the year. The length of the average workweek was 34 hours, 24 minutes.

According to the Bureau of Labor Statistics, 149,000 jobs were added to private payrolls with the remaining 60,000 coming from government. Turning to industries, there were 7,000 jobs added to manufacturing payrolls. There were 20,000 jobs added in state government to go along with 32,000 at the local level.

Health care and social assistance added 65,000 jobs while construction posted 23,000. Retail did fall 11,200 and there were 12,600 temporary help jobs cut.

Consumer Price Index (CPI)

Prices were up 0.2% in the month of June according to the Bureau of Labor Statistics. When food and energy were taken out, prices were also up 0.2%, but every risen 4.8% for the year. Food prices were up 0.1%, and energy rose 0.6%, still down 16.7% for the year.

The increasing cost of shelter was the biggest contributor to an increase, going up 0.4% and rising 7.5% over the last year. Motor vehicle insurance was also up 1.7%. There were also price increases for clothing, recreation and personal care. The good news is you can get cheaper airfare, communications and home furnishings.

Producer Price Index (PPI)

On the production side, prices were only up 0.1% on the month of June and the same for the yearly increase. This data from the Bureau of Labor Statistics is a good sign because inflation slowing down for producers can only be a good thing for consumers.

Mortgage Rates

Mortgage rates have been somewhat lower over the past few days. The positive inflation reports have both the stock market and bond markets rallying. With that in mind, it could be a great time to lock your rate. The data in the Freddie Mac survey that we are about to sure was collected last week, so it’s less reflective of the moment.

According to the Freddie Mac Primary Mortgage Market Survey^®, the average rate on a 30-year fixed was up 15 basis points at 6.96%. This has risen from 5.51% last year.

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