Federal Reserve Skips Rate Hike – Market Update

It seems like the news cycle is moving faster and faster, but the Federal Reserve for one would like to slow down. They chose not to move up the federal funds rate target at their most recent meeting.

Headline News

This article benefits from the analysis of our friends at Econoday.¹ Let’s run through some of the market moving data.

Retail Sales

Retail sales were up 0.4% overall in the month of April, a number that held steady even when vehicles were removed from the equation, said the Census Bureau. Gas prices were down a bit in April because when gas was removed, sales were up 0.6% for the month. However, overall numbers came in below consensus expectations for a 0.7% uptick.

Taking a look at a couple of key categories, sales of cars and trucks were up 0.4%, with sales at gas stations down 0.8%.

Turning to a couple of the categories that are key in housing, the data is mixed. Sales at building materials and garden equipment stores were up 0.5% in April. Meanwhile, sales of home furnishings were down 0.7% in a category that includes furniture sales. Furthermore, sales of electronics and appliances were down 0.5%.

There’s still some discretionary spending money because sales at restaurants and bars were up 0.6% in April. Meanwhile, sales at nonstore and miscellaneous retailers were up 1.2 and 2.4%, respectively. Department stores sales were down 1.1%, but there was a 0.9% uptick for general merchandise stores.

Industrial Production

Overall industrial production was up 0.5% in April and has risen 1% in the manufacturing sector, according to the Federal Reserve (Fed). The capacity utilization rate in industry is 79.7%, down just a touch from the last read.

In the manufacturing sector, there was a 1.4% uptick in durable goods manufacturing with a 0.6% rise in the manufacture of nondurable goods. There was a 9.3% increase in the manufacture of motor vehicles and parts. Meanwhile, mining was up 0.6%, while utility production was down 3.1%.

Taking a closer look at mining, the Fed pointed to increases in the extraction of oil and gas. Meanwhile, on the utility side, output was down 1.9% in terms of electricity and 10% for natural gas. The natural gas production is likely to continue to decline as the weather warms.

Housing Market Index

In May 2023, homebuilders weren’t necessarily optimistic, but they weren’t pessimistic either. And the survey from the National Association of Home Builders shows things may be trending in a positive direction. The overall number of 50 is essentially breaking even, but it’s the highest level since July of last year.

Sales of single-family homes are on the rise according to this survey group, with the component up 5 points at 56. Meanwhile, expected sales over the next 6 months were up 7 points at 57. Traffic is still the laggard, but it’s up 2 points at 33, indicating more prospective buyers are walking through homes.

New Residential Construction

In the first of a couple of joint reports from the Census Bureau and Department of Housing and Urban Development (HUD), completions of new housing units were down 10.4% in April at a seasonally adjusted annual rate of 1.375 million, still 1% higher than a year ago. Single-family completions were down 6.5% at 971,000, while there were 400,000 multifamily units completed in buildings with 5 units or more.

Meanwhile, ground was broken on 2.2% more units in May for a seasonally adjusted annual rate of 1.401 million. Particularly, single-family starts were up 1.6% at 846,000. There were 542,000 multifamily units started. The downside is that the overall number has fallen 22.3% since last year.

Permits are the furthest out from becoming actual livable homes, but these were down 1.5% at 1.416 million on an annual basis. These were down 21.1% from a year ago. In good news, single-family permits were up 3.1% at 855,000. There were 502,000 multifamily permits pulled.

Existing Home Sales

Overall sales of existing homes were down 3.4%, according to the National Association of REALTORS^® (NAR). They’ve fallen 23.2% on the year. There’s limited inventory and mortgage rates have been up and down.

Sales of single-family homes fell 3.5% to 3.85 million units, while multiunit home sales are down 2.3% at 430,000. These are down 22.4% and 29.5% on the year, respectively.

Inventory on the market relative to existing sales was up to 2.9 months’ worth of supply, compared to 2.6 months in March, but it’s still critically low. Meanwhile, the median price of an existing home in April was up 3.6% at $388,800. This is down 1.7% from the same time last year. Homes were coming on and off the market in 22 days in April.

New Home Sales

The new home sales rate was up 4.1% at an annual rate of 683,000 according to the Census Bureau and HUD. Overall supply in the market is at 8.5 months based on the current pace of sales in April. Single-family supply is slightly lower at 7.6 months.

The median price of a new single-family home was down 7.7% in April at $455,800, which fell 8.2% from last year. The analysts at Econoday speculate that this has to do with builders turning to smaller projects.

There was an 18% uptick in the number of single-family home sales that haven’t broken ground. Meanwhile, 39% of sales were currently under construction. Finally, 38% of new home sales were for completed units.

Gross Domestic Product (GDP)

GDP is one measure of economic growth or decline. In the second preliminary reading for the first quarter from the Bureau of Economic Analysis, it showed the economy was growing at an annual rate of 1.3% in the U.S. Much of this had to do with a 3.8% uptick in consumer spending annually. Both are positive revisions from the last reading.

Goods spending was up 6.3% overall, with a 16.4% uptick in spending on durable goods. Meanwhile, services spending rose 2.5%, compared to 2.3% in the last report. Government expenditures were also up slightly, at 5.2%. Exports were also up 5.2%, with a 4% rise in imports. Private inventories rose by $16.9 billion as well.

Now to the downsides. Gross investment was down 11.5%, although this is better than the initial estimate. Business investment was up 1.4%. However, residential fixed investment, homes, was down 5.4%.

Durable Goods Orders

Durable goods orders came in up 1.1% on the month of April. On the downside, orders were down 0.2% when transportation was excluded. However, orders of core capital goods were up 1.4%, which is a good sign of business investment.

There was a 3.7% uptick in orders of transportation equipment as there was a 32.7% increase in military aircraft orders. Machinery orders were up 1% and computer orders increased 1.8%.

On the downside, commercial aircraft orders were down 8.3%, but this is coming off a 96% increase in March. Motor vehicle orders were down just 0.1%. Looking into supply chain, shipments were down 0.7%. Meanwhile, there was a 1% uptick in inventories. There was a 0.8% rise in unfilled orders. Backlogs tend to mean hiring.

Personal Income And Outlays

Personal incomes were up 0.4% in April, said the Bureau of Economic Analysis. The good news is this matched inflation in both the overall and core price indexes. So, inflation doesn’t appear to be outpacing wage growth according to the Fed’s preferred measure. The downside is that personal consumption expenditures were up 0.8%. Americans don’t appear to be saving.

One thing that might give the Fed pause is that both year-over-year inflation rates overall and excluding food and energy came in higher than estimates. These were up 4.4% and 4.7%, respectively.

Looking at incomes, there was a 0.5% increase in wages to partially offset a 3.4% decline in government social benefits. Benefits for veterans were up 0.7%. In something recession watchers are probably tracking closely, unemployment insurance payments were up 0.4%.

On the spending side, it was up 1.6% for durable goods, 0.8% for nondurable goods and 0.7% for services. Inflation likely had something to do with this.

Case-Shiller Home Price Index

In data going back to March, home prices for all purchase transactions in 20 major metropolitan cities were up 0.5% on a seasonally adjusted basis, according to Case-Shiller. When removing the seasonal adjustment, they were up 1.5%. They’ve fallen 1.1% for the year. The Southeast had the biggest gains while Western cities bring up the rear.

FHFA House Price Index

Meanwhile, the home price index from the Federal Housing Finance Agency operates a little bit differently than Case-Shiller’s rolling 3-month average and it only looks at conventional loans. Yet the trajectory of upward prices matches. According to the data from March, prices were up 0.6% for the month and 3.6% year to year.

Consumer Confidence

In May, consumer confidence was down 1.4 points at 102.3. However, April was revised upward by 2.4 points. The current conditions component was down 3.2 points to 148.6. Meanwhile, the index for future expectations was down 0.2 points at 72.5.

People are worried about employment being an issue, but business conditions aren’t considered to be in bad shape right now. Meanwhile, future income and employment prospects were perceived to be a bit better than last time the survey was taken. Business conditions in the near future are also seen as positive.

According to the Conference Board, 5.6% of people plan to buy a home in the next 6 months. Meanwhile, there was an uptick in appliance and auto purchase planning. Inflation expectations do continue to be elevated.

ISM Manufacturing Index

According to the Institute for Supply Management, activity continued to contract in May, below the breakeven level of 50 for the seventh straight month. The pace of the shrinking is also accelerating. The overall index was at 46.9 in May compared to 47.1 in April.

New orders were down 3.1 points at 42.6. Meanwhile, production was up 2.2% at an index level of 51.1. Employment is also expanding slightly, up 1.2 points at 51.4. Supplier deliveries are coming faster, as this index fell 1.1 points at 43.5. Although this sounds like a good thing, it tends to be the result of fewer new orders coming in.

Inventories are also following suit and being drawn down 0.5 points at 45.8. Backlog orders are down 5.6 points at 37.5. That number hasn’t been this low since February 2009.

Employment Situation

There were 339,000 jobs added to nonfarm payrolls. The unemployment rate did tick up to 3.7% from 3.4%, said the Bureau of Labor Statistics.

Because the participation rate remained steady at 62.6%, it does mean more people lost their jobs or attempted to switch and didn’t find one right away. However, this is still historically low. Like many of the things in this report, it’s something to keep an eye on.

Looking at individual industries, there were 74,600 jobs added in health care and social assistance, 64,000 added in professional and business services and 48,000 in hospitality. Additionally, there were 24,200 jobs picked up in transportation and warehousing and 56,000 in government.

Rounding out some of the bigger industries, 25,000 jobs were added in construction. Meanwhile, there were 2,000 jobs cut in manufacturing.

Wages were up 0.3% and have ticked up 4.3% for the year. Meanwhile, the length of the average workweek was slightly shorter at 34 hours, 18 minutes.

International Trade

The overall U.S. trade deficit increased by $14 billion, according to the Census Bureau. The goods deficit was about $96.1 billion, while we have around a $21 billion services surplus.

Exports were down 1.5% overall at just over $249 billion. Services exports were up 0.2%, but goods exports were down 5.3%. On the services side, travel exports were up. Meanwhile, on the goods side, consumer goods exports were down more than $1.7 billion and there was a $2 billion decrease in crude oil exports.

Turning to imports, they were up 2.2% overall including a 2% increase in goods imports and a decline of 0.6% in imports of services. A couple of the big import drivers were a $2 billion rise in automotive and an increase of more than one $20 billion in industrial supplies imports. Meanwhile, in services, our reliance on imports for transport and travel declined.

Consumer Price Index

This isn’t the Fed’s preferred measure of inflation, but there is some evidence that the pace of price increases is slowing down based on this reading from the Bureau of Labor Statistics. Overall inflation was up 0.1% in May and 4% on the year. Without food and energy, it was up 0.4% for the month and has gone up 5.3% on the year.

In some of the key categories we truck, shelter was up 0.6% in May and has gone up 8% since last year. Rent was up 0.5% and 8.2% for the year. Food prices rose 0.2% and have gone up 6.7% since last May.

Meanwhile, energy was down 3.6% and has fallen 11.7% since last year. There was a 4.4% monthly increase in the price for used cars and trucks, but these were down 4.2% this year. Also on the higher side were motor vehicle insurance, clothing and personal care items.

Plane tickets and household furnishings saw price decreases last month.

Producer Price Index (PPI)

Prices for producers were down 0.3% overall in May. They’ve gone up just 1.1% on the year. Food prices were down 1.3% and there was a 6.8% drop in energy prices in May, according to the Bureau of Labor Statistics.

Taking out food and energy, prices were up 0.2% and they’ve risen 2.8% since last May. When further taking out trade services, monthly prices were flat and have again gone up 2.8% year-to-year.

Overall goods prices were down 1.6% for the month. Meanwhile, price growth in services was down 0.1% to a 0.2% monthly increase. Overall, prices in the services sector are up just 2.7% for the year.

Mortgage Rates

Mortgage rates fell this week after going up each of the last 3 weeks. Maybe the market knew something because the big news of the past couple days is the fact that the Federal Reserve chose to skip a rate hike this time around when it came to the target for the federal funds rate.

Of note, this likely isn’t the end of rate hikes. Four times a year, the Fed releases projections of its members. The central tendency among the members is to anticipate another rate hike or two prior to the end of the year. If you see a rate you like, it cannot hurt to lock your rate if you’re in the market. The crystal ball is broken.

The average rate on a 30-year fixed mortgage according to Freddie Mac was 6.71% last week, down 8 basis points. This is up from 5.23% last year.

Looking at shorter terms, the average rate on a 15-year fixed mortgage fell 11 basis points to 6.07%. At this time a year ago, the rate was 4.38%.

¹ Important Legal Notice: Econoday has attempted to verify the information contained in this calendar. However, any aspect of such information may change without notice. Econoday does not provide investment advice, and does not represent or warrant that any of the information is accurate or complete at any time. Copyright 2023 Econoday, Inc. All rights reserved.