Personal Income and Outlays Slowing Trending Higher

Personal income rose 0.3% and spending rose 0.4%. The consumer is making a little more money and spending a little more money at the same time, while inflation is very low. That’s an alright combination. It’s not good, but it’s not bad either.

Wages and salaries rose +0.5 and +0.6 percent over the last two months. Turning to spending, the gain is 0.4 percent which is 1 tenth above consensus with July revised 1 tenth higher to 0.4 percent also.

Stock traders track the Personal Income and Outlays report because it helps them gauge the strength of the consumer sector and ultimately where the economy is headed. Income gives households the power to spend and that consumer spending keeps the economy growing.

GDP Stronger Than Thought +3.9%

Second quarter GDP came in at +3.9 percent. Very nice! The main reason for the better than expected number was that personal spending was stronger than originally thought.

Consumer spending also pushed the final sales component up +3.9 percent for a 4 tenths upward revision.

The third quarter GDP is forecast to come in much lower at around 1.5% or less than half of second quarter GDP.

Stock traders track the GDP because it is the broadest measure of economic activity across the economy. Traders like to see solid economic growth because solid business activity translates to higher corporate profits.

New Home Sales Highest Since February 2008

New home sales came in at 552K for the month of August. The consensus range was 500K to 531K. This is the highest level since February 2008!

The chart of new home sales show a clear strong uptrend:

Stock traders track new home sales because they have a powerful multiplier effect throughout the economy. When someone buys a new house not only does it generate revenue for the home builder, the real estate agent, and the bank that financed the purchase, it also generates revenue for the makers of: washers and dryers, furniture, refrigerators, and so on. This creates a powerful “ripple effect” throughout the economy.

Durable Goods Orders Drop -2% In August

Durable goods orders dropped -2% in August. This reading makes sense as last week’s industrial production data was also weak. The rising U.S. dollar and the global economic slowdown are hurting the factory sector.

Both aircraft and motor vehicles were weak. Orders for aircraft fell -12 percent in August while vehicle orders fell -1.5 percent.

Durable goods orders will not be lifting the Q3 GDP estimate.

Stock traders track orders for durable goods because it shows how busy factories will be in the months to come, as manufacturers work to fill those orders. The report shows demand for things like cars, refrigerators, computers, industrial machinery, and electrical machinery. If businesses spend more on equipment, they are obviously experiencing growth in their business.

Existing Home Sales Slow But Still Strong

Existing home sales came in at 5.31 million for August. Although that’s a slight slowdown, existing home sales are still in a powerful uptrend. July was revised down to 5.58 million.

Existing home sales are up 6.2 percent year-on-year. The year-on-year median price is up 4.7 percent to $228,700, which is the lowest since August 2014.

Stock traders track existing home sales because people have to be feeling pretty comfortable and confident in their own financial position to buy a house. There is also a multiplier effect through the economy. Once the home is sold, it generates revenues for the realtor. Home buyers also tend to buy washers, dryers, refrigerators, and furniture. The economic “ripple effect” can be substantial.

Fed Hawks Reasons Why Rate Hike Should Have Happened

Two Fed hawks gave their reasons why they thought rate hikes should have happened in September. The Richmond Federal Reserve President Jeffrey Lacker is a voting member, while the Federal Reserve Bank of St. Louis James Bullard is not.

Let us briefly look at each of these two bankers opinions on why the Fed should have hiked rates.

The Fed’s Jeffrey Lacker (hawk, FOMC dissenter), was the only dissenting vote at the FOMC. Laker’s reasons for dissenting are:

– Higher rates are needed considering the current economic outlook and conditions; US economy is strong enough to justify a rate hike. Its time the Fed recognizes the significant strides made by the economy even though the recovery has been disappointing in some ways.

– Below target inflation is transitory and has been near 2% since January 2015.

– The 25 bps rate hike now would have left policy exceptionally accommodative; further delay of liftoff would be a departure from past Fed behavior.

The Fed’s James Bullard (hawk, non-voter), gave the following reasons for why the Fed should have raised rates in September:

– FOMC should have raise rates this week, the case for rate liftoff is “quite strong”, the Fed’s objectives have essentially been met.

– Should have raised rates; Policy is still at emergency levels.

– There is little chance monetary policy will be restrictive anytime soon.

– Will be many years before policy is restrictive; there is a long way to go before rates have normalized. Policy will remain exceptional accommodative through the medium term.

Philadelphia Fed Business Outlook Survey

Buried in the wake of the Federal Reserve news stories that saturated markets yesterday was the Philadelphia Fed Business Outlook Survey.

We have been tracking the Philly Fed Business Outlook Survey for months now and the way I have chosen to interpret this report is that the rising U.S. dollar and slowing global growth is seriously hurting the U.S. economy by way of the manufacturing sector.

In fact, the Empire State Index has been in deep negative territory for the last two months.

The Philly Fed Outlook survey came in at -6 for the first negative reading since February 2014.

The chart looks horrible folks. The Fed has already been using contractionary monetary policy by talking up rate hikes and the Obama Administration has also been contracting with fiscal policy. You can see the effects of that contractionary monetary and fiscal policy in the chart above.

Stock traders likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers more moderate growth so that it won’t lead to inflation. The Philly Fed survey gives a detailed look at the manufacturing sector, how busy it is and where things are headed. Since manufacturing is a major sector of the economy, this report has a big influence on market behavior.

Industrial Production Points To Weak Consumer

Industrial production fell -0.4% in August, pulled down by a huge plunge in motor vehicle production of -6.4 percent. The manufacturing component fell -0.5 percent. July’s total industrial production was revised 3 tenths higher to +0.9 percent and manufacturing revised 1 tenth higher to +0.9 percent.

– Manufacturing Production: -0.5% v -0.3%e
– Prior Industrial Production revised higher from 0.6% to 0.9%
– No revisions to prior Capacity Utilization at 78.0%
– Prior Manufacturing Production revised higher from 0.8% to 0.9%

Motor vehicle production was down -6.4 percent following July’s huge +10.6 percent spike.

Utility production was up +0.6 percent in August, while mining fell -0.6 percent. Mining has been hurt for the last year by falling commodity prices. Total industrial production is up only +0.9 percent year over year.

The capacity utilization rate came in at 77.6 percent.

Stock traders track the index of industrial production because it shows how much factories, mines and utilities are producing. The manufacturing sector accounts for less than 20 percent of the economy, but it is great for tracking sector rotation. In addition, the capacity utilization rate provides an estimate of how much factory capacity is in use. If the utilization rate gets too high (above 85 percent), it can lead to inflationary bottlenecks in production. The Federal Reserve watches this report closely and sets interest rate policy on the basis of whether production constraints are threatening to cause inflationary pressures. The bond market can be highly sensitive to changes in the capacity utilization rate.