The Q3 blip up remains a soybean export, inventory building and healthcare premium story likely to be reversed in q4, as it all continues it’s general deceleration since oil capex peaked a couple of years ago:

GDP 3.5% in Q3. The acceleration in real GDP in the third quarter primarily reflected an upturn in private inventory investment, an acceleration in exports, a smaller decrease in state and local government spending, an upturn in federal government spending, and a smaller decrease in residential investment, that were partly offset by a smaller increase in personal consumption and an acceleration in imports.

Highlights

The third-quarter lived up to its early expectations, rising with each new revision to an inflation-adjusted 3.5 percent annualized rate for the best showing in two years. The consumer was the driving force in the quarter, spending at a 3.0 percent rate (up from 2.7 percent in the prior estimate) on top of the second quarter’s very strong 4.3 percent rate. Exports, benefiting from agricultural, were another positive as was nonresidential fixed investment which got an upgrade in the latest estimate to show a plus 1.4 percent annualized rate. Inventories also added to the quarter, but less so than prior estimates which is a positive for fourth-quarter production and employment. The GDP price index is unrevised at 1.4 percent. The fourth-quarter, held down by a reversal for exports and perhaps by less strength in consumer spending, isn’t quite tracking as strongly as the third quarter proved to be.

Healthcare premiums count as personal consumption expenditures and have gotten a one time boost from Obamacare and are unlikely to continue to grow at current rates:

Healthcare costs are growing but not all that fast:

Still working its way lower since the shale boom ended and oil capex collapsed about 2 years ago:

The chart looks like we’ve managed to reverse a ‘death dive’ but I’d give it another month as it was influenced by the large drop in the unemployment rate that came about because the size of the labor force was reported to have dropped by that much:

The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). The trend for each state’s index is set to the trend of its gross domestic product (GDP), so long-term growth in the state’s index matches long-term growth in its GDP.
Read more at http://www.calculatedriskblog.com/2016/12/philly-fed-state-coincident-indexes.html#R1M9We6R5D4zziYl.99

As previously discussed- sales are slowing and inventory is too high:

U.S. Car Makers Idle Plants Amid Oversupply Concerns

By Mike Colias Adrienne Roberts and Christina Rogers

Dec 21 (WSJ) — Detroit auto makers are pulling back on first-quarter production in response to a cooling in retail demand and a shift in consumer tastes, a speed bump for an industry that has laid the foundation for U.S. economic expansion in recent years.

All three domestic car companies this week said they have scheduled down time at some of their factories for as much as three weeks in January. Auto makers typically idle assembly plants for a week or two around the holidays—but shutting factories for multiple weeks in January is unusual. Auto makers produced 3.6% more vehicles in North America last month than November 2015, according to researcher WardsAuto.com.

Bad:

Highlights

Defense came to the rescue of November’s durable goods report though core capital goods orders are another positive. Durable goods fell 4.6 percent in November but were down an even sharper 6.6 percent excluding defense. When including defense and excluding transportation (commercial aircraft and vehicles), orders rose a better-than-expected 0.5 percent.

Orders for core capital goods (nondefense ex-aicraft) rose a very solid 0.9 percent though the gain is offset slightly by a 2 tenths downward revision to October where the gain is now only 0.2 percent. Shipments of core capital goods, reflecting prior weakness in orders, show only modest life, also at 0.2 percent.

Turning back to defense, orders for defense aircraft doubled in the month, up 103 percent. Orders for defense capital goods, which include aircraft, rose 29 percent. But outside of defense, non-aircraft components show strength including communications equipment (up 6.7 percent), primary metals (up 2.3 percent), machinery (up 1.3 percent), and vehicles (up 0.8 percent).

Total shipments inched 0.1 percent forward in November with inventories also up 0.1 percent to keep the inventory-to-shipments ratio stable at 1.64. A negative in the report is a 0.2 percent dip in unfilled orders following a 0.8 percent rise in October which looks very much like an outlier.

This report is known for its volatility which for November is highlighted by aircraft, both defense and commercial for opposite reasons. In sum, year-end momentum for the factory sector appears to be in place, suggesting a better finish to what has been a flat year.

Even not adjusted for inflation at best it’s gone flat:

As the chart shows, the decline in real disposable personal income continues uninterrupted:

Highlights

November may have been a cycle high for confidence but it actually proved a weak month for the consumer. Personal income was unchanged in November as the wages & salaries component dipped into the negative column at minus 0.1 percent. Consumer spending rose 0.2 percent and reflected specific weakness in vehicles. Not helped by the weakness in income, the consumer had to dip into savings during the month where the rate fell 2 tenths to 5.5 percent.

Price data are very flat, unchanged for both the PCE and PCE core (less food & energy) with the year-on-year rate at 1.4 percent for the PCE and at 1.6 percent for the core. And in a comparison that doesn’t point to accelerating inflation pressures, the year-on-year rate for the core fell 2 tenths to 1.6 percent..

Two months into the fourth quarter, consumer spending is running at a plus 2.0 percent annualized pace, well down from the 3.0 percent rate of the third-quarter (see GDP report earlier this morning).

But to put the report in context, the wages & salaries component had been showing outsized strength in recent months as had vehicle sales. So one month of weakness shouldn’t be a surprise. But the inflation readings are clearly a concern for Fed policy makers who want to see pressures building.

Highlights

Business and consumer confidence may have jumped but November proved to be a weak month for the economy based on the national activity index which fell to minus 0.27 from a revised minus 0.05 in October. The industrial sector proved weak, falling to minus 0.20 from October’s minus 0.01. Part of this decline reflects warm weather and less utility output but also reflects slippage in manufacturing production. Personal consumption & housing were also weak, at minus 0.10 vs minus 0.03 and reflecting weakness in retail spending and dips for housing starts & permits. Employment was a small positive in the month, at plus 0.2 vs October’s 0.1, with sales/orders/inventories at plus 0.01 vs minus 0.02.

This is persistent, strong euro medicine that ‘absorbs’ the portfolio selling that’s been going on for over 2 years. And the lack of inflation and tight fiscal policy tell me it will persist until currencies adjust sufficiently to shift the balance:

Euro Area Current Account

Eurozone’s current account surplus rose to €32.8 billion in October 2016 from €30.9 billion in the same month a year earlier. The services surplus widened to €8.2 billion (from €2.4 billion a year earlier) and the primary income surplus increased to €8.8 billion (from €4.6 billion). Meanwhile, the goods surplus narrowed to €27.0 billion (from €33.7 billion in the previous year) and the secondary income deficit went up to €11.2 billion (from €9.8 billion). If adjusted for seasonal factors, the current account surplus rose to €28.4 billion compared to €24 billion in October 2015.

Another indicator that shows the US could have already gone into recession:

GDP forecast revised lower:

December 16, 2016: Highlights

The FRBNY Staff Nowcast stands at 1.8% for 2016:Q4 and 1.7% for 2017:Q1.

This week’s news had a negative effect on the nowcast, pushing down the Q4 and Q1 measures by about 0.7 percentage point each.

The largest negative contributions came from capacity utilization and industrial production data as well as housing data, which were only partly offset by a positive contribution from survey data.

Border Adjustability: The House Republican Blueprint proposes to convert the corporate income tax into a destination-based cash flow taxation system that would ‘border adjust’ by not taxing revenues from exports and disallowing deductions for the cost of imports. The economic effects of such a policy are similar to an export subsidy combined with an import tariff of equal size.

Housing remains depressed, and not the driver of US growth that had been forecast by most analysts:

Highlights

Housing starts are being hit by huge swings. November starts fell 18.7 percent in November to a much lower-than-expected 1.090 million annualized rate following an upward revised gain of 27.4 percent to 1.340 million in October. There’s less volatility on the permits side where a roughly 30,000 undershoot in November, at 1.201 million vs the Econoday consensus for 1.240 million, is offset by a roughly 30,000 upward revision to October which is now at 1.260 million.

Trends for both starts and permits have been struggling with year-on-year starts down 6.9 percent and year-on-year permits down 6.6 percent.

The best news in the report is a 15.4 percent gain in housing completions to a 1.216 million rate which follows a 6.3 percent jump in the prior month. Houses authorized but not started are also up, 3.0 percent higher to 138,000. Gains here will help ease what is very tight supply for new homes.

Still, lack of supply remains a negative for the new home market where sales, in sharp contrast to starts and permits, look to post a roughly 20 percent gain this year.

This chart is not population adjusted:

This is strong euro stuff, further supported by low inflation, even as the euro falls to decade lows due to ongoing portfolio shifting:

Euro Area Balance of Trade

The Eurozone trade surplus rose 37.8 percent to €26.5 billion in September 2016 compared to a €19.2 billion in the same month of the previous year, above market consensus of €22.5 billion. Exports increased 2 percent while imports dropped 2 percent. Considering the first nine months of the year, the trade surplus increased to €204.8 billion, compared with €169.1 billion in the same period of 2015.

Budget Shortfalls Expected in the Most States Since Recession

By Liz Farmer

Dec 13 (Governing) — Almost half the states cut their budgets this year, and that trend is likely to continue into 2017.

Weak revenues are causing the most state budget shortfalls since the Great Recession.

According to the National Association of State Budget Officers’ (NASBO) annual state spending survey, half of all states saw revenues come in lower than budgeted in fiscal 2016 and nearly as many (24) are seeing those weak revenue conditions carry into fiscal 2017, which ends in summer 2017 for most states. It marks the highest number of states falling short since 36 budgets missed their mark in 2010.

As a result, 19 states made mid-year budget cuts in 2016, totaling $2.8 billion. That number of states “is historically high outside of a recessionary period,” according to the report.

The revenue slowdown is caused mainly by slow income tax growth, even slower sales tax growth and an outright decline in corporate tax revenue.

Farmland Values in Iowa Tumble
First time they have dipped 3 years in row since ’80s farm crisis

Iowa’s average farmland value declined for the third year in a row, down 5.9 percent to $ 7,183 an acre over the past year. It’s the first time since the 1980s farm crisis that land values have fallen three straight years, according to an Iowa State University report released Tuesday.

Fed still failing to hit its 2% target after years of trying, and after years of forecasting that it would hit its 2% target:

Highlights

Inflation at the consumer level remains low. The CPI rose 0.2 percent in November with the year-on-year rate up 1 tenth to plus 1.7 percent. The core rate, which excludes food and energy, also rose 0.2 percent with this year-on-year unchanged at 2.1 percent.

Food prices were unchanged in November though energy did move sharply, up 1.2 percent and led by a 2.7 percent jump in gasoline. Excluding just energy, the CPI rose only 0.1 percent.

The Labor Department is citing housing as a central area of consistent price pressure. The housing component only rose 0.2 percent in November but was up 0.4 percent in both of the prior two months. Owners’ equivalent rent, a closely watched reading in this report, rose 0.3 percent for a second straight month.

Medical prices have also been a source of pressure but were unchanged in November for a second month in a row. Apparel is a weak point in the report, down 0.5 percent for the second steep monthly fall of the last three months. Weakness here hints at holiday discounting.

The year-on-year rates are inching forward but just barely. Low inflation will allow the Fed to be patient when raising rates.

More Trumped up surveys, even as ‘real’ data sags?

Highlights

The Empire State report is showing less strength than the Philly Fed report but momentum is building. The general conditions index is in positive ground for a second month in a row, at 9.0 for the December score vs 1.5 in November. New orders are also positive for a second month, at 11.4 vs last month’s 3.1. Like the Philly Fed report, 6-month expectations for new orders are showing a sudden surge, up 18 points in the month to 40.1. Other readings, however, are still lagging including employment, at minus 12.2, and the workweek at minus 7.0. Price data, also like the Philly Fed, show pressure for inputs but no traction for selling prices. The weaknesses aside, the strength and optimism for new orders are strong indications of wider factory strength going into year end.

Highlights

Both the Philly Fed and Empire State reports have been pointing to accelerating strength for the factory sector, as does Markit Economics’ manufacturing PMI which comes in at 54.2 for the December flash. This index has been moving steadily higher from September’s 51.5. Positives this month include a rise in hiring and a big build for inventories, one the report says reflects confidence in the outlook. New orders are solid but slowing due to weak foreign sales while growth in output is also slowing. Price data show pressure for input costs, especially steel, and slight improvement in selling prices which otherwise remain flat. The factory sector had been flat all year but looks to post solid numbers for the fourth quarter.

This is where I see additional risk to growth post election- stronger $US due to portfolio shifting, higher oil prices, and a weaker global (export) market:

Highlights

The nation’s current account narrowed to $113.0 billion in the third quarter from a downward revised $118.3 billion in the second quarter. The trade deficit narrowed by $8.3 billion in the quarter reflecting a $9 billion narrowing in the goods gap that offset a small decline in the services surplus. The surplus in primary income also declined while the deficit on secondary income widened, both small negatives. The gap relative to GDP remains moderate, down 2 tenths in the quarter to 2.4 percent.

November 2016 Retail Hiring Falls To 6-Year Low

Dec 13 (Econintersect) — Retailers added fewer workers through the first two-thirds of the typical holiday hiring period – and is down nearly 10% from a year ago.

The latest data from the Bureau of Labor Statistics (BLS) showed that employment in retail grew by 371,500 in November. That was down 9.3 percent from a year ago, when jobs in the sector increased by 409,500. It was the lowest November employment increase since 2010.

November followed equally anemic employment gains in October, when retailers added 154,600 workers. That figure has since been adjusted even lower to 150,300, which is 23 percent lower than the 194,800 retail employment gains recorded in October 2015.

While seasonal hiring is down in retail, it is picking up in other areas; namely, transportation and warehousing. Employment in the sector increased by 96,200 workers in October and November, according to BLS data. That was up from 71,300 a year ago.

From Fed Chair Yellen:

The labor market has improved enough that the United States will not need big U.S. government spending to reach full employment, Fed Chair Janet Yellen said Wednesday.

“I would judge that the degree of slack has diminished. I would say at this point that fiscal policy is not, obviously, needed to help us get up to full employment,” the central bank chief told reporters after the Fed hiked interest rates.

These charts indicate the extent to which central banks move foreign exchange levels. The Swiss National Bank has been selling their euro to buy dollars, as indicated in the first chart, and the second chart shows how CB’s shifted from euro to dollars when they feared ECB ‘money printing’ would be inflationary: