PR note, ADP, Holiday sales, Euro area sales taxes, Erdogan on rates, Tillerson comment, PR bonds

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Just noticed this. PR has had over 500,000 move to the states for economic reasons:

For many Puerto Rico residents, it’s time to leave the island

Note: Puerto Rico is not included in the national employment report.

FYI:

Highlights

Hurricanes didn’t scramble ADP’s sample too much in September with their private payroll estimate at 135,000 which is very close to Econoday’s consensus for 140,000. The result is down sharply from August but is still constructive and consistent with a strong labor market, especially given the disruptions in Texas from Hurricane Harvey and in Florida from Hurricane Irma.

ADP’s estimate for August is revised only modestly lower, down 9,000 to 228,000 which is still far above the government’s initial total of 165,000. The spread between these readings hint, however uncertainly, at an upward revision to August data in Friday’s employment report.

Econoday’s consensus for private payroll growth in Friday’s report is 117,000 though the range of estimates is very wide, between 20,000 and 150,000. Watch later this morning for the non-manufacturing report from the Institute For Supply Management whose employment index will offer another indication on what to expect for Friday.

Holiday sales not forecast to add any more to growth than they did last year:

Holiday Sales Forecasts Are Rosy, but Not for All Retailers

Oct 3 (WSJ) — On Tuesday, the National Retail Federation said it expects holiday retail sales, which excludes autos, gasoline and restaurants, to increase between 3.6% and 4% in November and December, up from $655.8 billion last year. Last year, holiday spending fell in line with the group’s 3.6% growth forecast, but in 2015 the results were well short of the NRF’s prediction of a 3.7% gain. Christmas falls 32 days after Thanksgiving this year and is on a Monday, not a Sunday, which gives shoppers an extra weekend to shop. “Over all, the industry is very strong,” Matthew Shay, NRF chief executive said on a call with reporters. “Brick and mortar is getting better and more effective online.”

This is a tax increase for the macro economy:

EU to reform sales tax, prepares changes to rates

Oct 3 (Reuters) — The European Commission will propose on Wednesday changes to the way sales taxes are levied in the European Union. The new measures on value-added tax would mostly tackle frauds in which companies pocket VAT revenues from cross-border sales instead of paying them to the local government. The move would also end the practice of companies avoiding VAT by basing themselves in countries with low VAT rates. They will now, as a general rule, have to pay the VAT charged by the country where their products are sold. That principle has already been established by temporary regulations. The proposed reform would make that permanent.

My take is he’s exactly right, as I’ve been suggesting for more than 20 years:

Tillerson reportedly described Trump as ‘a moron’ and was set to resign in July

Rex Tillerson says he ‘never considered’ resigning; does not deny calling Trump ‘moron’

Interesting outburst from the President:

Puerto Rico bonds plunge after Trump pledge to wipe out debt

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State Index, Construction spending, PMI and ISM

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More data that shows we may already be in recession, and in line with the deceleration in bank lending:


Large downward revision to last month was larger than this month’s gain:

Highlights

The construction spending report is often volatile and today’s results are an example. The headline is up a solid 0.5 percent in August but July’s decline, initially at 0.6 percent, has been downgraded sharply to minus 1.2 percent.

Spending on residential construction rose 0.4 percent but July’s initial increase has been cut in half to 0.2 percent. Yet there is standout August strength in multi-family spending which rose 0.9 percent but is still short of reversing July’s 1.2 percent decline. Single-family spending is constructive, at 0.3 and 0.4 percent gains the last 2 months. Home improvements are also positive, with gains of 0.5 and 0.3 percent.

Turning to the nonresidential side, spending rose 0.5 percent but follows declines of 1.4 and 1.2 percent in the prior 2 months. Transportation is leading the way in this group, up 4.4 percent on the month and 17.6 percent on the year. Manufacturing is the laggard, down 4.3 percent in August for a yearly 20.8 percent decline.

Public building has been weak all year though educational building did rise 3.5 percent yet is still down 2.8 percent from a year ago. Federal spending fell 4.7 percent in the month for an 8.3 percent decline.

Overall construction spending shows only a 2.5 percent year-on-year rise despite a very favorable 11.6 percent increase in residential construction. Yet residential starts and permits have been uneven pointing to the risk of slowing in the months ahead.


Surveys like this have been looking reasonably firm for quite a while, even as the ‘hard data’ continues to soften:

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Credit check, Expectations vs spending, Inflation, Comments on Fed policy

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You may be hearing about ‘spike’ in lending last week, so I’ll try to give you some perspective using commercial and industrial lending charts before just showing year over year changes:

In this 10 year chart you can see how the growth in lending suddenly slowed back in November 2016. You can also see that last week’s spike up is something that’s happened many times and looks like ‘normal volatility’ and, at least so far, not an indication of something unusual happening that’s changed the overall outlook. Or, as also happened in prior cycles, a spike in borrowing can be a sign of distress, such as when inventories spike will falling sales, or when other shocks to cash flow force sudden borrowings:


On a year over year basis last week’s increase in lending also doesn’t look to have changed the outlook:

Loans create deposits, with M2 a partial measure of deposits, which can be altered by QE and other operating factors like cash in circulation. But those types of things have been largely quiet recently so M2 growth is currently a not terrible look at overall deposit growth:

Trumped up expectations and surveys vs real spending, which has been weak:


And what is called ‘inflation’ is also looking weak:


And wage growth remains at what are generally historic lows:

So the Fed sees all this, and indicates that they are leaning to another rate hike in December, as they continue to forecast increases in inflation that, after many years of similar forecasts, have yet to materialize. And they list every reason for the low inflation indicators, except for a lack of aggregate demand (low spending), when all of the above charts support a low demand story, as does all of the other weak data released last week- personal income, housing starts and sales, etc.

Presumably the Fed is raising rates to ‘remove accommodation’ which means they are trying to keep things that aren’t growing all that fast now from growing too fast in the future do to all
the ‘accommodation’ they believe they have embedded in the economy with low rates and qe.

The channel for Fed interest rate policy is credit- lower rates are presumed to encourage borrowing, while higher rates are presumed to discourage borrowing. And so to me the Fed looking at the deceleration of the growth of lending and of M2 as evidence the economy needs more rate hikes and the unwinding of QE doesn’t make sense?

Note how this Fed President is worried about the risk of the emergence of too much demand:

Boston Fed President Eric Rosengren on Wednesday came down on the side of further interest-rate hikes, saying they would be a form of insurance against the possibility of an overheated economy.

Current economic trends suggest an economy “that risks pushing past what is sustainable,” Rosengren said in a speech to The Money Marketeers of New York University. This could result in higher asset prices, or inflation well above the Fed’s 2% target, he warned.

“Steps lowering the probability of such an outcome seem advisable — in other words, seem like insurance worth taking out at this time,” he said.

“As a result, it is my view that regular and gradual removal of monetary accommodation seems appropriate,” he added.

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Personal income and spending, Consumer sentiment

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July Personal income revised down to .3 and August only .2 further confirms income growth- the driver of consumption- has slowed down in line with the deceleration in bank lending, and the same seems to be the case with spending, with weak price indicators further confirming the same weak demand narrative. And the very low savings rate tells me there’s a lot more weakness to come:

Highlights

The next Federal Reserve rate hike may not be in December after all, based on an unexpectedly weak personal income and spending report that includes very soft inflation readings. Income is the best news in the report as it managed the expected 0.2 percent August gain getting boosts from proprietor income, transfer receipts and also rent. Wages and salaries, in part reflecting a decline in hours, came in unchanged though this follows strong growth in the prior 2 months. Another weakness in today’s report is a 1 tenth downward revision to overall July income which now stands at 0.3 percent. The savings rate held unchanged in August at a moderate 3.6 percent.

Now the bad news starts. Spending came in at only 0.1 percent as spending on durables, the likely result of Hurricane Harvey’s late month hit on Texas and related declines in auto sales, fell a very steep 1.1 percent to fully reverse strength in the prior month. Spending on both nondurables and services actually inched forward in August to 0.3 percent each.

The really bad news comes from inflation readings as the core PCE price index, which is the Federal Reserve’s central inflation gauge, inched only 0.1 percent ahead while the year-on-year rate fell backwards, down 1 tenth to 1.3 percent for the weakest result since November 2015. Overall prices, likely getting a small boost from a Harvey-related spike in gasoline prices, rose 0.2 percent with this yearly rate, however, also moving backwards, down 1 tenth to 1.5 percent. All these inflation readings, interestingly, came in no better than Econoday’s low estimates.

Data in this report, after inflation adjustments, are direct inputs into third-quarter GDP and the results will pull down estimates. Real spending fell 0.1 percent in August to cut in half July’s 0.2 percent gain. The Bureau of Economic Analysis which compiles the report could not quantify Harvey’s effect and had to make estimates for missing data. Yet the impact appears obvious and is the most tangible hurricane effect so far to hit the nation’s economic data. The next hurricane effects will be coming from Irma’s September strike on Florida.


Trumped up expectations persist, but aren’t translating into spending:

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GDP revision, Inventories, Corporate profits, Trump fundraiser

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Revised higher due to inventory building- not good- and weak prices also tend to indicate low demand. And note how q3 gdp estimates have been coming down as well:

Highlights
Second-quarter GDP proved strong, at an as-expected 3.1 percent annualized rate for the third estimate driven by consumer spending at a 3.3 percent rate. Nonresidential fixed investment, at a 6.7 percent rate, was also a strong contributor and offsetting a 7.3 percent decline for residential investment. Government purchases, at minus 0.2 percent, were a slight drag on the quarter while both net exports and inventories were slight positives. GDP prices, like other inflation measures, were soft, up 1.0 percent overall and 1.1 percent for the core.

Today’s report confirms that the economy was showing solid momentum going into the third quarter where this morning’s preliminary data for August net exports and August inventories are very strong.

Highlights
Retail inventories rose a sharp 0.7 percent in August and are led by a 1.2 percent build in vehicle inventories which, following the month’s weak vehicle sales, hints at overhang. Replacement demand following Hurricane Harvey, however, should soak up some of the inventory. Retail inventories excluding vehicles rose 0.4 percent. Overhang or not, retail’s build together with a 1.0 percent jump in wholesale inventories, where preliminary data were also released this morning, are immediate positives for third-quarter GDP.

Highlights
Wholesale inventories rose a very sharp 1.0 percent in August, split evenly between a 1.0 percent build for durables and a 1.2 percent build for nondurables. This along with a heavy 0.7 percent build for preliminary retail inventories, which were also released this morning, are positives for third-quarter GDP.

The chart shows corporate profits have been largely flat for over 5 years, with a dip when oil capex collapsed and a subsequent recovery only back to prior levels:


Looking like just another politician in that regard:

Trump’s Le Cirque fundraiser pulls in $5 million for GOP

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New home sales, Pending home sales, Durable goods orders, Children

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Heading south in line with the deceleration of mortgage lending:

Highlights

Weakness in the South pulled down new home sales in August as it did in last week’s existing home sales report. New home sales fell sharply in the month to a 560,000 annualized rate vs an upward revised rate of 580,000 in July and a downward revised 614,000 in June (revisions total a net minus 7,000).

Sales in the South, which is by far the largest region for housing, fell 4.7 percent in the month to a 307,000 rate for a year-on-year decline of 9.2 percent. But importantly, sales in the West and Northeast were also lower, down 2.6 and 2.7 percent respectively, with sales in the Midwest unchanged.

September in fact was a weak month for housing demand, evident in this report’s median price which fell a very sharp 6.2 percent to $300,200. Year-on-year, the median is up only 0.4 percent which, in another negative, is still ahead of sales where the yearly rate is minus 1.2 percent.

Builders, despite late month disruptions in the South, moved houses into the market, up 12,000 to 284,000 for a striking 17.8 percent yearly gain that hints at a glut. But supply had been so thin that the balance is now at a traditional level, at 6.1 months vs 5.7 and 5.3 months in the prior two months and 5.1 months a year ago.

Hurricane effects are likely in the next report for September with the South to continue to suffer. But today’s data do mark a shift, one of softening sales nationally, which is a short-term weakness, and a rebalancing in supply which is long-term strength. Yet for the 2017 economy, the housing sector looks to be ending the year in weakness, some of it hurricane related.


This isn’t looking so good either:

Highlights

Existing home sales have been on the decline as signaled all along by the pending home sales index which is down a very steep 2.6 percent in the latest reading which is for August. Hurricane Harvey’s late August hit on Texas didn’t help pending sales in the South which fell 3.5 percent but pending sales show across-the-board weakness: Northeast down 4.4 percent, Midwest down 1.5 percent, and the West down 1.0 percent.

Pending sales nationwide are down a year-on-year 2.6 percent while final sales of existing homes are down 1.7 percent. The pending index has been on a tailspin this year, peaking at 112.3 in February and now down at 106.3 for a year-to-date decline of 5.3 percent. New home sales, along with sales of existing homes, have also been moving lower making for a housing sector that is visibly stumbling into year end. The cause? It’s not mortgage rates which are very low nor employment which is very strong. High asking prices, however, are one factor as is soft wage growth.

This type of thing went down hard after the collapse in oil capex in November 2014, And subsequently resumed growth a modest rates, as per the chart:

Highlights

A second straight jump in capital goods leads what is a mostly very strong durable goods report where the August headline rose 1.7 percent. This is only slightly above expectations but not core capital goods (nondefense ex-aircraft) which jumped 0.9 percent vs Econoday’s consensus for a 0.3 percent gain. This together with a second straight jump in shipments of core capital goods, up 0.7 percent in August, point to business confidence and strengthening business investment and will significantly lift estimates for second-half nonresidential investment.

The headline gain reflects a monthly upswing in civilian aircraft orders, up 45 percent in August following a drop of 71 percent and a surge of 129 percent in the prior two months. Excluding transportation, the report’s strength fades, up only 0.2 percent which is half the expected gain. Weakness here is in defense capital goods which fell 9.4 percent but following July’s 15.3 percent jump. Other declines include fabricated metals (down 0.4 percent), computers (down 2.3 percent), and electrical equipment (down 0.1 percent).

But there’s more good news than bad news including motor vehicles which had been weakening but now show a 1.5 percent August gain for orders and a 1.9 percent rise in shipments. Communications equipment also jumped with orders up 4.0 percent. Other readings include a moderate 0.3 percent rise for both total shipments and inventories that keeps the inventory-to-shipments ratio steady at a lean and constructive 1.69. Unfilled orders did not show improvement, unchanged following July’s 0.3 percent decline.

The factory sector did not show any initial effects from Hurricane Harvey’s late August hit and, assuming Hurricane Irma’s effects proves as slight in September, appears poised for solid year-end acceleration centered in capital goods. The one missing piece in the factory sector, however, is manufacturing production as measured by the Federal Reserve which has remained stubbornly weak including a 0.3 percent fall in the report for August. Note that revisions in today’s report are minor compared to the factory orders report when capital goods data from the July advance durables report were sharply upgraded.


A bit of a fallacy of composition here? (who’s supposed to care for the retired?)
We’ve set up our institutional structure to eliminate our species?
;)

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Vehicle sales, Homebuyer affordability, Bank loans, FX reserves, Growth index, Rail traffic

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Looking like an uptick here, some of it weather related?

From WardsAuto: Forecast: SAAR Expected to Surpass 17 Million in September

A WardsAuto forecast calls for U.S. light-vehicle sales to reach a 17.5 million-unit seasonally adjusted annual rate in September, following August’s 16.0 million SAAR and ending a 6-month streak of sub-17 million figures. In same-month 2016, the SAAR reached 17.6 million.

Preliminary assumptions pointed to October, rather than September, as the turning point for the market, as consumers replace vehicles lost due to natural disasters and automakers push sales to clear out excess model-year ’17 stock. However, the winds have already begun to turn, and September sales will be significantly higher than originally expected.
emphasis added

Sales have been below 17 million SAAR for six consecutive months.
Read more at http://www.calculatedriskblog.com/#Xo888Paz0wrbTfbl.99


No recovery here:


Another chart that may be indicating the euro liquidations have run their course:


Note that the slowdown started in November, about the same time the loan demand deceleration increased:

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Chicago Fed, Small business optimism, NY Fed comments

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Note the shift:

From NY Fed’s Dudley. I added a chart after several of his statements so you can see
what he sees as support for his statements. Looks a lot to me like he’s trying to manage expectations?

“The fundamentals supporting continued expansion are generally quite favorable. Low unemployment, sturdy job gains,

and rising wages—even at a pace below previous expansions—

are lifting personal income.

Household wealth has been boosted by rising home and equity prices, and household debt has been growing relatively slowly, contributing to a healthy household balance sheet. Thus, consumer spending should continue to advance in coming quarters.

(the will likely be revised lower as the latest retail sales reports was lower than expected and revised the prior month lower)

Also, this doesn’t show any signs of turning around and contributing more to consumer spending?

Business fixed investment outlays are also likely to continue to rise.

Why? Looks more like it’s flattened out after a dip from the oil capex collapse, especially with the recent softness in consumer spending and personal income:

With the supply of labor tightening, there are greater incentives for businesses to invest in labor-saving technologies.

(There’s been just as large a benefit from investing in labor-saving technologies over the last several years, as real wages aren’t
materially higher than they were.)

Investment spending should also benefit from a better international outlook and improvement in U.S. trade competitiveness caused by the dollar’s recent weakness.

He thinks exports to emerging market nations will pick up?
Again, looks like there’s been a flattening after the collapse of oil capex:

The softer dollar and solid growth abroad also suggest that the trade sector will no longer be a significant drag on economic growth.

Except we have to first get past the J curve effect and the recent higher prices for imported oil before the current trend reverses:

With a firmer import price trend and the fading of effects from a number of temporary, idiosyncratic factors, I expect inflation will rise and stabilize around the FOMC’s 2 percent objective over the medium term.

Agreed that the higher oil prices and other weaker dollar effects could add a few tenths to headline cpi, but core inflation might stay low for longer.

In response, the Federal Reserve will likely continue to remove monetary policy accommodation gradually.

No mention of the strong deceleration of bank loan growth when the only channel from rates to growth is credit…

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Retail sales, Industrial production, Euro area trade, Rail week

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The story is the weakness is weather related, as was the cpi increase, though not the downward revision for the prior month. (I suppose getting control of the weather would be a useful policy tool for the Fed to hit its targets?)

The economy is to some degree path dependent, which in this case means that a slowdown in sales = a slowdown in income which can reduce future sales even after the weather issues clear up, especially given the declining growth rate real disposable personal income, the drop in the growth of borrowing, and the consumer dipping into savings to sustain spending.

In fact, with this month’s report and the downward revisions, as per the chart it looks like consumer spending has gone flat, and is now more in line with the deceleration of the credit aggregates previously discussed:

US retail sales fell 0.2% in Aug, vs 0.1% increase expected

“The Commerce Department said while it could not isolate the impact of Harvey on retail sales, it had received indications from companies that the hurricane had “both positive and negative effects on their sales data while others indicated they were not impacted at all.”

from Morgan Stanley:

  • Eight of thirteen major categories saw increases in retail sales in August, while five categories saw substantial weakness that dragged down the overall sales figures. Weakness in retail sales in August was seen in motor vehicles and parts (-1.6%), electronics & appliance stores (-0.7%), building materials, garden equipment & supply dealers (-0.5%), clothing & accessory stores (-1.0%), and nonstore retailers (-1.1%). Positive results in the report were seen in miscellaneous store retailers (+1.4%), general merchandise stores (+0.2%), sporting goods, hobby, book & music stores up 0.1%, health & personal care stores (+0.1%), food & beverage stores (+0.3%), gasoline stations (+2.5%), and food services & drinking places (+0.3%).
  • While auto sales and sales at home improvement stores were weaker in August, we expect to see some bounceback in September. Early industry figures for September point to a large bounceback in auto sales, even before hurricane-related tailwinds kick in. We also expect that sales at home improvement stores will rebound in September as post-hurricane rebuilding efforts begin.
  • Core retail sales came in well below assumptions built into our 3Q GDP tracking, and combined with downward revisions to prior months. These factors led to a significant downward revision to our 3Q GDP tracking estimate to 2.4% from 2.8% previously, with 3Q consumption now tracking at 2.0% vs 2.8% previously.
  • Moreover, weakness in the home improvements category led to a downward revision in our tracking for 3Q residential investment to -3.6% from -2.8% previously.


    • Down due to weather issues, but otherwise probably chugging along at a modest pace:

    Still a large and persistent trade surplus, which is fundamentally euro friendly:

    The Euro Area trade surplus narrowed to EUR 23.2 billion in July 2017 from EUR 24.8 billion in the corresponding month of the previous year. Still, the reading came in above market expectations of EUR 21.4 billion.

    Exports of goods to the rest of the world increased by 6.1 percent to EUR 177.7 billion from EUR 167.6 billion in July 2016, while imports advanced at a faster 8.2 percent to EUR 154.6 billion from EUR 142.8 billion. Intra-euro area trade rose to EUR 145.6 billion, up by 5.6 percent compared with July 2016.

    In the the seven months to July, the trade surplus narrowed to EUR 130.2 billion from EUR 154.1 billion in the same period of 2016.

    Rail Week Ending 09 September 2017: Intuitive Sector Decline Continues

    Week 36 of 2017 shows same week total rail traffic (from same week one year ago) improvedaccording to the Association of American Railroads (AAR) traffic data. The economically intuitive sectors are in contraction.

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    Euro reserves, Small business survey, Municipal revenues

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    Trumped up expectations continue even as earnings deteriorate:

    As U.S. Economy Improves, Cities May Be Headed for Another Downturn

    Cities may be facing a new period of economic stress — even as the national economy continues to improve.

    According to a National League of Cities (NLC) report released on Tuesday, municipal finance officers are expecting minimal growth this year — less than 1 percent — after dealing with slower revenue growth last year. If that happens, NLC Research Director Christiana McFarland says it would “be the first time we are seeing two consecutive years of slowing growth since the start of the recession.”

    The report also reveals a decline in public officials’ confidence in their cities’ finances. This year, 69 percent said they are better able to meet the financial needs of their communities — down from at least 80 percent in each of the last three years.

    This all may be “the start of fiscal contraction” for municipalities, the report concludes, and city revenues may never fully recover from the recession before the next economic downturn hits.

    The wary outlook this year comes after a disappointing 2016. Last year, city revenues were expected to finally rebound from the Great Recession. But the reality fell short: City revenues (accounting for inflation) reached just under 98 percent of what they were in 2006 — the year before the recession started. While property tax revenue increased by a healthy 4.3 percent, sales and income tax revenue growth were slower than normal.

    Now, city officials are expecting much lower rates of growth in property tax revenue — 1.6 percent for fiscal 2017 — and budgeted for an outright decline in sales and income tax revenues.

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