9/30/2014
By Jennifer Coombs

On Monday, there were three major economic releases, all of which should have added a fair amount of optimism to the market, but weren't able to quell the worries of international conflict...

Firstly, higher consumer sentiment in August was also supported by an improvement in both income and spending. For the month, personal income growth was in-line with economist expectations, growing by 0.3% after a 0.2% gain in July. Wages & salaries were particularly strong in this component, increasing by 0.4% in August after a 0.2% increase in July. Spending was also reported as in-line with economists’ expectations growing by 0.5% for the month after no change in spending for July. One can source the strength in spending to the durables component which was up a big 1.8% in August after no change in July, plus higher auto sales helped to boost the number as well.  Lower gas prices led to nondurable spending declining by 0.3% in August. Services also jumped 0.5% after posting no change in July. However, as Americans spend more, they are clearly saving less: the personal saving rate as a percentage of income was 5.4% in August; 20 basis points lower than the 5.6% in July. Ultimately, this report indicates that the consumer sector is quite healthy, and although some retailers are posting volatile same store sales, growth for the next few months should be moderately positive.

Next, we got another reading on the housing market for the month of August with pending home sales. Investors’ outlook on the space remains flat as pending sales were down a disappointing 1.0% in August while economists were looking for a 0.8% gain. Year-over-year, sales are down 2.2% which is roughly in-line with the 5.3% decline in existing homes data from last week. The decline was largely due to a lack of first-time buyers, a lack of distressed homes on the market, and a strong demand for rentals. Mortgage rates are still low for the time being, but ought to rise as soon as the Fed takes action. Regionally, sales declined in all regions except for the West, where sales rose 2.6% month-over-month. The South is the largest housing region, and showed a 1.4% decline during the month and no change over last year.

 Lastly, and probably the most optimistic report, was the Dallas Fed’s Manufacturing Survey – which is just one more Fed district survey showing manufacturing improvement in September. The production index, a key measure of manufacturing conditions, increased from 6.8 to 17.6 in September. New orders climbed by 5 points to 7.5, suggesting an improvement in forward momentum. However the most impressive was the capacity utilization index which increase to a whopping 20.2 in September after dipping down to 3.6 in August. Nearly a third of all manufacturers in the district noted an increase in capacity utilization. Perceptions of broader business conditions were also more optimistic this month with the general business activity index moving up to a reading of 10.8; nearly four points above its non-recession average of 7. The September employment index posted the fourth robust reading in a row; holding fairly steady at 10.6. Among firms in the Dallas Fed region, 24% reported net hiring compared with just 14% reporting net layoffs. Overall, data on manufacturing for September is looking quite positive across the US. The next key report on manufacturing will be ISM and Markit’s final reading on the manufacturing PMI Wednesday.

Jennifer Coombs
Wall Street Strategies

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