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Econ Wrap-Up: Awesome Philly Fed

11/20/2014
By Jennifer Coombs

Manufacturers all over the world have confirmed that economic activity is slowing down everywhere in November. So far in the month, the preliminary readings for the manufacturing purchasing managers’ index (PMI) all reflect either deceleration or outright contraction of activity across Europe, China, and Japan. However, the same might not necessarily be true here in the US, especially not after the Philadelphia Federal Reserve district reported some of the most impressive numbers ever seen in the region.

The Empire State Manufacturing survey noted modest growth for the month earlier in the week, but today, the Philly Fed report blew those numbers out of the water. In the Mid-Atlantic manufacturing sector, general business conditions surged to a reading of 40.8, almost doubling October's very strong growth of 20.7. The most important component, new orders, is what drove this surge which came in at 35.7 for November from 17.3 in October. Shipments were also strong at 31.9 versus 16.6 the month before, and employment nearly doubled to 22.4 from 12.1 in October. Despite the surge in demand, pricing pressures (due to falling oil prices) are actually easing up. There is also strength to be seen in leaner inventories and improved delivery times. These numbers are some of the most impressive readings in the Philly Fed’s nearly 50-year report. Markit’s flash manufacturing PMI data this morning suggested that manufacturing activity has slowed down significantly so far in the month, so this report seriously clashes with that data. Anecdotal reports on the manufacturing sector should be averaged together since it’s still pretty early in the month to tell if manufacturing numbers have truly improved on a national level or not.

Jobless claims showed some improvement in the week of November 15th as well, however they aren’t pointing to improvement for the November employment report, so far. Initial jobless claims edged lower by 2,000 to 291,000 claims while the 4-week rolling average slightly increased to 287,500. This past week was actually the sample-survey week for the November employment report and when compared with October, showed a 7,000-gain, bringing the 4-week average up almost as much to 6,250. Ultimately, this won’t translate to positive data in the November jobs report. However, when it comes to continuing claims there is no survey-week comparison yet as the data is lagged by a week (November 8th). Continuing claims declined by 73,000 to 2.33 million with the 4-week rolling average down 6,000 to 2.369 million. Overall though, this average has been trending slightly lower to reach new recovery lows. In this week’s report, there are no special factors that may skew the data and despite the lack of improvement in initial claims, this underscores the health in the jobs market right now.

The recovery in the housing market may not be a fluke after all. Despite the decline in housing starts noted yesterday, existing home sales increased nicely in October. Sales jumped by 1.5% in the month, riding the jump of 2.6% in September even higher. Additionally, the October pace of 5.26 million units majorly topped expectations for 5.15 million units, and on a year-over-year basis, sales increased by 2.5%. The supply of homes for sale declined by 2.6% in October after dropping 2.1% in September, making the months’ supply of homes drop to 5.1 months compared to 5.3 months in September. The chart below demonstrates the relationship between sales and inventory. The demand for existing homes appears to be soft though, as the median price for a house eased by 0.4% after a 4.3% drop in September. However, versus a year ago, prices were up 5.5% in October 2014. Today’s report suggests that there’s modest improvement in housing sales, however the numbers of supply and prices are a bit bothersome. The housing sector is recovering slowly, though it’s far from robust.

Overall consumer prices in October were a flat 0.0% after firming up by 0.1% in September, and market expectations were for a 0.1% decline. Excluding food and energy, the CPI was warmer, gaining 0.2% after nudging up 0.1% in September and the consensus was for a 0.1% increase in October. Energy prices fell 1.9% after slipping by 0.7% September. Gasoline dropped 3.0%  after declining by 1.0% the month before. Food price inflation rose 0.1%, following a gain of 0.3% in September.For the core rate, the shelter index, airline fares, household furnishings and operations, medical care, recreation, personal care, tobacco, and new vehicles were among the indexes that increased. Declines were seen in used cars and trucks and apparel.

Lastly, the Conference Board’s index of leading economic indicators is showing nice improvement in October at +0.9% which is indicative of overall economic growth. The most impressive gain is once again in interest rates, which is currently reflective of the Fed’s near-zero rate policy. Additionally, low unemployment claims are a good contributor to the rise in housing permits. Oddly enough, the only negative component of the index was the stock market, but given the gains so far in November, this component will likely rebound big this month. All in all, the leading index is on the warmer side of things and highlights what will be the drivers of growth going into year’s end.

 

Jennifer Coombs
Wall Street Strategies

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