The U.S. Economy Created 157,000 Jobs in July, the Unemployment Rate Dipped to 3.9%… The jobs numbers for May and June were revised higher by a total of 59,000 jobs.
What it means – The number of jobs created were at the low end of expectations, but that was a good thing. If jobs had come in “hot,” then investors would be more concerned about the Fed raising rates at a faster clip. As it is, businesses claim they can’t find enough workers, so more jobs would exacerbate an already difficult situation.
But companies have the tools to deal with labor shortages – pay more. We’re not there yet. Average hourly earnings increased 0.3% last month, which matched expectations, and are 2.7% higher than last year, the same annual pace as in June. Again, this gave investors worried about inflation a bit of relief. But it shouldn’t last long. Worker shortages from truckers to caregivers are making it difficult for companies to deliver.
Expect wage gains in the months ahead, which will drive inflation.
Federal Reserve Keeps Interest Rates at 1.75% to 2.00%… As widely expected, the Fed didn’t raise rates on Wednesday. However, the central bankers upgraded their evaluation of U.S. economic activity from “solid” to “strong.”
What it means – The Fed hasn’t raised rates at an off-quarter meeting in many years, so their decision to stand pat wasn’t a surprise. The next opportunity to raise rates comes in September, when the Fed is expected to bump the overnight rate to between 2.00% to 2.25%. The interesting tidbit from the latest meeting was the upgraded assessment of economic activity.
If the central bankers believe things are heating up, then they might have to respond with rate hikes at a faster pace than currently planned. If they do pick up the pace, they risk derailing economic growth by making it more expensive to borrow for houses, cars, etc.
This is a delicate balancing act that has always – always! – proved too difficult. Central banks either react too late or overreact.
S&P/CoreLogic Case-Shiller Home Price Index Up 6.5% in May over Last Year… Home price growth came in 0.1% shy of expectations but continued a two-year string of reports over 5%.
What it means – Monthly growth inched up 0.2%, pushed higher by prices out west as prices fell in New York and Detroit. Investors are nervous that home prices will follow home sales, which are flat for the year and look poised to dip in the months to come.
With interest rates ticking up a bit making payments slightly less affordable, labor shortages, and rising material costs, any weakness in home prices could signal a slowdown in what was already a modest real estate market. No doubt home prices have moved up sharply, but homebuilding remains about half of what it was before the financial crisis, and well off the long-term average.
Because home building represents leveraged spending, weakness in this sector is usually a sign of overall economic headwinds. If housing activity continues to fall, it could make for a very volatile second half of 2018.
Second-Quarter Eurozone GDP Falls 0.4% to 2.1%… The rate of expansion was on the low side of expectations and was the slowest rate since the second quarter of 2014.
What it means – The report confirms what we already suspected, Europe is slowing down. That will make life uncomfortable for the members of the European Central Bank. ECB President Draghi had noted the bank’s intention to end its bond-buying program this year, and to potentially begin raising interest rates by the summer of 2019.
It will be hard to make a case for such moves if economic growth fails to rebound. However, if the ECB remains on course, then it will struggle to find enough bonds to buy, and the exceptionally low rates, currently at minus 0.40%, drive investors to buy the relatively high-yielding U.S. Treasuries.
Eurozone Prices Rose 2.1% in July over Last Year… Core inflation edged up 1.1%.
What it means – Echoing GDP growth, inflation remains muted. The 1.1% increase in core prices actually is 0.2% higher than June’s reading, which shows how weak prices have been for several months. Tepid prices, like modest growth, make the ECB’s job much harder.
U.S. Motor Vehicle Sales Down 700,000 Units on an Annualized Rate… July auto sales dipped from 17.5 million per year to 16.8 million, missing expectations of 17.1 million.
What it means – That was the lowest rate since last August when Hurricane Harvey took a bite out of sales. Motor vehicle sales are roughly 20% of retail sales, so the dramatic fall could lead to weakness in third-quarter GDP, and that’s before any tariffs have been levied on vehicles.
Most manufacturers registered falling sales, but GM stopped reporting monthly numbers, and Fiat Chrysler registered gains due to strong sales in its Jeep division. It could be higher financing costs are making it harder to buy cars, or it could be that we just don’t need as many.
June Factory Orders Up 0.7%, Missing Expectations by 0.2%… Aircraft and autos added to the gains, but orders were held back by weak core capital goods.
What it means – Core capital goods represent non-defense spending, excluding aircraft, which is a long way of saying business investment. Growth for such orders was revised down from 0.6% to 0.2%, pulling down the overall figure. This is where the rubber meets the road for tax reform. Will companies spend a bunch of their newfound wealth to expand factories and production, or will they simply sock away the cash, buy back their stock, and pay fatter dividends? it looks like the way it’s playing out is the latter – buy backs and dividends. New factories are delayed until companies struggle to fulfill orders.
Tesla Selling Surfboards, and Forecasting Profits… The electric car company offered 200 surfboards for sale last Saturday at $1,500 apiece. They sold out within two days and are now offered on eBay for about $3,000. While the company probably made a tidy profit on the surfboards, it hasn’t quite been able to achieve that with its main business, selling cars.
Tesla lost just over $3 per share last quarter, slightly worse than expectations. But the company noted it had produced 5,000 Model Three cars for several weeks at the end of July and expects production to reach 6,000 units per week by the end of August.
Founder and CEO Elon Musk also forecast the company will bank profits from here on out. That’s bold talk from a company that lost more than $700 million last quarter and will lose its per unit tax credit in 2019.
Data supplied by Dent Research/Delray Beach Publishing
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