The holiday shopping season is expected to be busy so we’ll have to wait until next month for confirmation. For now, the economy is doing just okay – and I actually agree with Janet Yellen in her “highly uncertain” appraisal of the future economic outlook, as reported by Bloomberg on Wednesday, December 14, 2016.
It’s much too early to determine how new fiscal policy might affect our economy. The economic headwinds that we have described in detail over the last several years haven’t gone away and neither has the corner the Fed backed us into over the last eight years with their policy experiments.
Thanks to Dent Research, provided here is our weekly information roundup ending the week on December 16, 2016. We start each subject with what you hear in the news and finish with what that information means to you. We hope this information will help you separate the noise from the news.
U.S. Consumer Prices Rise 0.2% in November, Up 1.7% Over Last Year… Excluding food and energy, prices were also up 0.2% last month, but are 2.1% higher for the year.
What it means – As the cheap energy prices from the end of 2015 and early 2016 rotate out of the calculation, overall prices inch higher. While oil and gas prices might have been on a rollercoaster ride the past 16 months, housing prices and medical costs have been on an escalator, moving steadily higher.
This might give the Fed cover to raise rates (see below), but without higher incomes, which we don’t have, it hits consumers squarely in their pocketbooks. Higher costs for essential services like energy and healthcare might explain our weak retail spending last month.
Fed Raises Overnight Interest Rate by 0.25%... The new rate is 0.50% to 0.75%. The central bankers also forecast three rate hikes in 2017.
What it means – Twelve long months. That’s how much time we spent talking about, worrying about, and agonizing over the next time the Fed would raise rates. Now they have, and no one cares. It’s not about this rate hike, it’s about the pace of future hikes, just as it was in December of 2015. Back then, the Fed expected to raise rates at least four times in 2016. That didn’t exactly pan out. The bankers are more cautious about 2017, but still think they’ll push rates to roughly 1.4%.
Americans are used to low rates, which mean low-cost auto loans and mortgages. As rates move up, these two industries could suffer a bit. The central bankers don’t want to kill the modest recovery, so they’ll take things very slowly.
Harry and I don’t see interest rates walking up very far. When the reality of our economic situation comes back into play, I think rates will fall again, and the Fed will stand pat.
Housing Starts Fell 18.7% in November, Down 6.9% Over Last Year… The volatility in multifamily unit starts this month (-43.9%) and last month (+77.7%) caused the wild swing from October’s 27.4% gain. Still, single unit starts dipped 4.1% for the month.
What it means – The housing industry has been preparing for a final push and a market rollover. November’s figures gave us further confirmation.
In addition to the drop in housing starts, permits fell 4.7% in November and dipped 6.6% over the past year. A decline in permits doesn’t bode well for future housing starts, and some permitted projects never break ground.
Though permits fell, completions jumped 15.4% in November as homebuilders were busy pushing out as much inventory to the market as they could.
The Fed’s rate hike will only make things worse, since added borrowing costs for mortgages will put further downward pressure on home prices.
U.S. Producer Price Index Up 0.4% in November, Up 1.3% Over Last Year… Excluding food and energy, prices paid to suppliers rose 0.2% in November and 1.6% higher than last year.
What it means – When manufacturers and service providers pay higher prices to their suppliers, eventually consumers get stuck with the bill. With oil up 100% from the bottom earlier this year, we were bound to see some inflation, since goods require fuel for their transportation. The problem is that we’re still not seeing solid income growth. Without that, higher prices mean lower spending, which will drag on the economy. I don’t take this as a sign that growth is just around the corner. For that, we need fatter paychecks.
U.S. Retail Sales Up 0.1% in November, Missing Expectations of 0.4%... Excluding autos, sales rose 0.2%.
What it means – There were some areas of growth, like building materials and gardening equipment, as well as restaurants. But overall, the report disappointed investor expectations of a great holiday shopping season.
A notable fail was e-commerce sales, which increased only 0.1% last month. These numbers are right in line with my view of the economy – muddling along, but not great – even if they are out of sync with the wild optimism that’s taken hold since the election.
U.S. Industrial Production Dropped 0.4% in November, Capacity Utilization Fell to 75%... Manufacturing and utilities pulled down the report, while mining, which includes oil and gas, posted a small gain.
What it means – Some of this really was the weather, as warmth across the nation in November reduced electricity use, weighing on utilities. But the drop in manufacturing reflects falling car sales, which also put a dent (pun intended) in retail sales above. Weak industrial production reflects modest consumer demand, and strengthens the case as to why repatriated profits won’t lead to new business investments. If companies aren’t using most of their capacity today, why would they build more? I’ll touch on this subject more in Economy & Markets today.
Greek Leaders Contemplate New Elections to Stave off Financial Crisis… The current ruling party, which agreed to austerity measures, might hold new elections in which it’s certain to lose. This would allow the new ruling coalition to avoid the painful financial cuts.
What it means – The Greek leaders have a problem. They need cash, but their European lenders don’t want to give it to them. The lenders point out that the Greeks haven’t implemented many of the drastic financial cuts that they agreed to when they received the earlier bailout bucks. The Greeks counter that the measures are, well, painful.
So, the Greeks came up with a novel approach – just replace the existing government with a bunch of people who didn’t agree to the measures in the first place, and start all the negotiations over. Brilliant!
While the leaders in Athens might change, the situation doesn’t. Greece is still broke, and the euro is still broken.
Senate Majority Leader Mitch McConnell Calls U.S. Debt Levels Dangerous and Unacceptable… The comments come at a time when investors hope President-Elect Trump will enact tax cuts while borrowing to fund infrastructure projects.
What it means – Well, at least somebody agrees with me that debt and deficits matter. I’ve been waiting for someone, anyone, to talk about the financial hole we are in.
Unfortunately, it came after the election, but hey, better late than never.
Senator McConnell didn’t make his comments in a vacuum. He’s staking out his ground for future negotiations with Trump concerning lower taxes and higher spending. The Trump budget would add an additional $7 trillion to the U.S. debt over the next 10 years, over and above our current debt trajectory. McConnell wants any changes to be revenue neutral. Given that the Donald spent his life borrowing bucks and betting on future gains to pay it all off, chances are he won’t agree with the Senator’s point of view.
We’ll see if this looming showdown affects the markets, where investors have pinned their hopes on rising inflation from spending and buckets of free cash from tax cuts.
International Energy Agency (IEA) Forecasts Oil Demand Will Outstrip Supply by 600,000 Barrels Per Day in 2017… Based on proposed production cuts from OPEC and non-OPEC nations, the IEA expects supply to fall below demand, leading to shrinking inventory.
What it means – Excuse me if I don’t get worked up over this. There are just a few holes in the story that make it, well, unbelievable.
The deal relies on OPEC members to keep their promises of lower production, and yet everyone knows they all cheat, and everyone knows there is no way to enforce production levels. And even if all OPEC members abide by the agreement, it simply cuts production to the expected demand level.
To make any headway in shrinking inventory, the non-OPEC members must keep their end of the bargain as well and cut 600,000 barrels of oil per day. To make it even less likely, the IEA projections assume that the Chinese increase their demand by 1.4 million barrels a day, and that American frackers remain on the sidelines.
To recap, if oil-producing countries keep their promises, the Chinese economy grows quickly enough to use an extra million barrels of oil a day, and American energy producers turn a blind eye to a profitable opportunity, then we’ll definitely see higher oil prices in the months to come! Right.
Next Week – Expect a quiet week before Christmas, but there are a few economic releases on the calendar, including existing home sales, durable goods, and new home sales.
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