Last week was a short but very busy period for economic news, with looks at business sentiment, the trade balance, and, most important, the job market. This week’s data will start with prices and concerns over inflation.
Last week’s news
On Tuesday, the Institute for Supply Management (ISM) Manufacturing index blew away expectations. It rose from 58.1 in July to a 14-year high of 61.3 in August. This is a diffusion index, where values above 50 indicate expansion and below 50 indicate contraction. So, this is an extremely strong result. The surprising uptick is inconsistent with other surveys, which raises the risk that it is an outlier, especially given slowing global growth, recent appreciation in the dollar, and uncertainty in trade policy. The rise was well supported in the survey, however, with increasing new orders and production. If it holds, it has to be considered quite positive for the economy as a whole.
On Wednesday, the international trade report also beat expectations—in a bad way. The trade deficit worsened, going from $45.7 billion to $50.1 billion, a five-month high. Exports surged in the second quarter, as buyers bought ahead of pending tariffs. But exports declined last month, even as imports increased. Overall, given this weakness, trade will likely be a drag on third-quarter growth.
On Thursday, the ISM Nonmanufacturing index also rebounded. After a sharp drop in August, it went from 55.7 to 58.5. As with the manufacturing report, this is a diffusion index, so this level continues to indicate expansion. The larger-than-expected bounce came from higher business activity and a substantial rise in the new orders index. With consumer confidence high and spending growth solid, this indicator—along with the manufacturing index—shows the overall business sector remains very positive on the economy as a whole.
Finally, on Friday, the employment report also beat expectations. It rebounded to 201,000 in August, although the already weak July report was revised down to 147,000. The unemployment rate remained steady as expected, but the underemployment rate declined to a 17-year low. Wage growth was the big positive surprise. It rose by 0.4 percent on a monthly basis and ticked up from 2.7 percent to 2.9 percent on an annual basis, which is a nine-year high. This is another very healthy report and signals continued economic growth. It also likely locks in another rate hike from the Fed in September.
What to look forward to
On Wednesday, the producer price reports will be released. The headline index, which includes energy and food, is expected to rise by 0.2 percent for August, up from a flat result in July. There may be some upside risk on energy prices, as well as tariff-driven increases in other input prices—particularly steel and electronics. The annual change is expected to drop from 3.3 percent to 3.2 percent, indicating that longer-term inflation pressures remain above the target range set by the Fed. The core index, which excludes energy and food, should also rise. It is expected to go from 0.1 percent in July to 0.2 percent for August. The annual figure should stay steady at 2.7 percent. Tariffs are reported to be driving faster input inflation, although it is not yet expected to show up in the aggregate figures.
On Thursday, the consumer price reports are expected to show continued inflation at the headline level. The headline index will likely rise by 0.3 percent in August, up from 0.2 percent in July. The annual figure is expected to drop from 2.9 percent in July to 2.8 percent in August. The core index, on the other hand, should stay steady—with the monthly figure holding at 0.2 percent and the annual figure at 2.4 percent. As with the producer prices, these figures indicate inflation continues to run above the Fed’s target levels, which should continue to drive interest rates higher.
On Friday, the retail sales report is expected to show growth of 0.6 percent for August, up from 0.5 percent in July, on a rise in gasoline prices and steady auto sales. There is some downside risk, as a modest pullback may be likely after a big increase in July. Core retail sales, which exclude autos, are also expected to do well. August growth should remain steady at 0.6 percent—the same as in July.
Also on Friday, the industrial production report should tick up a bit, from a gain of 0.1 percent for July to a gain of 0.3 percent for August. Manufacturing will likely show similar growth—from a 0.3-percent gain in July to a 0.4-percent gain in August. There’s some downside risk with these numbers, as manufacturing employment declined last month and growth in oil drilling and utility production was moderate.
Finally, we’ll see the University of Michigan consumer confidence survey on Friday. It is expected to hold steady from August to September at 96.2. This is a historically high level and suggests that consumers are not yet worried about the effects of a trade war, given a decline in gas prices and the recent stock market surge. There may be some upside risk here, as the recent increase in the Conference Board survey brought it close to an 18-year high.
Thanks for reading and have a great week!
Brad McMillan is the chief investment officer at Commonwealth Financial Network, the nation’s largest privately held independent broker/dealer-RIA. He is the primary spokesperson for Commonwealth’s investment divisions. This post originally appeared on The Independent Market Observer, a daily blog authored by Brad McMillan. Forward-looking statements are based on our reasonable expectations and are not guaranteed. Diversification does not assure a profit or protect against loss in declining markets. There is no guarantee that any objective or goal will be achieved. All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance is not indicative of future results.