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Friday, March 15, 2019

My Warning was Warranted

This time last month, I sent out a warning suggesting we not give up hope on consumers’ desire to shop. At that time, the Commerce Department reported retail sales plummeted 1.2 percent in December, the worst drop in nine years. It wasn’t clear if the data was incorrect due to the government shutdown or if the consumer had retreated into a bunker. The latest report reflects both issues may have been the cause, giving us more concern, but also some relief. It turns out that retail sales were weaker than initially reported for December, falling 1.6 percent. However, sales rose 0.2 percent in January as eight of the 13 categories showed improvement. The stronger-than-expected increase provides some reassurance that consumers have not closed their wallets or cut up their debit cards, but are still feeling positive about their financial situations, especially when you look at where the spending occurred. Spending was strongest on discretionary items, such as sporting goods, hobbies, and restaurants. Big-ticket items, such as furniture and autos, posted declines for the month.

Key Indicators this Week:

Housing – New home sales fell 6.9 percent in January to 607,000, the weakest level since October. Sales peaked at 712,000 during this business cycle and have been falling since November 2017. The report is disappointing after homebuilders expected an increase in buyer demand. Prices fell 3.8 percent, the first annual decline. Homebuilders are optimistic that lower prices and mortgage rates will bring buyers back to the table.

Inflation  Inflation remains well contained, with little chance of accelerating anytime soon. CPI rose 0.2 percent in February, while the core rate of inflation inched up 0.1 percent. The change in core prices was the smallest increase in five months. Year-over-year core inflation fell to 2.1 percent, driven mostly by weakness in core goods pricing. The strong dollar is providing an offset to tariffs and helping keep the costs of imported goods low. Prices for autos fell the most since September, and prescription drug costs had the biggest drop ever. There is room for core services pricing to increase if wage pressures begin to build, even though we have not seen evidence of this yet in the expanding labor market. Producer prices rose 0.1 percent in February and 1.9 percent from a year ago, the slowest annual pace since June 2017. Most of the monthly increase came from a 0.4 percent rise in final goods, with 80 percent of that coming from energy prices. 

Manufacturing  This week’s reports on the manufacturing sector were weaker than anticipated. The New York Fed’s Empire index came in at 3.7 percent, the weakest reading since May 2017. Prices paid increased, new orders fell and work hours declined. In a separate report, industrial production rose 0.1 percent in February, much lower than the 0.4 percent expected gain. The factory activity component fell 0.4 percent for the third decline in five months. The one semi-optimistic report was for durable goods orders, which increased 0.4 percent in January. While most of the gain came from a 15.9 percent jump in commercial aircraft orders, the proxy for business investment increased 0.8 percent, the largest gain since July and the first increase in two months. 

Strategically for Credit Unions:

The yield curve remains inverted from one to five years. The fed fund futures market continues to see zero percent chance for a rate increase this year. The curve from two to 10 years is 15 basis points. This is five basis points higher than the recent December low of 10 basis points. 

Sarina Freedland – Senior Investment Officer

Although this information has been obtained from sources we believe to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. This is for informational purposed only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results. Changes in any assumption may have a material effect on projected results.

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