Employment Report Beats Expectations, Sort Of – Market Update

It’s always good when people or reports are better than you think. It’s like that for my baseball team right now. If only they had started better. We’ve also had some good surprises coming in terms of jobs numbers lately, leaving me with similar mixed feelings. Let’s get right into it!

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As always, this report is made possible in part with the help of analysis from our friends at Econoday. ¹

Consumer Price Index (CPI)

Inflation is here. The question is now how high and for how long. Overall inflation was up 0.6% in May and 5% since the same time a year ago. When food and energy were removed from the equation, inflation was up 0.7%, with prices rising 3.8% since last year. The year-over-year increase in inflation was the highest since August 2008.

Food prices were up 0.4% in May, matching the increase in April. Overall, they’re up 2.2% in the last year. On the energy side, prices were flat. However, they’ve risen 28.5% higher than they were at this time last year. It’s worth noting that much of the world wasn’t really driving anywhere last May, but still.

There was also a 7.3% uptick in in the price of used cars and trucks after a 10% boost in April. Other categories increasing were new vehicles, airfares and apparel. In a key category we look at, the price of shelter was up 0.3% with an equal increase in owners’ equivalent rent. Rent itself was up 0.2% last month.

There are generally three theories explaining the major increase in prices over the last few months and the degree to which each of them is infecting things depends on who you read:

The Federal Reserve believes this inflation is transitory, driven by supply chain bottlenecks resulting from the pandemic that will eventually work themselves out. The second explanation is that because people were hunkered down at home, prices for many items were lower and the comparison now that spending has picked back up looks way higher by comparison. Finally, the last theory is that there’s too much stimulus in the economy in the amount of dollars in circulation has driven inflation. Take your pick.

Producer Price Index (PPI)

On the production side, prices were up 0.8% in May and 6.6% on the year. This would lead you to believe that prices on the consumer side have more room to go up in coming months because cost increases are often at least partially passed on. This is the largest overall monthly increase since November 2010.

When food and energy were taken out, prices were up 0.7% and 4.8% annually. When further removing trade services, prices were up 0.7% and 5.3% since last May. The increase in this category that could be considered core is the highest annual one since August 2014.

There was a 1.5% uptick in the price of goods. This included a 40% jump in the index that takes out food and energy. Meanwhile, service prices were up 0.6%, including a 27.3% uptick in automobile retail margins.

Retail Sales

Retail sales were down in May, but that doesn’t tell the whole story. Although they fell 1.3%, April numbers were revised way up, from flat initially to an increase of 0.9%. Stimulus checks being distributed and then stopping at various times throughout the year have contributed to ups and downs in this number and last month is no exception.

Taking out vehicles, sales were down 0.7%. This is an important number to keep an eye on as the lack of key computer chips is contributing to a downturn in supply that likely doesn’t help sales. Further taking out gas, sales were down 0.8%. Gas sales were up 0.7% in May.

Sales of building materials were down 5.9% after a fall of 2.3% in April. This is another sign that the housing market may be cooling slightly. Meanwhile, electronics and appliance sales were down 3.4%, with general sales falling 3.3%. Nonstore retailers’ sales were down 0.3% after falling 0.8% the month prior. E-commerce is down with people going out to shop.

Industrial Production

Now this is good news! Production was up 0.8% overall in May with a 0.9% surge in manufacturing. Meanwhile, capacity utilization in factories was up 0.2% to 75.2%. On the downside, industrial production in April was revised way down to 0.1% and manufacturing was down 0.1%.

Turning back to May, manufacturing was helped by a 5.7% increase in vehicle production. It’ll be interesting to see how volatile this is given the shortage of key computer chips. Business equipment and consumer goods production both had upswings. Meanwhile, construction supplies were down, likely due to not having materials for manufacture.

There was a 1.2% uptick in mining with a 0.2% downturn in utility production.

Housing Market Index

In June, the housing market index was down slightly, falling 2 points to 81. This means that builder confidence wasn’t quite as high in June, although the number is still overwhelmingly positive.

Looking at individual components, current sales came in at 86. Meanwhile, sales over the next 6 months came in at 79. Finally, traffic of prospective buyers going through homes was 71. All components were down 2 points on the month.

New Residential Construction

Housing completions were down 4.1% at a seasonally adjusted annual rate of 1.368 million. This is 16.1% higher than last year, but not much construction was happening at the time. Meanwhile, single-family completions were down 2.6% at 1.004 million. Multifamily completions, those with five units or more, came in at 387,000.

Still, there are signs that help for a housing supply may be on the way. Starts were up 3.6% at 1.572 million, up 50.3% from May of last year. Single-family starts rose 4.2% to 1.054 million, while there were 465,000 multifamily starts.

Finally, backing up the timeline further, permits were down 3% at 1.681 million, 34.9% higher than a year ago. Single-family permits were down 1.6% at 1.13 million. There were 494,000 multifamily permits in May.

Existing Home Sales

Existing home sales were down 0.9% in May to 5.8 million on a seasonally adjusted basis. They were up 44.6% compared to last May. It’s important to note that this particular time frame for the year ago comparison would have been after things kind of slowed for the pandemic and before they picked up, as there was increased demand from people who weren’t as into their current homes after prolonged exposure.

Sales prices continue to be high, which likely isn’t helping. These are up 2.8% in May to $350,300 at the median. Supply was at 2.5 months at the current pace of sales. This is up marginally from 2.4 months in April, but still exceptionally low.

New Home Sales

New home sales were down 5.9% in May to an annual rate of 769,000. This is the lowest rate since May of last year, in the throes of the pandemic. The median sale price is up 18.1% for the year at $374,400 after rising 2.5% in May. Supply is up to 4.8 months at the current pace of sales with 330,000 new homes being added to the market, up 14,000 from April.

Durable Goods Orders

New orders of durable goods were up 2.3% in May, after falling 0.8% in April. The good news for the April numbers is that they were revised higher. When transportation was taken out, orders were up 0.3% following a 1.7% increase in this category in April. On the downside, core capital goods were down 0.1%, but this is after rising 2.7% last month.

There was a 7.6% uptick in transportation orders. Shipments of durable goods were up 0.4% in May after being unchanged in April. Unfilled orders were up 0.8% and inventories rose by 0.7%.

Gross Domestic Product (GDP)

The economy grew at a rate of 6.4% in the final reading of the first quarter. Additionally, the share of that tied to personal consumption expenditures was up to 11.4%, which added 7.42% in terms of the consumer contribution to GDP.

Among the key changes in this revision were the fact that business investment added 1.51% compared to 1.39% in the previous revision to GDP while net exports subtracted 1.5%, vs. a previous estimate of a 1.2% negative contribution.

Personal Income And Outlays

Personal incomes were down 2% in May. Rather than having to do with wages, there were no stimulus checks and unemployment compensation related to the pandemic was down. Personal expenditures were flat. This is despite them being up 0.9% in May.

There was higher spending on services, notably recreation, while there was a decline in goods spending, led by cars and parts. One thing that we’ve been keeping a close eye on is inflation and this is the Federal Reserve’s preferred metric. It was up 0.4% overall on the month and 3.9% on the year. In core categories, prices were up 0.5% and 3.4% since last May.

Case-Shiller Home Price Index

This index looks at 20 major metropolitan cities and is based on a rolling 3-month average, looking at the sales of all homes in the areas. On an adjusted basis, prices were up 1.6% in April and 2.1% overall. Since last year, prices are up 14.9%. The record for annual gains is 17.1%, set during the housing bubble in 2004.

Federal Housing Finance Agency (FHFA) House Price Index

The FHFA reported that home prices were up 1.8% in April and have risen 15.7% on the year, a new record. This index is based on monthly changes as opposed to a rolling average. It also only looks at home sales backed by conventional mortgages from Fannie Mae and Freddie Mac.

Consumer Confidence

Consumer confidence was up a sizable 7.3 points to 127.3 in June in the best reading since the beginning of the pandemic. For comparison, the reading in February 2020 was 132.6. Additionally, May was revised up 2.8 points at 120.

In job market readings, 0.7% fewer people see jobs as hard to get at 10.9% of those surveyed. Additionally, 54.4% of people see jobs as plentiful. That’s up almost 6%. The outlook for the future is less certain. Fewer people see more jobs opening up in the next 6 months, but also fewer people anticipate less jobs. On the income side, more people are feeling positive than negative.

Inflation expectations are the highest I can remember them in this report, at 6.7% over the next year, which is up 0.2%. In good news, buying plans for cars, homes and appliances are up across the board. Those who see the stock market rising outnumbered those who see it falling by 37.6% to 30.5%.

Pending Home Sales Index

Homes under contract for sale in May increased by 8% to an index level of 114.7. This is a good sign for June and July sales of existing homes as this is a leading indicator.

ISM Manufacturing Index

This manufacturing index was down 0.6 points in June to 60.6. While slightly slower, this still indicates strong growth in the sector. New orders were at 66 compared to 67 in May. Backlog orders were up 6.1 points to 70.6.

Although some of the top line numbers point to a need for new hires, the industry is just about breaking even at 49.9, showing the slightest downturn. This is blamed on a lack of available candidates. Delivery delays are also quite high at 75.1, although this is down from 78.8 in May. Prices paid continue to climb, up 4.1 points at 92.1.

Employment Situation

Nonfarm payrolls were up 850,000 in June, well above expectations for a number just above 700,000. The bad news is the unemployment rate increased from 5.6% to 5.9%. Although this might normally mean an increase in labor force participation, that number remained steady at 61.6% of the population.

There were 662,000 jobs added in the private sector while 188,000 jobs were added to government payrolls. Looking at individual sectors, 15,000 jobs were added in manufacturing, while 7,000 jobs were eliminated in construction, while there were 642,000 service jobs added.

Looking deeper into different sectors, there were 306,000 jobs added in hospitality and leisure as tourist destinations gear up for people to travel again. Meanwhile, there were also gains in both public and private education, with professional and business services and retail making significant contributions.

Average hourly earnings were up 0.3% and 3.6% since last year. The number of hours worked in an average workweek did decrease by 6 minutes to 34 hours, 36 minutes in June.

International Trade

The U.S. trade deficit increased by $2.1 billion in May to come in at $71.2 billion. Exports were up 0.6%, with services exports up 1.5% along with agricultural exports. On the downside for exports, capital goods and vehicles were down.

Imports were up 1.3% with demand for consumer goods being up a bit. Meanwhile, services imports were up 1.8% and there was more demand for agricultural goods and industrial supplies from abroad.

Mortgage Rates

Mortgage rates fell under 3% to begin July. If you’re in the market to purchase a home or refinance and ready to apply, rates remain extremely attractive right now.

According to Freddie Mac, the average rate for a 30-year fixed mortgage with 20% down and 0.6 points paid in fees fell 4 basis points to 2.98%, this is down from 3.07% a year ago.

Meanwhile, the average rate on a 15-year fixed mortgage with 0.7 points paid in fees was down 8 basis points to 2.26%. This has fallen from 2.56% last year.

Finally, the average rate on a 5-year treasury-indexed, hybrid adjustable-rate mortgage was up a single basis point with 0.3 points paid to 2.54%. This is down from 3% last year at this time.

Stock Market

The Dow Jones Industrial Average was up 152.2 points Friday to close at 34,786.35 points, up 0.45% over the last 30 days ending Friday. Meanwhile, the S&P 500 was up 2.98% of the same period, after rising 32.4 points Friday to finish at 4,352.34. Finally, the Nasdaq finished Friday at 14,639.33, up 116.95 points on the day and 5.46% on the month.

If all of these numbers aren’t your thing, we’ve got plenty more to share with you. Here’s an excellent article on DIY porch screening. Have a great month!

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