The past five trading days were relatively quiet for the major indices, and not even the end of the Facebook (FB) lockup period could throw the markets off today.
That’s partly because we received round after round of largely positive news on the U.S. economy, including especially optimistic retail sales data and building permits. And as long as the economic news remains good and investors stay calm about the ongoing Eurozone debt deals, the Dow could very well break through its 2012 high of 13,279 and reach the highest level since the financial crisis.
But, before we get there, let’s take a moment to receive the past week’s biggest economic headlines.
Retail sales jumped 0.8% in July. This was substantially higher than economists’ consensus expectation of a 0.2% increase. Excluding vehicle sales, which rose 0.8%, overall retail sales still rose 0.8%. This indicates that there were broad base sales gains in virtually all categories. July’s retail sales report was a welcome relief after three straight monthly declines. Clearly, July’s retail sales report will likely cause some economists to raise their third-quarter GDP estimates.
The Producer Price Index (PPI) rose 0.3% in July. The core PPI, excluding food and energy, rose 0.4%, which was high than economists’ consensus expectations of a 0.2% rise. In July, wholesale food prices rose 0.5% due largely to the drought in the Midwest, while energy prices declined 0.4%. In the past 12 months, PPI has risen just 0.5%, so this latest report on wholesale inflation was very positive.
The Consumer Price Index (CPI) was unchanged in July, which was much better than economists’ consensus forecast of a 0.2% rise. Core CPI (which excludes food and energy) rose 0.1%; energy prices declined 0.3% and food prices rose 0.1%. In the past 12 months, core CPI has risen 2.1%, which is the smallest gain since late 2011. During the same period, headline CPI has risen 1.4%, which is the smallest annual change since late 2010. At this moment, inflation is under control and no action by the Fed is anticipated.
Business inventories advanced 0.1% in June, coming below economists’ expectations of a 0.2% gain. This represents the slowest pace in nine months and follows a 0.3% gain in May. The drop in June was caused by a 1.1% drop in sales. As I mentioned last week, businesses are being cautious about their inventories; stockpiles have reached their highest level since February 2010. So while I’m not overly concerned with this conservatism, I’ll continue to monitor the situation on this front.
The Jobs Market
Jobless claims remained largely unchanged last week, rising just 2,000 to 366,000. Economists expected the measure to rise to 368,000. The four-week moving average dropped to 363,750—this represents the lowest level since the end of March. Businesses are playing it smart—they’re keeping their staff levels constant to match the current sales pace. I’m encouraged to see that jobless claims have remained below the 400,000 benchmark for so long.
Industrial production climbed 0.6% in July, which was in-line with economists’ consensus estimate. One detail of the July industrial production report was particularly encouraging: Capacity utilization rose to 79.3% in July, the highest level since April 2008. Another interesting detail is that utility output rose 1.3% in July, so the heat wave that has been impacting much of the U.S. may have distorted the headline figure. In the past 12 months, industrial production is up 4.4%; this is indicative of an improving U.S. economy.
The Housing Market
New housing starts declined 1.1% to a 746,000 annual pace in July, following June’s reading that hit a four-year high. The consensus estimate called for housing starts to rise to 765,000. This was caused by a drop in starting construction on new single-family homes. While we all would have liked to see stronger housing starts for July, the fact remains that this measure of homebuilding has jumped 21.5% in the past year.
In July, building permits jumped 6.8% to an annual rate of 812,000—this is the highest level of activity since August 2008. Permits for single-family homes advanced 4.5%; this is considered to be the most important figure in this report by many economists. This is very encouraging for the housing market.
The Big Picture
The Leading Economic Index (LEI) rose 0.4% in July, which was slightly better than economists’ consensus forecast of a 0.3% rise. Fully seven of the 10 LEI components rose, including jobless claims and building permits. The main drag on the July LEI was new goods orders.
If this week’s economic reports are any indication, the U.S. economic appears to be on track for a slow, but steady, economic recovery. Next week, we’ll receive more data on existing home sales, new home sales and durable goods orders as well as get the latest minutes from the Federal Open Market Committee. If there are any market-moving events, I’ll be sure to check in on this blog next week.