Decline in US Durable Goods Orders for May 2017

Often seen as a marker for business investment, U.S. durable goods orders fell for the second month in May 2017. According to a report by the U.S. Commerce Department, durable goods (items meant to last a minimum of three years) fell 1.1 percent between April and May, dropping to $228.2 billion.

May’s decline marks the largest drop in six months and is greatly attributed to a decrease in orders for aircraft. While previously a strength, aircraft orders have declined for the second time in two months with a 12 percent decrease in orders for commercial aircraft and a 31 percent decrease in orders for defense aircraft, a notoriously volatile category.

Core capital goods were another area of weakness in May with an unexpected 0.2 decline in both orders and shipments for this category.

In contrast, there was a 0.6 percent increase in machine orders, a 1.2 percent increase in vehicle orders, and a 0.8 percent gain in total shipments.

Excluding the category of transportation (which does not include aircraft), durable goods orders also rose very slightly, increasing by 0.1 percent/

While not completely negative, May’s readings point to a lack of confidence in business prospects in the United States.

Decline in the US Housing Market

The latest Monthly New Residential Construction Report from the U.S. Census Bureau brings some negative news for the U.S. housing sector. Housing starts hit an eight month low in May 2017, falling 5.5 percent, to a rate of 1.092 million.

Housing permits also decreased 4.9 percent to 1.168 million.

There were declines across all individual components, with single-family starts falling 3.9 percent to a rate 794,000 and permits falling 1.9 percent to 779,000. Correspondingly, multi-family starts fell 9.7 percent to 298,000 and permits dropped 10.4 percent to 389,000.

In contrast, housing completions rose 5.6 percent, coming in at a rate of 1.164 million, adding supply to a thin market. 

The overall decline in construction activity suggests that residential investment will be a negative factor in second quarter GDP.

Industrial Production Up by 0.5% in the Euro Area

The latest data release from Eurostat, shows that seasonally adjusted industrial production has risen 0.5% in the euro zone between April and May 2017. The annual rate has risen by 1.4% in both the euro area and the EU28. 

Source: Eurostat

This  is largely due to a 4.7% increase in the production of energy, with a 0.6% rise in the production of durable consumer goods, a 0.2% rise in the production of non-durable consumer goods and a 0.1% rise in the production of intermediate goods making up for a 0.7% decrease in the production of capital goods. 

The 0.5% total increase was spurred by a 1% country-level increase in Germany, covering smaller decreases in France (down 0.6%), Italy (down 0.4%) and Spain (down 0.1%). Although, among member states for which data are available, the highest country-level increases were reported in Ireland (+7.7%), Malta (+2.9%), and Portugal (+2.0%). The highest decrease was recorded in Slovakia (-10.9%), 

In total, aggregate euro zone industrial production is increasing and the goods sector is predicted to experience a stable second quarter.  

UK CPI Hits 4 Year High

According to the latest data available from the Office of National Statistics, a 0.3% monthly increase in the UK Consumer Price Index has lifted the annual inflation rate to 2.9% in May 2017, a slight increase from the 2.7% estimated by the Bank of England.

This marks the highest reading since April 2012, continuing a trend of increased prices after a period of low inflation in 2015. It also marks the 5th consecutive month where inflation has exceeded the Bank of England’s target rate of 2%.

The increase in the CPI is mainly attributed to a rise in the prices of recreational and cultural goods, most notably video games. Overall prices in this category rose 0.9% between April and May, the largest increase in all categories measured. This was coupled with modes price increases for food, clothing, electricity, furniture and household goods.

These increases were partially offset by a decrease in transportation prices, especially in air and sea fares.

Strong Demand in the US Labor Market

The latest Jobless Claims report available from the US Department of Labor points to a strong demand in the labor market. The number of Americans filling for unemployment benefits fell 10,000 in the first week of June, dropping to 245,000.

The four week moving average rose slightly to 242,000, an increase of 2,500 from the previous week.

The seasonally adjusted insured unemployment rate was reported at 1.4%, unchanged from the previous week.

The seasonally adjusted insured unemployment decreased 2,000 to the record low level of 1,917,000. 

Cooling Demand Coupled with a Minor Monthly Increase in Prices for the UK Housing Market

After peaking in March 2016, annual house price growth in the UK has fallen to 3.3% in May 2017, according to the latest Halifax House Price Index. A 0.4% monthly increase in the price of houses between April and May contrasted with a 0.2% quarterly decrease. With prices remaining virtually unchanged over the past three months, the report suggests that the underlying trend for housing prices remains down (albeit at a moderate level). 

The report highlighted a weak market performance with UK home sales falling 0.3% between March and April coupled with a 0.2% decrease in mortgage approvals for house purchases (a key indicator of completed house sales) in the same period. The cooling demand is attributed to a combination of rising inflation, weak wage growth, and increases in stamp duty tax rates for buy to let and second home purchases. 

A 14 month trend of low supply continues into April, keeping the average number of properties for sale in estate agent's books at record lows. 

Martin Ellis of Halifax concludes, “The fact that the supply of new homes and existing properties available for sale remains low, combined with historically low mortgage rates and a high employment rate, is likely to support house price levels over the coming months.”

Solid Growth Reported in the Eurozone Retail Sector for May 2017

Eurozone retailers recorded an increase in like-for-like sales in May according to the latest IHS Markit Eurozone Retail PMI report. While positive overall, the data highlighted a country level discrepancy: encouragingly high levels of growth in Germany and France counterbalanced a continuing decline in retail sales in Italy.

The IHS Markit Eurozone Retail PMI (measuring month-on-month changes in like-for-like retail sales in France, Germany, and Italy) was measured at 52.0. Decreasing from 52.7 in April, the reading points to a solid though slightly weaker rise in sales for the month.

Conversely, sales were down on an annual basis and the data showcased across the board under performance by retailers. All three countries reported gaps between forecast and actual sales with the highest discrepancy recorded in Italy.  

Gross margins fell sharply as retailers were faced with a rise in average purchasing costs. Input price inflation was reported in all three economies, most markedly in Germany.

High levels of purchase activity were also reported, catalyzed by high sales volumes and contributing to a continuing increase in stocks of goods for resale.

Finally, the data showed a rise in retail sector employment, continuing a trend which began in November 2015.

Alex Gill of IHS Markit concludes, “Overall the data paint a positive picture of the euro area retail sector. However, a sharp fall in gross margins suggests the business climate remains challenging”.

Steady Economic Growth in the Eurozone Led by the "Big Two"

According to the latest data made available by IHS Markit, the eurozone continues to grow at a record pace. The final reading of the IHS Markit Eurozone PMI Composite Output Index for May 2017 remained at 56.8, unchanged from April's final reading. 

Output expansion in the zone was bolstered by the strong growth of new business while high levels of new orders spurred faster job creation, leading to a marked rise in employment. The manufacturing sector led the overall expansion with goods production rising at a rapid pace. 

This steady rate of growth is led by the "big two" nations, France and Germany. In Germany, growth was attributed to an increase in manufacturing production while in France, growth came as a result of a strong performance in the service sector. 

The IHS Markit Eurozone PMI Services Business Activity Index came in at 56.3, a slight decrease from 56.4 in April. According to the release, all "big four" economies (including France, Germany, Spain, and Italy) saw an increase in output, with the expansion of eurozone services business activity sparked by an increase in new orders. This increase also led to an increase in job creation and a corresponding increase in staffing levels. 

In conclusion, Chris Williamson, Chief Business Economist at IHS Markit, stated, "The final PMI readings add to mounting evidence that the eurozone is enjoying a strong second quarter, consistent with GDP rising at a 0.7% rate...The outlook for the eurozone economy therefore seem to be tilting to the upside and it seems likely that we'll start to see many forecasters' expectations for 2017 growth revised higher". 

Final reports on IHS Markit PMI readings for France and Germany in May 2017 are also available. 

More Mixed News on the US Economy

The IHS Markit Flash U.S. Purchasing Managers’ Index for May 2017 showed a moderate rebound in private sector economic activity. The Flash U.S. Composite Output Index rose to 53.9 from 53.2 in April, the largest increase since February. Driven by growing employment and a high level of new orders, the Flash U.S. Services Business Activity Index rose to 54.0.  New business growth has accelerated to its highest reading since the beginning of 2017, accompanying an increase in job creation. Average business costs also increased, mainly due to a rise in service sector input prices. Service sector input prices rose at the fastest rate since 2015. However, there was a marked decrease in the optimism that had permeated the service sector at the beginning of the year. Things were less positive in the manufacturing sector. Production, hiring and new orders all increased at the slowest pace since 2016. “Some manufacturers suggested that domestic clients had adopted a wait-and-see approach to investment spending. Meanwhile, new export sales increased only marginally in May, which pointed to a sustained drag from subdued external demand.”

According to a report by the National Association of Realtors, sales of existing homes fell more than anticipated in April 2017, attributed to a shortage of houses on the market and correspondingly high prices. However, while existing home sales declined 2.3 percent to a seasonally adjusted annual rate of 5.57 million units, the number of days that homes stayed on the market decreased 1.64% compared to April 2016. 

A report from the U.S. Energy Information Administration  states that U.S. oil refinery inputs averaged 17.3 million barrels per day during the week ending May 19, 2017, an increase of 159,000 barrels per day over than the previous week’s average. Gasoline production also increased, with an average of over 10.2 million barrels produced per day. U.S. crude oil imports decreased to an average of 8.3 million barrels per week and U.S. commercial crude oil inventories decreased by 4.4 million barrels from the previous week while gasoline decreased by 0.8 million barrels and distillates by 0.5 million barrels. 

European Manufacturing Jobs Added at the Highest Rate in Over 20 Years

The Eurozone has shown stable economic momentum, according to the IHS Markit Flash Eurozone Composite Purchasing Managers’ Index for the month of May. The Flash Eurozone PMI Composite Output Index remains at 56.8, unchanged from its final reading in April. The Flash Eurozone Services PMI Activity Index fell 0.2 points to 56.2, offset by the Flash Eurozone Manufacturing PMI which rose 0.3 points to 57. The Composite Output Index in France rose a full point to 57.6 and 0.6 points in Germany to 57.3. Employment and job creation also increased, corresponding to business optimism about the future.

Manufacturing output growth and exports increased at the highest rate in six years. Manufacturers hired employees at the fastest rate in over 20 years.

Price pressures remained elevated with an increase in output prices (the second fastest rate since July 2011). However, an ease in input cost inflation suggests a potential future decrease. Overall, these factors point to an anticipated second quarter increase in Eurozone real GDP of approximately 0.6%.