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When full employment is full employment
Simply Economics - June 8, 2018
By Mark Pender, Senior Editor



Full employment should be the name of a new dance. Because that's what policy makers seem to be doing around the issue. For many the 5 percent unemployment mark, first hit in mid-2015, was a signpost for full employment and the subsequent mumbles over NAIRU have since been drowned out by policy makers who find ways to say that the labor market has plenty of room to run.


The economy

For the first time in 20 years of JOLTS data there are more job openings, at 6.7 million in data for April, than the unemployed, at 6.3 million in April which has since fallen to 6.1 million in May. Together with May's dip in the unemployment rate to 3.8 percent, the increasing mismatch between openings and available labor poses some of the most convincing evidence yet that the economy is at full employment. Something to watch in FOMC updates this coming week is any change in their unemployment forecasts as 3.8 percent was already, back in March, the Fed's median for the year.


JOLTS data also track hirings, a total which rose to 5.6 million in April but were still far short of openings, at a 1.12 million spread and the second largest on record next only to March's 1.15 million. This gap suggests that employers are having a hard time finding people to fill the jobs and more immediately for economic data means that over 1 million openings are being pushed ahead each month into the next month's jobs market. The openings-hirings imbalance is also evident in year-on-year rates with openings up a robust 9.7 percent and with hirings lagging at 6.8 percent which, nevertheless, is a very strong pace. Are these rates sustainable? The coming rate hike by the Fed, aimed at keeping the labor market from overheating, will be an effort to moderate these rates of growth.


The most immediate news on the jobs market shows that demand is not letting up. Jobless claims have been very low though the 4-week average for initial claims, the blue line in the graph, has been edging higher, to 225,500 in the June 2 week but following a deep trough in early May. But the 4-week average for continuing claims, the green columns in the graph, fell more than 13,000 to 1.729 million in lagging data for the May 26 week. Readings throughout this report are at or near historic lows with the average for continuing claims the lowest since December 1973. And talking about low unemployment rates, the rate for insured workers who have lost their jobs is only 1.2 percent.


One sample where employment may be showing a little less strength is ISM non-manufacturing. The blue line of the graph tracks the report's employment index which posted a gigantic spike over 60 in January but has since been showing slowing rates of monthly growth (any reading over 50 is considered month-to-month expansion). Monthly growth has been steadier for actual non-manufacturing payrolls which are the green columns and which came in at a very substantial 205,000 in May. The slowing rate for ISM raises the question whether the lack of available labor is actually holding down hiring — an issue cited in its May report for construction workers and also truck drivers both of whom are hard to find with the shortage of the latter helping to explain the sample's unusually long delivery delays.


Another major concern for ISM's sample, and other private and regional samples as well, is the outlook for cross-border trade. Going into what more and more looks like a contentious time between the U.S. and its partners, the nation's trade deficit was improving. The monthly deficit totaled only $46.2 billion in April which of course is enormous but well under recent months including three straight between December and February that were over $50 billion. A sharp decline in cellphone imports helped bring down April's gap as did a respectable rise in exports including for food.


The nation exported $12.4 billion of food and related products in April to just top food imports at $12.2 billion. Agriculture and food products have not been a weakness in the nation's trade picture as imports and exports are almost matched, at just over $10 billion per month. But food could become a very visible issue given what are now increasing announcements of trade actions against U.S. exports. And it is also a reminder of what's at stake for the U.S. economy: $2.221 trillion of total exports over the last 12 months.


We end the week's data run with inventories, an area that has been a solid plus for the economy. Wholesale inventories for April, the green area in the graph, inched only marginally higher to $629 billion. This slope, as well as those for manufacturers and especially retailers, has been flat at the same time that sales have been accelerating especially for wholesalers. Low inventories, though a negative for GDP, are a plus for both future production and future employment as businesses have to restock to keep up with demand. The nation's businesses have been very cautious in their inventory management, reflected not only in these data but also in anecdotal reports including ISM manufacturing where more and more of the sample have been saying that inventories for finished goods are too low.


Markets: The day the Fed stood still

Few topics can tighten up an FOMC member like the yield curve, specifically a flattening one where short yields, rising in response to Fed rate hikes, catch up with long yields. Increases in the 2-year yield, the blue line of the graph, have been climbing a little faster than the green line of the 10-year yield. When these two have met in the past, recession, the pink bars in the graph, sometimes follow. A burst of Treasury selling at mid-week tied to reports that the European Central Bank may soon end its QE bond-buying program, led to a narrowing in the 2-to-10 year curve to about 40 basis points though the spread widened back out to 46 by week's end. So far this year, against a backdrop of giant selloffs in the stock market and the drums of trade war, the tightening has totaled only a handful of basis points. Yet should the narrowing pick up and become consistent, and should the 2-year eventually meet up with the 10-year, a crisis of confidence would be a risk for the Federal Reserve.


There's been no crisis of confidence regarding the Fed's unwinding of its balance sheet, although an update does raise questions. The working down of $270 billion of Treasury holdings has been going as scheduled, totaling $88 billion from the beginning of unwinding in October last year. But reduction of $180 billion in mortgage-backed securities has been far behind schedule, only $34 billion lower at $1.735 billion in the June 6 week. To get on schedule, the Fed, by the end of this month, would have to let $39 billion of MBS run-off without reinvesting. That would be more than it has run off to date. Yes there are special factors with the MBS market like sudden prepayments, but $34 billion is beginning to be noticeable. Could a run-off of this size shake up this month's bond market? Perhaps, but the Fed does have to get on schedule sometime.


Markets at a Glance Year-End Week Ended Week Ended Year-To-Date Weekly
2017 1-Jun-18 8-Jun-18 Change Change
DJIA 24,719.22 24,635.21 25,316.53 2.4% 2.8%
S&P 500 2,673.61 2,734.62 2,779.03 3.9% 1.6%
Nasdaq Composite 6,903.39 7,554.33 7,645.51 10.8% 1.2%
Crude Oil, WTI ($/barrel) $60.15 $65.61 $66.63 10.8% 1.6%
Gold (COMEX) ($/ounce) $1,305.50 $1,297.60 $1,302.70 -0.2% 0.4%
Fed Funds Target 1.25 to 1.50% 1.50 to 1.75% 1.50 to 1.75% 25 bp 0 bp
2-Year Treasury Yield 1.89% 2.47% 2.48% 59 bp 1 bp
10-Year Treasury Yield 2.41% 2.90% 2.94% 53 bp 4 bp
Dollar Index 92.29 94.22 93.78 1.6% -0.5%


The bottom line

The Fed gets to fight back in the coming week with an expected rate hike that should underscore their credentials as boom busters, as protectors of stable economic expansion. Still the absence of inflation does give the doves some leeway as does perhaps the growing uncertainty in the global economy.


Week of June 11 to June 15

Labor-market constraints and the risk of inflation will be the subtext for a week highlighted by an expected FOMC rate hike on Wednesday. Immediate pressures for consumer prices are not expected in a report that opens the week on Tuesday followed by producer prices on Wednesday where pressures tied to metal tariffs may not lift prices overall but will offer a reminder of the new threats they pose. Wednesday afternoon the FOMC takes the stage, likely raising rates in the latest installment of their gradualist policy and also updating their quarterly projections where any incremental increases for GDP or employment or inflation or future rate hikes could make the biggest headlines of all. Jerome Powell will also be giving his quarterly press conference. But one area the Fed has been downgrading is consumer spending where, however, the outlook may be improving based on the strong consensus for Thursday's retail sales report. Friday will offer a concentrated look at one area of the economy that hasn't been soft at all and that's manufacturing: Empire State will offer the first small-sample look at June's activity while industrial production will offer the first definitive conclusion on May.




Small Business Optimism Index for May

Consensus Forecast: 105.3

Consensus Range: 104.0 to 106.4


The small business optimism index is expected to come in at 105.3 in May vs April's 104.8. Strength in this index has been centered in business investment and earnings.



Consumer Price Index for May

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.1% to 0.5%


Consumer Price Index

Consensus Forecast, Year-on-Year Change: 2.8%

Consensus Range: 2.3% to 2.8%


CPI Core, Less Food & Energy

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.2% to 0.3%


CPI Core, Less Food & Energy

Consensus Forecast, Year-on-Year Change: 2.2%

Consensus Range: 1.9% to 2.3%


Forecasters are calling for no more than modest pressure in the consumer price report for May, at monthly gains of 0.2 percent overall and with the core rate also seen up only 0.2 percent. Year-on-year rates are expected to be mixed with the overall up 3 tenths to 2.8 percent but the core up only 1 tenth at 2.2 percent.


Treasury Budget for May

Consensus Forecast: -$144.0 billion

Consensus Range: -$156.0 billion to -$105.0 billion


Corporate tax receipts are sharply lower this year but not individual tax receipts which fed a strong $214.3 billion budget surplus in April that trimmed 2018's deficit, seven months into the fiscal year, to $385.4 billion which was still, however, 11.9 percent deeper than the year-ago pace. For May, forecasters see the monthly statement turning negative at a deficit of $144.0 billion.




PPI-FD for May

Consensus Forecast, Month-to-Month Change: 0.3%

Consensus Range: 0.1% to 0.5%


PPI-FD Less Food & Energy

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.1% to 0.3%


PPI-FD Less Food, Energy, & Trade Services

Consensus Forecast, Month-to-Month Change: 0.2%

Consensus Range: 0.2% to 0.3%


Unaccelerating rates at a modest tempo are expected for inflation at the wholesale level in May: at 0.3 percent for headline PPI-FD, at 0.2 percent excluding food and energy, and also at 0.2 percent when excluding food, energy and trade services. Steel and aluminum prices have been climbing but not enough yet to feed into overall producer inflation.


Federal Funds Target for May 12 & 13 Meeting

Consensus Forecast, Midpoint: 1.875%

Consensus Range: 1.75% to 2.00%


An incremental 25-basis-point rate hike is the unanimous consensus of Econoday's sample for the June FOMC, to a mid-point 1.875 percent within a 1.75 to 2.00 percent range. The strength of employment will likely be cited as the central factor for the rate hike, offsetting still moderate rates of inflation and what may be a no better than modest assessment of consumer spending. Quarterly FOMC forecasts will be updated and Jerome Powell will give his second quarterly press conference.




Initial Jobless Claims for June 9 week

Consensus Forecast: 224,000

Consensus Range: 217,000 to 230,000


Initial claims are expected to come in at 224,000 in the June 9 week vs 222,000 in the prior week. Low readings in this report are consistent with strong demand for labor.


Retail Sales for May

Consensus Forecast: 0.4%

Consensus Range: 0.1% to 0.6%


Retail Sales Ex-Autos

Consensus Forecast: 0.5%

Consensus Range: 0.3% to 0.7%


Retail Sales Ex-Autos Ex-Gas

Consensus Forecast: 0.4%

Consensus Range: 0.2% to 0.5%


Retail Sales Control Group (Ex-Food Services, Ex-Autos, Ex-Gas, Ex-Building Materials)

Consensus Forecast: 0.4%

Consensus Range: 0.3% to 0.5%


Despite a wide consensus range, strength for retail sales is the call, at a consensus gain of 0.4 percent in May with ex-auto, given slight weakness in the month's unit auto sales, showing even more strength at 0.5 percent. Ex-auto ex-gas sales are seen at a 0.4 percent gain with control group sales, which also exclude food services and building materials, also expected to rise 0.4 percent.


Import Prices for May

Consensus Forecast, Month-to-Month Change: 0.5%

Consensus Range: 0.4% to 0.6%


Export Prices

Consensus Forecast, Month-to-Month Change: 0.3%

Consensus Range: 0.2% to 0.6%


Import price pressures are expected to warm up in May following what was a surprisingly contained showing in April. High oil prices along with metal tariffs are the risk for import prices which forecasters see rising 0.5 percent in May following April's 0.3 percent gain. Export prices for May are seen up a moderate 0.3 percent.


Business Inventories for April

Consensus Forecast,  Month-to-Month Change: 0.3%

Consensus Range: 0.2% to 0.5%


A healthy 0.3 percent rise is the consensus for April business inventories, a build that would be in line if not too low compared to underlying sales which have been growing at a faster rate than inventories. An unexpected reading in this report, whether high or low, could affect expectations for second-quarter GDP.




Empire State Index for June

Consensus Forecast: 19.6

Consensus Range: 17.0 to 22.5


June's Empire State index is expected, at a consensus 19.6, to roughly match May's strength at 20.1. New orders have been solid and backlogs have been on the rise which point to general strength for the June report.


Industrial Production for May

Consensus Forecast, Month-to-Month Change: 0.1%

Consensus Range: -0.6% to 0.5%        


Manufacturing Production

Consensus Forecast,  Month-to-Month Change: 0.1%

Consensus Range: -0.8% to 0.4%


Capacity Utilization Rate

Consensus Forecast: 78.0%

Consensus Range: 77.4% to 78.3%


Held down by manufacturing, industrial production is expected to rise only 0.1 percent in May. The report's manufacturing component, which dominates the weighting in this series, is also expected to inch only 0.1 percent higher in line with weakness in factory hours in the May employment report. The mining component has been showing great strength with utility output the last two reports also a positive. Pressures on capacity utilization are expected to ease 1 tenth to 78.0 percent.


Consumer Sentiment Index, Preliminary June

Consensus Forecast: 98.7

Consensus Range: 97.6 to 99.0


The consumer sentiment is expected to firm slightly to 98.7 in the preliminary reading for June vs May's already very solid 98.0. Year-ahead inflation expectations in this report have been flat.


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