U.S. Consumer Spending Rose in July Consumer spending rose for the fourth straight month in July, a sign domestic consumption could continue to drive U.S. economic growth over the second half of the year.
Personal consumption, which measures how much Americans spent on everything from hotel stays to hamburgers, rose a seasonally adjusted 0.3% in July from a month earlier, the Commerce Department said Monday. Incomes rose 0.4%, a pickup from growth in the prior two months. Both measures matched consensus expectations from economists surveyed by The Wall Street Journal. (…)
July’s rise was led by an uptick in real spending on motor vehicles and services, which offset lower spending on nondurable goods, or items not intended to last more than three years, the report said.
Consumer spending had climbed 0.5% in June, 0.3% in May and 1.1% in April. Each of those gains matched or outpaced the month’s income growth, suggesting consumers felt comfortable splashing out a little following two straight quarters in which the personal saving rate was 6% or higher. Consumers upped their savings slightly in July, as the personal saving rate rose to 5.7% from an upwardly revised 5.5% in June. (…)
The personal-consumption expenditures price index, the Federal Reserve’s preferred inflation measure, was flat in July from the prior month. From a year earlier, the index was up 0.8%, its smallest annual increase since March. (…)
So-called core prices, which exclude the volatile categories of food and energy, rose 0.1% from the prior month and were up 1.6% from a year earlier. The annual core reading has been consistent since March. (…)
When adjusting for inflation, Monday’s report showed consumer spending rose 0.3% in July from the prior month. Inflation-adjusted disposable personal income—income after taxes—rose 0.4%.
As Food Prices Fall, Economic Pain Hits More Businesses Consumers’ glee at the supermarket checkout over lower food prices isn’t shared by all: Farmers, grocers and restaurateurs are feeling the pinch of cheap milk, beef and corn prices on their incomes.
The U.S. is on track this year to post the longest stretch of falling food prices in more than 50 years, a streak that is cheering shoppers at the checkout line but putting a financial strain on farmers and grocery stores.
The trend is being fueled by an excess supply of dairy products, meat, grains and other staples and less demand for many of those same products from China and elsewhere due to the strong dollar. Lower energy costs for transportation and refrigeration also are contributing to sagging food prices, say economists. (…)
Those great bargains at the grocery store are spreading pain across the Farm Belt. Farmers and ranchers are getting less money for raw milk, cheese and cattle, forcing them to slash spending. Tractor suppliers like Deere & Co. are cutting production due to the farming slump.
Economists and food analysts say the supermarket price declines could last at least through year-end. (…)
The price of food at home is down 1.6% on a seasonally unadjusted basis in the 12 months through July, says the BLS. (…)
Ben Moore, a sixth-generation farmer who grows corn and soybeans on some 5,000 acres in Indiana and Ohio, said 2016 is shaping up to be his least profitable year in 20 years. Facing weak crop prices, he is making do with his current tractors and combines rather than upgrading his equipment, and is pushing for lower prices on pesticides, seeds and fertilizer. (…)
At least six national food retailers, including Costco Wholesale Corp. and Whole Foods Market Inc., and four of the five largest publicly traded food distributors, including Sysco Corp. and US Foods Holding Corp., have reported that their margins suffered in the last quarter because of food deflation, the first time analysts can recall so many grocers singling out deflation as a big problem.
Food deflation is a rare phenomenon and rarely lasts for very long. Restaurants seem to be enjoying fatter margins, however.
The price of wheat has crashed to the lowest level in a decade as huge harvests pile up in big growers from Russia to the US, cutting the cost of staple foods around the world.
Extensive planting and benign weather have forced analysts to repeatedly raise crop outlooks. The International Grains Council last week increased its global wheat production forecast to a record 743m tonnes, up 1 per cent from last year. (…)
The recent US winter wheat harvest was 45m tonnes, up 21 per cent from 2015, according to the US Department of Agriculture. Merchants who have run out of room in silos are piling wheat outdoors.
Storage concerns are also growing in Russia, which is this year set to become the largest wheat exporter after hauling in more than 70m tonnes. In Canada, the government anticipates the second-largest wheat crop in 25 years, of 30.5m tonnes. Australia’s imminent wheat harvest is forecast at 26.5m tonnes, the most in five years. (…)
US Wheat Associates, a Washington-based export promotion body, argued that supplies of high-quality wheat were less than met the eye.
“While total supply gets the most attention, wheat’s real value is as a functional food ingredient, not as a bulk commodity,” it said in a newsletter. “When you dig a bit deeper, the total supply of milling quality wheat is much different — and it is tightening.”
Fed’s Fischer says U.S. job market ‘very close’ to full strength
David Rosenberg is “baffled” by Fischer’s comments””:
Can Fischer be serious about being close to full employment when the U6 rate has flat-lined around 9.7% since February? The employment-to-population ratio is at a level more consistent with an 8% jobless rate than 5%.
The chart plots the U6 rate which troughed at the 8% level in 2007 and the gap between U6 and the official unemployment rate. This gap is currently 4.8% compared to its 2007 average low of 3.5%.
Eurozone business confidence drops to lowest since Oct ’13
(…) Confidence in the industrial sector suffered the sharpest reversal as surveyed manufacturers reported their worst deterioration in current orders since the depths of the financial crisis in 2009.
The glum prospects were shared across other major sectors of the eurozone economy. Services confidence declined by 1.2 points on the back of lower demand expectations, with retail trade falling 2.7 points.
Four of the five largest eurozone members also saw economic confidence slide, according to the European Commission, helping push the overall index to a four-month low, down by 1 point to 103.5 – steeper than the 104.1 forecast by economists.
The Netherlands, whose open trading economy has been cited as one of the most vulnerable to the UK’s EU exit, saw the worst August drop at -3.6 points, followed by Italy (-2.1), Spain (-1.5) and Germany (-1.1).
However, economic confidence in the UK managed to rise by 1.4 points to 104, helped along by buoyancy in the services sector.
Also losing confidence:
OIL
Oil Discoveries at 70-Year Low Signal Supply Shortfall Ahead
Explorers in 2015 discovered only about a tenth as much oil as they have annually on average since 1960. This year, they’ll probably find even less, spurring new fears about their ability to meet future demand.
With oil prices down by more than half since the price collapse two years ago, drillers have cut their exploration budgets to the bone. The result: Just 2.7 billion barrels of new supply was discovered in 2015, the smallest amount since 1947, according to figures from Edinburgh-based consulting firm Wood Mackenzie Ltd. This year, drillers found just 736 million barrels of conventional crude as of the end of last month. (…)
New discoveries from conventional drilling, meanwhile, are “at rock bottom,” said Nils-Henrik Bjurstroem, a senior project manager at Oslo-based consultants Rystad Energy AS. “There will definitely be a strong impact on oil and gas supply, and especially oil.” (…)
Global spending on exploration, from seismic studies to actual drilling, has been cut to $40 billion this year from about $100 billion in 2014, said Andrew Latham, Wood Mackenzie’s vice president for global exploration. Moving ahead, spending is likely to remain at the same level through 2018, he said. (…)
Ten years down the line, when the low exploration data being seen now begins to hinder production, it will have a “significant potential to push oil prices up,” Bjurstroem said. (…)
Overall, the proportion of new oil that the industry has added to offset the amount it pumps has dropped from 30 percent in 2013 to a reserve-replacement ratio of just 6 percent this year in terms of conventional resources, which excludes shale oil and gas, Bjurstroem predicted. Exxon Mobil Corp. said in February that it failed to replace at least 100 percent of its production by adding resources with new finds or acquisitions for the first time in 22 years. (…)
SENTIMENT WATCH
David R Kotok: Yellen. LIBOR, Markets
(…) LIBOR represents hundreds of trillions of dollars in loans and financings that are not directly tied to riskless T-bill interest rates. LIBOR is a real-world commercial, institutional, and personal financial reference.
Yellen never mentioned LIBOR in her speech.
Following Yellen’s speech, 3-month LIBOR was 0.83%, 6-month LIBOR was 1.22%, and 1-year LIBOR was 1.53%. Let’s do the forward rates. Three-month LIBOR, three months from now, is estimated at 1.61%. Six-month LIBOR, six months from now, is estimated at 1.84%. One can extend and project that the LIBOR yield curve will climb to over 2% within a year.
Some detractors say that this is due only to the major shift underway in money market fund characteristics. Maybe. But note that the money market rule changes take effect in about six weeks. We have purposefully extended this forward rate analysis to beyond the mid-October rule change date in order to avoid that October time frame. Our view is that other things are happening, too.
Look at the forward rate spreads. The 3-month spread between LIBOR forward and T-bill forward is projected to be over 100 basis points. The 6-month spread half a year from now is projected to be over 110 basis points. Note that this is now bumping up against the estimates of a 118–120 basis point rate that would be charged to activate swap lines between central banks in multiple currencies if there were an emergency need for liquidity in dollars or elsewhere. Note that the GSE debt tied to 1-year LIBOR exceeds $100 billion. It will reset up over $1 billion at an annual rate. Note that all this is happening while the market is pricing about a 50–50 chance of a single Fed hike in December.
At Cumberland, we have raised cash in our US stock market ETF accounts. (…)