Don’t Sweat This Summer’s US Economic Data

It's the dog days of summer, and if recent US headlines have you feeling in need of an ice-cold tonic, fret not! Your friendly MarketMinder staff has just the remedy: some cool bits of US data. As debates rage about the health of the US economy-particularly after some recent data were mixed-a high-level look suggests the drivers underpinning this expansion remain fine overall.

June CPI numbers came out last week following Fed head Janet Yellen's testimony to the Senate Banking Committee, which featured some inflation chatter: "There may be more going on. We're watching inflation very carefully in light of low readings. ... I think it's premature to conclude that the underlying inflation trend is falling well short of 2%. I haven't reached such a conclusion." In recent weeks, Fed people have been mulling whether inflation's slowdown is "transitory" or more likely to persist-if the latter, some have lobbied waiting on raising interest rates. It seems Ms. Yellen is in the "transitory" camp, though we caution against assuming Fed words mean action. Their decisions are "data-dependent," which is code for "they are going to wait and see and interpret the data as they will."

Mostly, we find it odd central bankers are tying themselves in knots over very stable prices, seeing as how price stability is supposedly one of their primary goals. For instance, while June CPI slowed to 1.6% y/y from May's 1.9%, energy prices' year-over-year gains petering out were partly to blame. Core inflation, which excludes food and energy, remains in the 1.7% - 2.3% bandwidth seen over the past several years. Prices of some core goods and services (e.g., vehicles and apparel in goods, airline fares, wireless phone services and motor vehicle repairs) have been weak lately, but it's normal for various items in the CPI basket to diverge. Plus, we daresay consumers aren't exactly screaming for the Fed to drive airfares higher.

Exhibit 1: US CPI vs. Core CPI Since June 2014

Source: FactSet, as of 7/18/2017. From June 2014 - June 2017.

June retail sales also stole attention-particularly because they fell -0.2% m/m. The contraction was driven primarily by food & beverage stores (-0.4% m/m) and gasoline stations (-1.3%). Excluding the latter, sales were flattish. Even so, some worried the contraction means spending weakened this year, particularly since retail sales fell in three of 2017's first six months. But that isn't unusual. They fell five times in 2016-yet consumer spending didn't implode last year. They also fell five times in 2015 and four in both 2013 and 2014. Sales are variable. They're also just part of overall consumer spending. They omit most services, the bulk of consumption. Personal consumption expenditures, which do include services, have risen every month this year through May.

All the eyeballs on retail sales led many to miss June industrial production's (IP) 0.4% m/m rise-released the same day. Is that because media sees IP as only a small slice of the services-heavy US economy and hence not terribly meaningful? Possible! (Though retail sales are similarly limited.) Or maybe it's just harder to hook readers with. IP has risen every month since January's dip, which illustrates the US economic expansion's breadth but isn't great headline fodder. We suspect a headline exclaiming "Five Straight Months of Growing Industrial Production: Grand!" isn't as exciting as "Two Straight Declines in Retail Sales Shows Weakening Consumption: Worried?"

Of course, the preceding are all backward-looking. What about the future? Some pundits believe the expansion will continue (albeit, pointing to backward-looking measures as proof), while others are more dour-particularly because of a flattening yield curve. While the spread between the 10-Year Treasury yield and the fed-funds rate has widened some after hitting its narrowest point of the year in late June, the yield curve is indeed flatter year to date. Yet a flatter yield curve isn't contractionary-trouble comes when the yield curve inverts. Even then, it isn't a timing tool. It's more a sign credit markets aren't healthy, which eventually leads to recession.

That isn't the case today. Banks continue lending to households and businesses alike. As the Federal Reserve showed last Friday, total bank lending rose 1.7% annualized in June, slower than May's 5.3% but still positive. While this is a noticeable slowdown from the previous two months, a higher-level look provides some more perspective. Lending accelerated from Q1's 1.0% annualized to 3.9% in Q2. Also, business lending (2.9% annualized in June, up from May's 0.9%) rebounded from Q1's -0.6% annualized contraction to 0.8% in Q2. Plus, The Conference Board's US Leading Economic Index (LEI) is high and rising, suggesting more growth awaits. As Fisher Investments Founder and Executive Chairman Ken Fisher summed up recently in USA Today: "But said simply: no US recession ever began while LEI was high and rising. LEI always fell for many months first. Today, US LEI is high and rising..."

As media debate the state of US consumers, business growth and how Washington will help (or hurt) the economy, we suggest taking a step back and surveying the whole landscape. The economy is humming along, intraparty gridlock limits legislative risk, and sentiment-while warmer-still endures bouts of skepticism. While we are even more optimistic about the prospect of non-US stocks this year-especially in Europe-US stocks should continue to do just fine in this environment.