ELLIOTT D. POLLACK
FOR IMMEDIATE RELEASE
December 16, 2019
The Monday Morning Quarterback
A quick analysis of important economic data released over the last week
It was an interesting week. Most of the economic news was good. The U.S. and China reached an interim agreement on tariffs. The U.S. will agree not to impose tariffs on $160 billion worth of Chinese goods that were supposed to go into effect yesterday. In addition, import taxes on $112 billion of Chinese goods will be reduced from 15% to 7.5%. In return, according to President Trump, the Chinese will buy “massive” amounts of U.S. farm and manufacturing goods and will implement structural reforms that would improve protections for U.S. intellectual property. Details to follow. This would be phase 1 of a multi-phased agreement that would take time to work out. In other trade news, apparently the Trump administration and congress have agreed on the USMCA trade bill, the effective replacement to NAFTA.
Last week also saw the FED hold interest rates steady in the short term as well as indicate that, as of now, they expect not to hold rates steady through 2020. This, of course, is always subject to change depending on economic conditions. And given the latest inflation numbers that indicate that inflation is at the upper end of the FED’s range, inflation will replace disinflation or deflation as something to watch.
As for other data, retail sales on their face were disappointing and well below expectations. However, the October figures were revised upward and the calendar worked against retail sales in November due to the late Thanksgiving. So, the report is probably no big deal. The consumer price index was at the high end of the FED’s range and real wages were up 1.1%. Why inflation has not yet occurred in a more significant form is still not really understood at this point. But, given the low unemployment rate and continued demand for labor, it probably will at some point. In addition, anecdotally, the quality of current new hires seems to be lower than earlier in the cycle especially in the blue-collar world. Also, as expected, manufacturing was very slightly down. In Arizona, the housing market continues to sizzle as supply continues to contract in the face of strong demand.
The “trade war” (more like a trade skirmish) with China seems to deescalating with both sides announcing a phased set of improvements. Phase 1 is that the tariffs on $160 billion in Chinese imports that were to be imposes yesterday were cancelled. Another $112 billion in Chinese goods will have tariffs reduced from 15% to 7.5%. In turn, China has tentatively agreed to purchase $50 billion of American farm products and manufactured goods as well as make “structural reforms” that give more protection to American intellectual property rights on goods manufactured in China. This was a key point since day one for the Trump administration.
The FED has kept overnight rates (the federal funds rate) at 1.50%-1.75%. This was expected. The vote was unanimous. FED expectations are that the Fund rate will stay at current levels for at least the next several months.
Consumer prices rose 2.0% in November when compared to year-earlier levels. The index rose 0.3% over last month. All items less food and energy was up 2.3% over a year ago and 0.2% over October. We paid higher prices for apparel, food, education and used cars. This is at the upper end of the Fed’s target range and indicates that there is no downward pressure on rates as the Fed’s focus changes from disinflation or deflation to inflation.
On the face of it, November retail sales were a disappointment. They were up only 0.2% when expectations were 0.5%. Year-over-year, retail sales were up 3.3%. The problem could well have been expectations, not the results. This is because Thanksgiving fell very late this year which left fewer days for holiday shopping until the month ended. Given the strength in employment and wages, it’s likely that the story of retail sales this holiday season will end well.
Total sales of manufacturing and trade goods were down 0.1% from a year ago and 0.1% from September in October. While this indicates that manufactured goods are still under pressure, the extent of the decline is minor.
According to the Home Builders Association of Central Arizona, Greater Phoenix enjoyed an excellent month for new home permits in November. Permits of new homes were 1,887 units in November 2019 compared to 1,529 a year ago. That’s a whopping 23.4% gain. Year-to-date, there have been 22,653 new home permits issued in Greater Phoenix compared to 20,846 for the first 11 months of 2018. That’s an 8.7% gain. The year is likely to end up with about 24,500 units permitted.
As we discussed last week, the supply side of the equation continues to tighten. The same is true in Greater Tucson where the inventory of new homes in the MLS has declined from 3,121 in November of 2018 to 2,367 units in November of 2019.
Elliott D. Pollack & Company (EDPCo) offers a broad range of economic and real estate consulting services backed by one of the most comprehensive databases found in the nation. This information makes it possible for the firm to conduct economic forecasting, develop economic impact studies and prepare demographic analyses and forecasts. Econometric modeling and economic development analysis and planning are also part of our capabilities. EDPCo staff includes professionals with backgrounds in economics, urban planning, financial analysis, real estate development and government. These professionals serve a broad client base of both public and private sector entities that range from school districts and utility companies to law firms and real estate developers.
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