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Pollack: World events dampen economic news
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The Source for Information and Analysis on the Arizona Economy and Real Estate
EDP LogoELLIOTT D. POLLACK

& Company

FOR IMMEDIATE RELEASE
July 18th 2016
 
The Monday Morning Quarterback
A quick analysis of important economic data released over the past week
Obviously, given the tragic events in Baton Rouge and France, it’s difficult to look at last week’s data and consider it anything but trivial.  In that regard, our hearts are saddened by the latest insanity and our thoughts and wishes go out to the people of France, Baton Rouge and all of those around the world who have been affected. I’m obligated to give it a try, so bear with me.
Most of the news was good or, at least, not unexpected.  Retail sales were actually better than anticipated.  The consensus forecast for real GDP in 2016 & 2017 remained tepid.  Manufacturing was up but the inventories to sales ratio remains higher than I’d like to see.  And industrial production and capacity utilization look nothing like one would expect at this point in the cycle.  There appears to be lots of excess capacity in the U.S. at the moment.  That suggests little inflationary pressure from manufacturing and lethargy in new plant spending.  In that regard, inflationary pressures remain low.  And due to weakness in the expectations component of the University of Michigan consumer sentiment index, sentiment experienced weakness in early July.  As I will discuss later in the MMQ, the Greater Phoenix and Greater Tucson apartment markets continue to look good.
Overall, not a bad week from an economic standpoint.  Given world events, however, it’s tough to get excited.
U.S. Snapshot:
  • Retail sales were up strongly in June.  Adjusted for inflation, retail sales were up 0.6% over May and up 2.7% from a year ago.  The largest gains from a year ago were in nonstore retailers ($5.8 billion, 14.2%) and food services and drinking places ($2.5 billion, 4.9%).
  • The latest Blue Chip Consensus Forecast indicates more of the same. Economists now believe that real GDP in 2016 will be up a weak 1.9%.  This will be the weakest performance since 2013.  The consensus projects 2017 will grow by 2.2%.  This is up but is still a tepid performance by historic standards.
  • Total manufacturing and trade sales were up 0.2% for May over April.  But, when compared to a year ago, they are down 1.4%.  Inventories were also up 0.2% for the month and stand 1.0% over a year ago.  The inventories/sales ratio stood at 1.40 in May.  This is the same as April and up from 1.37 a year ago.  As you can see by the chart below, this is high by historic standards and suggests that manufacturers could cut back on production in order to cut back the ratio.  Since most of the excess appears to be in autos and auto sales remain strong at the moment, such an event could be delayed.
  • Industrial production was up for the month of June (+0.6%) but was down (-0.7%)from a year ago.  Capacity utilization for the industrial sector was up 0.5%percentage points in June, but, remains 4.6% percentage points below its long run (1972-2015) average.
  • Consumer prices increased 0.2% in June on a seasonally adjusted basis.  The CPI now stands 1.1% above a year ago.  The base rate of inflation, the CPI for all items less food and energy, is up 2.2% over the last year.  This is just about at the FED’s target.
  • The University of Michigan sentiment index for early July was down a sharp 4.0points to 89.5.  Weakness was centered in the expectations component which fell 5.3 points to 77.1 for one of the weakest readings of the last two years.  Weakness in expectations ultimately points to doubts over the jobs outlook.
Arizona Snapshot:
  • According to Berkadia, the Phoenix apartment market continues to be very healthy.  Rents are up 7.2% from a year ago and were up 3.0% for the quarter.  The Average rent for the second quarter of 2016 was $953.  Vacancy rates stand at 5.1%compared to 5.3% a year ago.
  • As for Greater Tucson, Berkadia data indicates that rents are up 4.2% from a year ago to an average of $713 and vacancy rates are down in the second quarter to 6.5% from 7.6% a year ago.
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