Thursday

Sept. 29, 2016

www.bloombergbriefs.com

Yellen, Powell, Fed Presidents Speak; 2Q GDP 3rd PrintBEN BARIS AND GEOFF KINGS, BLOOMBERG BRIEFS EDITORS

WHAT TO WATCH: Atlanta Fed President speaks to the Future of Dennis LockhartFlorida Forum at 8:50 a.m. Fed Governor speaks at 10 a.m. from St. Jerome PowellLouis, Minneapolis Fed President then speaks at a town hall event in Neel KashkariRapid City, South Dakota at 2 p.m. Fed Chair will wrap up a busy day for Janet YellenFedspeak at 4 p.m. when she addresses, via video link, a forum for minority bankers hosted by the Kansas City Federal Reserve bank. Economists surveyed by Bloomberg forecast the third and final print for to rise to 1.3 percent from 1.1 second-quarter GDPpercent as last reported, 8:30 a.m.

ECONOMICS: Initial jobless claims are expected to rise to 260,000 in the week ended Sept. 24 after matching an April-low of 252,000 the week prior, 8:30 a.m. Pending

are forecast to print flat in August, following a 1.3 percent gain in July, home salesrelease at 10 a.m. Mexico's central bank decides on monetary policy, with economists split on whether policy makers will hike rates by 50 basis points to 4.75 percent.

GOVERNMENT: Wells Fargo CEO has been summoned to testify beforeJohn Stumpfthe House Financial Services Committee about the bank’s account scandal, 10 a.m.

MARKETS: held near $47 a barrel after advancing the most since April as WTI OPEC agreed to reduce production for the first time in eight years. Energy companies led gains on the , which headed for its biggest quarterly advance MSCI All Country World Indexsince 2013.    

(All times local for New York.)    

Click to view a live version of this chart on the Bloomberg terminal.here

COMMENTARY IN THIS ISSUE

Residential investment could register another negative contribution in the third quarter, bringing near-zero net input to 2016 growth: Yelena Shulyatyeva.

 

Broad weakness in heavy truck — saleswhich have been slipping for two years —has historically been a reliable hint that a recession is on its way: David Ader.

Former Philadelphia Fed President Charles Plosser Fed monetarydiscussespolicy, inflation, his views on economic theory, and Donald Trump's opinion of thecentral bank: and .Tom Keene Scarlet Fu

QUOTE OF THE DAY

"What’s important to me is whether or not, in...our collective decision making, I see politics being brought to bear in reasoning about our decisions, and I have seen that with neverany of my colleagues."  

— Fed Chair Janet Yellen, in response to a

question on whether Governor Lael Brainard

would have a conflict of interest if she were in talks

with Hillary Clinton’s campaign about a position

EQUITIES DATA MONITOR

BIG PICTURE  

Modest Revisions Will Not Ease Troubling GDP Slump

Forecasters anticipate a slightly firmer outcome for second-quarter GDP, when the second set of revisions are published, but this will hardly change the assessment that growth was extremely weak in the first half. The consensus forecast expects the third print on the second quarter to rise to 1.3 percent from 1.1 percent as initially reported. This is largely attributable to stronger exports, construction and consumption of services. If the revisions are indeed just a few tenths, this should have minimal implications for current quarter growth forecasts. If the second quarter is revised to 1.3 percent, first half growth will have averaged just 1.1 percent — well short of the pace which would generate real concern that the Fed is letting economic conditions overheat. To hit policy makers' full-year growth forecast of 1.8 percent, GDP would need to average 2.5 percent in the second half.

— Carl Riccadonna and Yelena Shulyatyeva, Bloomberg Intelligence Economists

Source: Bloomberg

Stocks rallied in Asia and Europe after a surprise announcement of an OPEC deal to cut crude output for the first time since 2008 triggered oil’s biggest jump in five months.

Sept. 29, 2016 Bloomberg Brief Economics 2

 BIG PICTURE  

Housing Huffs and Puffs, Fails to Help GDP GrowthBY YELENA SHULYATYEVA, BLOOMBERG INTELLIGENCE ECONOMIST  

The housing sector’s contribution to GDP growth this year is set to dwindle below 2015’s level, leaving the economy’s high concentration of consumer spending largely dependent on the sustainability and pace of income creation.

Residential investment — comprising of new construction, renovations and broker commissions — contributed 0.4 percentage points to 2.6 percent GDP growth in 2015. It added 0.3 percentage points in the first quarter of this year, but then turned negative, with a 0.3 percentage-point drag in the second quarter. Residential investment could register another negative contribution in the third quarter, bringing near-zero net input to 2016 growth.

Despite its current lackluster state, the longer-term prospects for residential investment are encouraging as demand for newly built homes should boost construction. In the meantime, the sector is relying more heavily on existing property sales and renovations. Resales and home improvements appear to have peaked earlier this year, thus the contributions from brokers’ commissions and renovations to residential investment will likely be negligible.

Since the housing boom and bust, the composition of residential investment has changed so that new construction currently makes up less than half of the output from the sector, whereas it played a dominant role before the crisis. As housing starts collapsed through the Great Recession, so did the share of new construction in overall residential investment — falling from almost 60 percent at the beginning of 2006 to just above 30 percent in the middle of 2011. This coincided with a significant pickup in the share of broker commissions on sales of residential properties as well as home improvements, which together make up more than half of the current output from residential investment.

The Bureau of Economic Analysis calculates the brokers’ commissions component as a percentage of home sales volume. The contribution to GDP increases with home prices and the number of real estate transactions, both

 Read this analysis with additional live charts on the Bloomberg terminal .here

for new and existing properties. In the wake of the housing crisis, the share of new home sales in the total plunged to 7 percent from about 17 percent, but recently improved to more than 10 percent. On average, a new home sale results in a higher broker commission than an existing home sale transaction, since the median price of a new home is about 35 percent higher. The recent pickup in the share of new home sales is encouraging, but as of the third quarter is still not sufficient to offset the recent slowing in existing home sales to lift the overall contribution of residential investment to GDP.

Output from home improvements is estimated based on growth in building materials sales and aggregate hours worked and earnings of remodelers. Both have been on a constant upward trend as of late, as many potential trade-up home buyers opted for improving their existing properties. Federal and state subsidies are increasing the impetus for energy-efficient upgrades, and the strengthening job market has also helped prompt more home owners to take on home remodeling projects. Also, a growing number of baby boomers are adjusting their homes for better accessibility, adding age-in-place features. Similarly, a rise in adult children living with their parents has resulted in a pickup in conversions of single family properties into multifamily homes.

However, forward-looking data imply significant cooling in the home-improvements component of residential

investment. Most improvement projects require a building permit. Remodeling permit applications saw a sizable drop after peaking in the beginning of this year, according to the BuildFax Residential Remodeling Index.

Permanent site construction has lost some steam lately due to a decline in multifamily construction, especially in the Northeast. However, prospects for single family construction look positive, as rising confidence among builders suggests. A broad-based improvement in both present and future components of the NAHB survey as of late supports this view.

The recent pickup in new home sales is encouraging in this respect. U.S. new home sales track progress in the single family sector. So far in the third quarter, the level of new home sales is 6.5 percent higher than the average of the second quarter. Longer-term, demand for new homes should boost growth in new construction.

Until construction activity re-accelerates, residential investment is unlikely to make a significant positive contribution to GDP growth. The last few years’ contribution was supported by rising existing home sales and a surge in renovation activity, which appears to be fading. The recent pickup in new home sales is encouraging, but too small to outweigh sluggishness in resales and the slowdown in renovations. Ultimately, for housing to make a meaningful contribution to GDP, new construction has to regain its dominant role.

Residential Investment Share

Sept. 29, 2016 Bloomberg Brief Economics 3

 

OPEC CUT

Sept. 29, 2016 Bloomberg Brief Economics 4

OPEC CUT

Oil Analysts Remain OPEC Skeptics as Pump-at-Will Policy DitchedBY ALARIC NIGHTINGALE, BLOOMBERG FIRST WORD

Oil analysts, many of whom were surprised by the Organization of  Petroleum Exporting Countries' decision yesterday to set out the framework of a deal to limit oil production,remain split about the impact of the producer group’s plan.

A Bloomberg News survey the week before the gathering showed that just two out of 23 analysts anticipated that OPEC would overcome its internal rivalries and agree on a strategy. The producer group said in Algiers that it will restrict output to a range of 32.5 million barrels a day to 33 million barrels a day, with the fine details to be hammered out at its next formal meeting in November.

Here are a selection of analysts’ comments following the Algiers meeting:

Assigning individual country quotas is the “major dispute” and while they may be decided at OPEC’s next meeting on Nov. 30, “this is still kicking the can down the

Citigroup

road,” say analysts including .Ed Morse

Reduction in output to 32.5 million barrels a day doesn’t solve oversupply

immediately, but could potentiallyaccelerate market re-balancing to as soon

as early 2017, say analysts includingAdam Longson.

Focus now turns to execution of deal,where history is poor.

The production plan is likely to boost prices short term, but output quotas could be exceeded even if they are ratified at the November meeting, say analysts including Damien Courvalinand J .eff Currie

“Strictly implemented in the first half of 2017 and all else constant, the production quotas announced today should be worth $7 a barrel to $10 a barrel to the oil price.

”“It has historically taken a fall in oil demand to ensure quota compliance, as in that case, production is forced lower by

Morgan Stanley

Goldman Sachs

a decline in refinery intake around the world. This is not the case today with resilient demand growth.”

“Do the Saudis want to awaken a sleeping giant? They will if prices top $50. The rig count is already rising and shale production has stabilized. Predictions of sub 8 million barrels a day U.S. production next year will go to the wayside,” says .Stephen Schork

“The agreement is significant, but we believe that what OPEC is now officially saying it will do, it had been planning to do anyway,” say analysts including

.Michael Cohen

Saudi output was forecast to fall after its peak summer power burn needs and November-December refinery turnarounds will remove some demand.

Iraq’s rejection of secondary-sources oil output estimate is “first sign that cracks are already appearing in deciding which producer cuts and by how much.”    

Schork Group

Barclays Capital

 

SURVEILLANCE

Sept. 29, 2016 Bloomberg Brief Economics 5

SURVEILLANCE

Charles Plosser, former president of the Federal

, speaks with Reserve Bank of Philadelphia

Bloomberg's Tom Keene and Scarlet Fu about

the Fed's monetary policy, inflation, his views on

economic theory, and Donald Trump's opinion of

the central bank. Listen to the full interview .here

Q: What is the present theory of your Federal Reserve System?A: I think the Fed is challenged. They're having a hard time trying to figure out what to do. From my perspective, I think they lack a strategy. So I think they're struggling with a situation which, in part, they concocted for themselves. I think they're having a hard time. But as you can imagine, I wish they'd just sort of get on with it and quit futzing around so much.

Q: Quit futzing around so much, yet there was some dissent at the last FOMC meeting — what does that portend for the November meeting and, more importantly, for December?A: I think two things are important to understand about the dissent. I was on that side several times during my career there. I think dissent is important. Any time you reach some kind of turning point or a difficult time, a decision, you expect to see more argument, more debate within the Committee about what is the right step and when should it be taken.

So I think this is clearly reflecting differences of opinion and I think to have dissent is one way of communicating to the markets and the public the nature of the debates that are going on within the Committee. So I think actually that is healthy. Whether that means they'll react in November or react in December I think it's hard to tell at this point, because obviously the data can change. But right now, in this last meeting, if you think about it, what they said was there was no data between June and September except risks were reduced, volatility camedown, the things that they cited as concerns seemed to have diminished

directly.Janet Yellen said the case for a rate

hike has increased. But we're going to wait. So what kind of strategy is that? And they couldn't even point to any data. In fact, everything they pointed to suggested a rate hike was coming, but they just didn't do it. So I think that reflects challenges within the Committee. It reflects, as I said a few moments ago, a lack of a strategy that is really driving their decision making and I think that's problematic for them.

Q: Do you think it's as simple as the Fed has a hard time generating inflation, or any monetary policy maker for that matter, yet we know how to bring down inflation, we just don't know how to generate it?A: I don't think that's quite true. I think it's true that they've had a hard time generating as much inflation as they would like. But we do know how to generate it. History is full of examples where central banks have generated inflation. And frankly, the Fed hasn't had to fight inflation in a while. So it's not clear that it's as asymmetric as you suggested. But nonetheless, I think the Fed would like to see inflation a little bit higher. But we're in a world where we're pretty close to what might be considered full employment. Core inflation, CPI inflation is above two percent. So not all the inflation numbers, at least in the United States, are as discouraging as some people make them out to be.

Q: Are you a traditionalist within orthodox Fed theory? Or do you think there is something germane to this idea that we've brought on our disinflation?A: I think that I'm kind of sitting on the fence a bit. I'm a traditionalist in some ways, a very neo-classical economist as you know. But this neo-Fisherian view of the world, where everything is driven by expectations of inflation and the Fisher equation, which is that real interest rates

 

plus expected inflation equals the nominal interest rate. And if you keep real nominal rates very low and the real rate doesn't change very much, then you can't expect any other outcome than low inflation. I think it's a very interesting idea and actually I put some credence in it. But I wouldn't put the predominance of my probabilities there.

Q: Donald Trump mentioned that what the Fed is doing is political. He basically hinted that Janet Yellen needs to be replaced, that he is going to kick her out as soon as he becomes president, and the Fed is inflating asset bubbles across the board. Is there any truth to what he is saying?A: While it is unusual for a presidential candidate to talk personally about a Fed chair, I'd like to make a point here. And that is I think the Fed has been under attack for the last four or five years by all sorts of groups — both left and right for that matter. And the Fed would like to remain apolitical, but it is becoming increasingly difficult for it to do so. If you look at the reforms in Congress for the Fed, some of them are better than others. But many of them are actually aimed at making the Fed a more political institution.

Congress has attacked the Fed. Last fall, in October, they passed a transportation bill. They said we can't decide what to do about fiscal policy and funding the transportation bill, so we're going to make the Fed pay for it. And so it raided the Fed's balance sheet. And before that, the Consumer Financial Protection Agency was funded by the Fed. What i think is there is a broad scope of people interested in putting at risk the Fed's independence and making it more political. All of that I think is bad. And I think Donald Trump's comment about that counter-reflects what is going on in Congress. So we shouldn't be quite as surprised as we think.

This interview has been edited and condensed.

 

DATA & EVENTS

Sept. 29, 2016 Bloomberg Brief Economics 6

DATA & EVENTS

TIME COUNTRY EVENT SURVEY PRIOR

8:30 U.S. Advance Goods Trade Balance -$62.2b -$59.3b

8:30 U.S. Wholesale Inventories MoM 0.00% 0.00%

8:30 U.S. GDP Annualized QoQ 1.30% 1.10%

8:30 U.S. Personal Consumption 4.40% 4.40%

8:30 U.S. GDP Price Index 2.30% 2.30%

8:30 U.S. Core PCE QoQ 1.80% 1.80%

8:30 U.S. Initial Jobless Claims 260k 252k

8:30 U.S. Continuing Claims 2129k 2113k

9:45 U.S. Bloomberg Consumer Comfort — 41.3

10:00 U.S. Pending Home Sales MoM 0.00% 1.30%

10:00 U.S. Pending Home Sales NSA YoY 2.60% -2.20%

14:00 Mexico Overnight Rate 4.75% 4.25%

19:30 Japan Jobless Rate 3.00% 3.00%

19:30 Japan Job-To-Applicant Ratio 1.37 1.37

19:30 Japan Natl CPI YoY -0.50% -0.40%

19:30 Japan Natl CPI Ex Fresh Food YoY -0.40% -0.50%

19:30 Japan Natl CPI Ex Food, Energy YoY 0.20% 0.30%

21:45 China Caixin China PMI Mfg 50.1 50Source: Bloomberg. Surveys updated at 5:25 a.m. New York.

 

CALENDAR

Click on the to see the full range of economists' forecasts on the terminal.   highlighted releases

OVERNIGHT

Euro-area economic confidenceunexpectedly improved in September in a sign the region’s recovery is maintaining its momentum. The Index of business and consumer confidence rose to 104.9 from a 103.5 in August (median forecast was 103.5), for the highest reading since January. EU-wide economic sentiment increased to 105.6 from 103.8.    

German unemployment unexpectedly rose in September, in a sign of concern among businesses over an economic slowdown and the consequences of Britain’s decision to leave the European Union, according to data from the Federal Labor Agency in Nuremberg. The number of people out of work increased by seasonally adjusted 1,000 to 2.68 million (median forecast was for a decline of 5,000), the first increase in the jobless number for a year. The unemployment rate held at 6.1 percent, the lowest since reunification

U.K. mortgage approvals fell to the lowest in almost two years in August, reflecting the mixed picture for the housing market since the Brexit vote.

— the Approvals declined to 60,058 weakest reading since November 2014 — from 60,925 in July, the Bank of England said today. Economists had forecast 60,200, according to a Bloomberg News survey. Net lending rose 2.9 billion pounds. The report also showed that consumer spending remained strong last month, rising by a net 1.6 billion pounds, with annual growth of 10.3 percent. Along with June, that’s the fastest expansion in more than a decade.

Japan’s retail sales fell for the first time in three months, signaling that consumer spending is struggling to maintain traction. Retail sales fell 1.1 percent in August from the previous month, when they rose 1.5 percent, according to a trade ministry report released today. The median forecast of economists surveyed by Bloomberg was for a 0.6 percent drop.

Europe

Asia

MARKET INDICATORS

U.S. Companies Have Cut Back on Equipment Spending

Whether it’s more a reflection of the collapse of domestic oil production or lackluster overseas demand, no matter how you slice it, American companies are doing little to beef up their operations. Figures from the Commerce Department on Wednesday showed shipments, or sales, of non-defense capital goods excluding aircraft fell at a 5.1 percent annualized rate in the three months through August. That proxy of investment, used to calculate gross domestic product, shows the weakness extended into the third quarter.

— Alex Tanzi, Bloomberg News

Sept. 29, 2016 Bloomberg Brief Economics 7

MARKET INDICATORS

COMMENTARY  

Sept. 29, 2016 Bloomberg Brief Economics 8

Bloomberg Brief: Economics

COMMENTARY  As Heavy-Truck Sales Go, So Goes the U.S. EconomyBY DAVID ADER, BLOOMBERG VIEW CONTRIBUTOR  

For most people, the economy’s ups and downs are best measured by famousindicators like monthly job reports and quarterly releases of gross domestic product. But students of the arcane took special notice earlier this month when theBureau of Economic Analysis released some disturbing data that didn’t make anybody’s front page. In August, domesticheavy-truck sales fell 29 percent from the same period of 2015, the weakest month in well over three years.

Any drop that dramatic could always be an anomaly, but heavy-truck sales have been slipping for two years. Broad weakness in this category has historically been a reliable hint that a recession is on its way.

It’s too soon to be sure that this history is repeating itself. Brian Wesbury, chief economist at First Trust, says August’s plunge could reflect comparatively narroweconomic problems like reduced domesticoil production and slackening mining activity. He also said that regulatory issues might have played a role if sales through mid-2015 were boosted by new requirements on trucks’ antilock braking systems. In that case, the August drop-offwould just represent a return to normalcy.

Those are reasonable caveats. But there are other worrying signs. Caterpillarhas said that used-machinery prices are down 10 percent from a year ago. That could also reflect the impact of oil and

 mining industry problems, yet a price decline in used construction equipment could have a dampening impact on new-equipment sales for big manufacturers.

Another warning comes from the Cass Freight Index, a measure of North American freight volumes and expenditures. In August, Cass noted that its Expenditure Index was down 3.3 percent from July and 6.3 percent from the previous August. These measures, too, have shown weakness over the last two years.

“August’s Cass Freight Index continued

to signal that overall shipment volumes (and pricing) are persistently weak, with increased levels of volatility as all levels of the supply chain continue to try and word down inventory levels,” Cass said in its latest report.

Weak truck sales have sometimes given false signals about a recession over the last 30-odd years. But the sheer size of this August’s drop looks different. We’ve never seen a plunge this steep that didn’t foretell a recession.

David Ader is an interest rate strategist. He has

worked with Greenwich Capital, RBS and most

recently with CRT.

 

 

 

 

 

Bloomberg Brief Managing Editor

Paul Smith

psmith152@bloomberg.net

Economics Editors

Ben Baris

bbaris1@bloomberg.net

James Crombie

jcrombie8@bloomberg.net

Global Director Economic

Research & Chief Economist

Michael McDonough

mmcdonough10@bloomberg.net

 

 

 

Chief U.S. Economist

Carl Riccadonna

criccadonna3@bloomberg.net

U.S. Economists

Richard Yamarone

ryamarone@bloomberg.net

Yelena Shulyatyeva

yshulyatyev2@bloomberg.net

Reprints & Permissions

Lori Husted

lori.husted@theygsgroup.com

+1-717-505-9701 x2204

 

 

 

Marketing & Partnership Director

Johnna Ayres

jayres1@bloomberg.net

+1-212-617-1833

Advertising

Christopher Konowitz

ckonowitz@bloomberg.net

+1-212-617-4694

Economics Terminal Sales

Matthew Traum

mtraum@bloomberg.net

+1-212-617-4671

Interested in learning more about

the Bloomberg terminal? Request a

free demo .here

 

 © 2016 Bloomberg LP.

All rights reserved. This newsletter

and its contents may not be

forwarded or redistributed without

the prior consent of Bloomberg.

Please contact our reprints group

listed left for more information.  

Hitting the Brakes