Tags: federal reserve | rate hike | economy | greece

Uneven Economy Might Thwart Fed's Rate-Hike Plans

By    |   Wednesday, 17 June 2015 07:33 AM

Greece has been the focal point of the headlines and the stock market so far this week with a game of "Will it or won’t it leave the euro zone?"

This renewed bout of uncertainty and what it could mean has once again sent turmoil through the markets.

Remember, however, we also have the June Federal Open Market Committee (FOMC) meeting this week. For the last few months, the data we’ve been receiving shows me the expected snapback coming out of the dismal March quarter has been far less than the Wall Street herd has been expecting.

On Monday, we learned the domestic manufacturing economy contracted again in May, missing expectations yet again. The reported figure for May industrial production was 78.1 percent.

According to the Federal Reserve report, industrial output fell 0.2 percent after a revised 0.5 percent drop in April. Expectations called for a 0.3 percent increase in the index for May. Taking a step back, we find this to be the sixth consecutive month of month-over-month declines in industrial production. Stated another way, we have not seen a month-to-month increase in industrial production since last November. In a word – Yikes!

A number of manufacturing-related industries correlate closely to industrial production, which makes it a report I follow closely. Digging into the May report, we see the mining industry has been taking it on the chin with declines each month over the last several months. That trend is not good for companies such as Caterpillar (CAT), Joy Global (JOY) or Kennametal (KMT). Utility production levels had been on the down slope in March and April as milder weather finally broke the winter chill. But given the hot temperatures in May — this past May was one of the hottest on record in the Washington, D.C., area — utility activity picked up.

What was most bothersome to me was the May drop in manufacturing. According to the Federal Reserve's findings, manufacturing activity declined 0.2 percent in May. If we exclude the booming auto sector, manufacturing fell 0.3 percent last month. This joins several other indicators — new truck orders, truck tonnage and weekly railcar data among them — that, when combined, paint a picture showing a second-quarter snapback following the dismal first-quarter gross domestic product report that is not shaping up as many had expected. The vector might be in the right direction, but the degree of velocity is simply not matching up.

We can throw another log — in the form of May Housing Starts — onto that less-than-expected fire. As we learned Tuesday, overall, May Housing Starts fell 11.1 percent month over month, with single-family housing starts clocking in at 5.4 percent below April and well below January levels.

While the bulls will point to a pick-up in building permits, I’m not quite sold on any rebound in housing for several reasons.

First, there are the obvious demographic factors — nearly 30 percent of Americans have no retirement savings and a preference exists among millennials to rent rather than own. These realities make me wonder if there is more to a 2015 slide in household formation than just the weather.

Second, margins at the home builders are being smacked and smacked hard as they pull out all the stops, offering concessions and incentives to lure prospective buyers following the overbuilding of houses on speculation that occurred previously. How rampant is the use of these enticements?

The best example of this came at Hovnanian Enterprises (HOV), which delivered 1 percent fewer homes in the March quarter, but saw its gross margins drop more than 400 basis points with management fingering incentives and concessions. Hovnanian wasn’t alone — Meritage Homes (MTH), MDC Holdings (MDC), Standard Pacific, D.R. Horton and PulteGroup all saw margins impacted by these practices.

Call me crazy, but weaker-than-expected demand, coupled with rampant activity that will pressure margins, has never been a good recipe for investors.

Rather, those factors help explain the recently announced merger between high-end homebuilder Standard Pacific Corp. (SPF) and Ryland Group (RYL).

What does it all mean?

Expect nothing from the FOMC meeting.

This week’s data also included a contracting June Empire State Manufacturing Index, which joins the growing list of weaker than expected regional Fed indices. By comparison, the Atlanta Fed's June 11 GDPNow model forecast that estimated the growth in second-quarter GDP at 1.9 percent. We can safely assume the latter forecast will be revised lower.

Factor the Greek uncertainty, strong dollar concerns, low to no inflation and the Fed now has more reason to hold off raising rates in the short term.

Coming out of the FOMC statement the question will be when to expect the next rate hike? Will it be late in 2015 or will the summer data show it could slip into 2016, an election year?

© 2019 Newsmax Finance. All rights reserved.

   
1Like our page
2Share
ChrisVersace
Greece has been the focal point of the headlines and the stock market so far this week with a game of will it or won't it leave the euro zone. This renewed bout of uncertainty and what it could mean has once again sent turmoil through the markets.
federal reserve, rate hike, economy, greece
793
2015-33-17
Wednesday, 17 June 2015 07:33 AM
Newsmax Media, Inc.
 

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

NEWSMAX.COM
MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved